-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SSlzDX92R8pCf2JF7ry6xgzxVfA2xFPsX4ThvsHXQhbhFdM20dLczDudIeLSm+9s iOXaCjs4xR9XHlO/MHSEEg== 0001047469-98-032956.txt : 19980828 0001047469-98-032956.hdr.sgml : 19980828 ACCESSION NUMBER: 0001047469-98-032956 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19980827 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN NATIONAL FINANCIAL INC CENTRAL INDEX KEY: 0001068843 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 330731648 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-62353 FILM NUMBER: 98699160 BUSINESS ADDRESS: STREET 1: 17911 VON KARMAN AVENUE SUITE 240 CITY: IRVINE STATE: CA ZIP: 92614 BUSINESS PHONE: 9496224700 MAIL ADDRESS: STREET 1: 17911 VON KARMAN AVENUE SUITE 240 CITY: IRVINE STATE: CA ZIP: 92614 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1998. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- AMERICAN NATIONAL FINANCIAL, INC. (Exact name of registrant as specified in charter) CALIFORNIA 6361 33-0731648 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
-------------------------- 17911 VON KARMAN, SUITE 200 IRVINE, CALIFORNIA 92614 (949) 622-4700 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------------------------- MICHAEL C. LOWTHER CHIEF EXECUTIVE OFFICER 17911 VON KARMAN, SUITE 200 IRVINE, CALIFORNIA 92614 (949) 622-4700 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: THOMAS G. BROCKINGTON, ESQ. NICK E. YOCCA, ESQ. SCOTT SANTAGATA, ESQ. J. MICHAEL VAUGHN, ESQ. RUTAN & TUCKER, LLP STRADLING YOCCA CARLSON & RAUTH 611 Anton Boulevard, Suite 1400 660 Newport Center Drive, Suite 1600 Costa Mesa, California 92626 Newport Beach, California 92660 (714) 641-5100 (949) 725-4000
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. -------------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / / CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE (2) REGISTRATION FEE Common Stock, no par value.................. 1,437,500 shares $12.00 $17,250,000 $5,088.75 Representative's Warrants(3)................ 125,000 shares .001 125 (3) Common Stock, no par value(4)............... 125,000 shares $14.40 $1,800,000 $531.00 TOTAL....................................... $5,619.75
(1) Includes 187,500 shares of Common Stock which may be purchased by the Underwriters to cover over-allotments, if any. (2) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the registration fee. (3) To be issued to the Representative of the several Underwriters. No fee pursuant to Rule 457(g). (4) Issuable upon exercise of the Representative's Warrants. Pursuant to Rule 416, there are also being registered such additional shares as may be issued pursuant to the anti-dilution provisions of the Representative's Warrants. -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED AUGUST 27, 1998 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. 1,250,000 SHARES [AMERICAN NATIONAL FINANCIAL, INC. LOGO] COMMON STOCK ------------ All of the 1,250,000 shares of Common Stock (the "Common Stock") offered hereby are being sold by American National Financial, Inc. (the "Company"). Prior to this offering there has been no public market for the Common Stock of the Company. It is currently anticipated that the initial public offering price of the Common Stock will be between $10.00 and $12.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. Fidelity National Financial, Inc. (NYSE:FNF) will own approximately 34% of the Company's outstanding Common Stock upon the completion of this offering. Application has been made to have the Common Stock approved for quotation on the Nasdaq National Market under the symbol "ANFI." ---------------- FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING ON PAGE 6 HEREOF. --------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING DISCOUNTS AND PROCEEDS TO PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) Per Share................................................ $ $ $ Total(3)................................................. $ $ $
(1) Excludes additional compensation to Cruttenden Roth Incorporated, the representative of the Underwriters (the "Representative") in the form of warrants to purchase 125,000 shares of Common Stock, exercisable over a period of four years commencing one year from the date of this Prospectus (the "Representative's Warrants"). The Company has agreed to indemnify the Underwriters against certain civil liabilities, including certain liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting offering expenses estimated to be approximately $570,000 payable by the Company, including $275,000 in the form of a nonaccountable expense allowance. (3) The Company has granted to the Underwriters a 45-day option to purchase up to 187,500 additional shares of Common Stock solely to cover over-allotments, if any (the "Over-Allotment Option"). If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ---------------- The shares of Common Stock are offered severally by the Underwriters named herein subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that delivery of the certificates for the Common Stock will be made against payment therefor at the offices of Cruttenden Roth Incorporated, Irvine, California or through the facilities of the Depository Trust Company, on or about , 1998. [CRUTTENDEN ROTH INC. LOGO] THE DATE OF THIS PROSPECTUS IS , 1998 [MAP] This map shows the locations of the current Company offices (designated by an "*"), and the states (shaded in blue) in which National Title Insurance of New York Inc. is presently licensed to underwrite title insurance. American Title Company, a subsidiary of the Company, has agreed to acquire National Title Insurance of New York Inc., although the consummation of this acquisition is subject to certain conditions. See "Risk Factors-- Risks Associated with the Acquisition of National" and "Business--Acquisition of National." CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE SHORT COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, EXCEPT WHERE THE CONTEXT REQUIRES OTHERWISE, REFERENCES MADE TO "ANFI" OR THE "COMPANY" MEAN AMERICAN NATIONAL FINANCIAL, INC. AND ITS SUBSIDIARIES, AND REFERENCES TO THE "PREDECESSOR" OR "PREDECESSORS" MEAN THE OPERATIONS DURING ALL PERIODS PRIOR TO JULY 1, 1997 OF VARIOUS SUBSIDIARIES OF FIDELITY NATIONAL FINANCIAL, INC. ("FNFI") THAT ARE NOW OPERATED BY THE COMPANY AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS (I) ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF $11.00 PER SHARE, (II) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (III) ASSUMES NO EXERCISE OF ANY OTHER OUTSTANDING WARRANTS OR OPTIONS, (IV) EXCEPT AS SET FORTH HEREIN GIVES PRO FORMA EFFECT TO THE REORGANIZATION DESCRIBED HEREIN (SEE "REORGANIZATION"); AND (V) REFLECTS A 6.0528-FOR-1 SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED IN AUGUST 1998. THE COMPANY American National Financial, Inc. ("ANFI" or the "Company") provides title insurance services as well as other real estate related financial and informational services including escrow, real estate information, trustee sale guarantees, and appraisals. In addition, the Company obtains specialized services for its customers, which include, but are not limited to, tax reporting services, exchange intermediary services and courier services. The Company's business is focused on the residential real estate market, and it generates the majority of its revenues from issuing title insurance policies as an independent agent on behalf of a title underwriter. For the fiscal year ended December 31, 1997 and the six months ended June 30, 1998, title insurance premiums represented approximately 63.8% and 60.6% of the Company's revenues, respectively. The title insurance industry consists of insurers ("underwriters") who issue policies through direct operations or through agents. The Company's principal subsidiary, American Title Company ("ATC"), is an agent, known in California as an "underwritten title company." ATC acts exclusively as an agent for Fidelity National Title Insurance Company ("FNTIC") with respect to the procurement of title insurance policies in 13 selected counties in California and one county in Arizona, subject to certain exceptions. FNTIC is a wholly owned subsidiary of FNFI (NYSE:FNF). Upon completion of this offering, FNFI will own approximately 34% of the outstanding Common Stock. ATC retains 88% of the title premiums collected on policies issued. The remaining 12% is comprised of an 11% underwriting fee and a 1% administrative service fee, both paid to FNTIC pursuant to ATC's agreement with FNTIC. As an agent, ATC is not subject to the loss and reserve requirements applicable to insurers, and under its agreement with FNTIC, ATC's liability is limited to the first $5,000 of loss under any policy issued by it on behalf of FNTIC, except in the case of negligence, or willful or reckless conduct. To date, the Company has not incurred any material liability under its obligation to reimburse FNTIC for such losses. The Company has agreed to acquire National Title Insurance of New York Inc. ("National"), a New York underwriter licensed in 35 states and the U.S. Virgin Islands, from a subsidiary of FNFI. The Company's planned acquisition of National, which is subject to regulatory approval, is intended to facilitate the Company's expansion into new markets and permit the Company to directly underwrite the title insurance policies that it issues in geographic areas not covered by the Company's exclusive relationship with FNTIC. The Company provides a variety of other real estate transaction services, in addition to title insurance, the most significant of which is escrow services. Escrow services provided by the Company include all of those typically required in connection with residential and commercial real estate purchase and finance activities. Fees from escrow services represented approximately 22.0% of the Company's and the Predecessors' revenues in 1997 and 23.7% of the Company's revenues for the six months ended June 30, 1998. The key elements of the Company's business strategy include: expanding geographically into key markets through a combination of opening new offices, teaming with local companies, and acquiring established operations; leveraging the business relationships it develops through its title insurance business to generate additional demand for its other services; recruiting highly qualified personnel with business relationships that permit the expansion of the Company's business; and pursuing strategic acquisitions of title insurance and related real estate service companies in order to penetrate new markets. The Company's principal executive offices are located at 17911 Von Karman, Suite 200, Irvine, California 92614. The Company's telephone number is (949) 622-4700. 3 THE OFFERING Common Stock Offered by the Company...... 1,250,000 shares Common Stock to be Outstanding after the Offering(1)............................ 6,167,096 shares Use of Proceeds.......................... To finance the acquisition of National and for general corporate purposes, which may include strategic acquisitions. See "Use of Proceeds" and "Business-- Acquisition of National." Proposed Nasdaq National Market Symbol... ANFI
- ------------------------ (1) Excludes (i) 125,000 shares issuable upon exercise of the Representative's Warrants, (ii) 332,904 shares issuable upon exercise of outstanding options at an exercise price of $0.66 per share; and (iii) 650,000 shares reserved for issuance under the Company's 1998 Stock Incentive Plan, of which 320,000 shares will be issuable, subject to certain vesting requirements, pursuant to options to be granted upon consummation of this offering at an exercise price equal to the initial public offering price. See "Management--Stock Incentive Plan." RISK FACTORS Prospective investors should carefully consider the factors discussed in detail elsewhere in this Prospectus under the caption "Risk Factors." 4 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION(1) (Dollars in thousands, except per share and other operating data)
PREDECESSOR --------------------------------------------------------------- COMPANY ------------------- YEAR ENDED DECEMBER 31, SIX MONTHS YEAR ENDED ------------------------------------------ ENDED JUNE 30, DECEMBER 31, 1993 1994 1995 1996 1997 1997 --------- --------- --------- --------- ------------------- ------------------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Total revenue..................... $ 18,576 $ 18,293 $ 29,721 $ 51,732 $ 25,141 $ 33,525 Personnel costs................... 9,810 13,917 18,512 29,216 14,364 16,185 Other operating expenses.......... 5,782 7,649 9,963 14,473 5,623 8,084 Title plant rent and maintenance..................... 1,215 1,538 2,405 4,107 2,009 2,664 Fees to underwriters.............. 1,282 1,503 2,628 4,151 1,852 2,614 Income before minority interest... 280 (3,909) (2,400) (174) 743 2,204 Net income (loss)(4).............. 280 (3,909) (2,400) (174) 743 1,123 PER SHARE DATA: Earnings per share: Basic........................... $ 0.38 Diluted......................... $ 0.38 Weighted average common shares outstanding:.................... Basic........................... 2,972 Diluted......................... 2,972 PRO FORMA DATA(6): Net income........................ $ 3,108 Earnings per share: Basic........................... $ 0.61 Diluted......................... $ 0.61 Weighted average common shares outstanding: Basic........................... 5,072 Diluted......................... 5,072 OTHER OPERATING DATA: Files opened...................... 60,600 93,900 40,700 46,800 Files closed...................... 36,700 63,000 28,200 32,600 Average fee per file(7)........... $ 786 $ 773 $ 835 $ 886 SIX MONTHS ENDED JUNE TOTAL YEAR ENDED 30, DECEMBER 31, ------------------------ 1997 1997(2) 1998(3) ------------- ----------- ----------- (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Total revenue..................... $ 58,666 $ 25,141 $ 45,275 Personnel costs................... 30,549 14,364 22,522 Other operating expenses.......... 13,707 5,623 7,775 Title plant rent and maintenance..................... 4,673 2,009 3,016 Fees to underwriters.............. 4,466 1,852 3,300 Income before minority interest... 2,947 743 5,131 Net income (loss)(4).............. N/A(5) 743 3,086 PER SHARE DATA: Earnings per share: Basic........................... $ 1.06 Diluted......................... $ 1.01 Weighted average common shares outstanding:.................... Basic........................... 2,918 Diluted......................... 3,060 PRO FORMA DATA(6): Net income........................ $ 5,339 Earnings per share: Basic........................... $ 1.06 Diluted......................... $ 1.03 Weighted average common shares outstanding: Basic........................... 5,018 Diluted......................... 5,160 OTHER OPERATING DATA: Files opened...................... 87,500 40,700 65,600 Files closed...................... 60,800 28,200 44,500 Average fee per file(7)........... $ 863 $ 835 $ 834
AT JUNE 30, 1998 (UNAUDITED) ------------------------------------------- PRO FORMA ACTUAL PRO FORMA(8) AS ADJUSTED(8)(9) --------- ------------- ----------------- BALANCE SHEET DATA: Cash and cash equivalents............................................. $ 6,154 $ 2,454 $ 14,602 Working capital....................................................... 8,612 5,976 18,125 Total assets.......................................................... 27,532 23,832 35,979 Long-term debt and capitalized leases................................. 7,123 2,223 2,223 Minority interest..................................................... 5,619 -- -- Shareholders' equity.................................................. 4,209 11,028 23,176
- ---------------------------------- (1) The Company was incorporated in November 1996 and acquired 60% of the outstanding common stock of ATC on July 1, 1997. Upon consummation of the Reorganization (See "Reorganization"), the Company will acquire the remaining 40% of the outstanding common stock of ATC. The summary financial information set forth above includes financial information for the Predecessor for the years ended December 31, 1993, 1994, 1995 and 1996, and the six month period ended June 30, 1997, and historical information for the Company for the year ended December 31, 1997 which includes the results of operations of ATC for the six month period from July 1, 1997 to December 31, 1997, and from January 1, 1998 to June 30, 1998. The column captioned "Total" reflects combined financial information for the Company and the Predecessor for the period shown. (2) Reflects only Predecessor financial information, which has been audited. The Company's historical operating results for the six months ended June 30, 1997 were not significant. (3) Reflects historical financial information of the Company. (4) The statutory tax rate was 40% (combined federal and state) for each of the periods presented. The effective tax rate fluctuates from period to period based on the components of taxable income. The effective tax rate for the six months ended June 30, 1998 was 41%, for the six months ended June 30, 1997 was 43% and for the twelve months ended December 31, 1997 (combined Company and Predecessor) was 44.1%. (5) Not applicable because the second six months of this period excludes the 40% minority interest in ATC. (6) To give effect to the Reorganization and assumes ATC had been acquired on January 1, 1997. See "Reorganization." (7) Average fee per file information consists of revenue divided by number of closed files (not including revenue generated by, or closed files relating to, the Company's Shortened Title Assurance Reports ("STAR Product"), which are excluded due to the abbreviated characteristics of the policy). See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (8) Gives pro forma effect to the Reorganization (see "Reorganization") and the repayment of acquisition debt since June 30, 1998. (9) Adjusted to give effect to the sale by the Company of 1,250,000 shares of Common Stock offered hereby at the assumed initial public offering price of $11.00 per share and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 5 RISK FACTORS IN EVALUATING AN INVESTMENT IN THE COMMON STOCK BEING OFFERED HEREBY, INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS. CYCLICAL NATURE OF REAL ESTATE MARKET The title insurance industry is dependent on the volume of real estate transactions that occur. Substantially all of the Company's title insurance, escrow and other real estate service business results from sales and refinancings of real estate, primarily residential properties, and from the construction and sale of new properties. Real estate activity is cyclical in nature and is highly sensitive to the cost and availability of long-term mortgage funds and general economic conditions. Real estate activity and, in turn, the Company's revenue base, can be adversely affected during periods of high interest rates and/or limited money supply. Accordingly, no assurance can be given that historical levels of premiums and fees received by the Company will be available to the Company in the future. GEOGRAPHIC CONCENTRATION The Company derives substantially all of its revenues from real estate transactions occurring in California. Due to the relatively high cost of real estate in California, the real estate market may be more sensitive to fluctuations in interest rates and general economic conditions than other regions of the United States. Adverse economic conditions affecting the California real estate market could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH THE RELATIONSHIP WITH FIDELITY NATIONAL FINANCIAL, INC. The Company maintains a close relationship with FNFI and its subsidiaries and relies upon them for a number of services in connection with its operations. The Company has agreed that until June 30, 2002 it will act exclusively as an agent for FNTIC with respect to the procurement of title insurance policies in 13 selected counties in California and one county in Arizona, subject to certain exceptions. In exchange for a management fee, FNTIC provides a variety of administrative services for ATC, including accounting, legal and human resources services. The unexpected loss of FNTIC's underwriting or administrative services, for any reason, could result in an interruption in the Company's operations until such services are secured elsewhere, which could have a material adverse effect on the Company's business, financial condition and results of operations. Certain of FNFI's subsidiaries are competitors of the Company's in several of the markets in which the Company operates. A director and certain officers of the Company are also directors or officers of FNFI. Accordingly, there is a possibility that the interests of the Company and FNFI might conflict. There can be no assurance that the directors or officers of the Company, in satisfying their fiduciary duties and the requirements of applicable statutory laws to ensure such conflicts are properly resolved, can or will act in the best interests of the Company. RISKS ASSOCIATED WITH THE ACQUISITION OF NATIONAL On March 16, 1998, ATC entered into a Stock Purchase Agreement with a subsidiary of FNFI to acquire all of the outstanding capital stock of National Title Insurance of New York Inc. ("National"). National, a New York based title insurance underwriter, is currently licensed to issue title insurance policies in 35 states and the U.S. Virgin Islands. ATC has requested regulatory approval of this transaction from the Department of Insurance of the State of New York. An element of the Company's business strategy is to utilize National not only as a means to generate underwriting premiums but to expand geographically into states where the Company's subsidiaries are not currently licensed. There can be no assurance, however, that the required regulatory approval will be obtained for the acquisition of National or that the acquisition will be completed. In addition, National does not currently underwrite title 6 insurance policies through direct operations or agency relationships and the Company will be required to commit resources to establish direct operations and agency relationships in order to realize the benefits of this acquisition. There can be no assurance that the Company will be able to develop any business or generate title insurance premiums through National, or that it will realize any of the benefits anticipated from the acquisition of National. See "Business--Business Strategy" and "Business--Acquisition of National." COMPETITION The title insurance business is very competitive, primarily in the areas of service and expertise. The size and financial strength of the title insurer who underwrites the policies are also important factors in decisions relating to the purchase of title insurance. Many of the Company's competitors have greater financial, personnel, marketing and other resources than the Company, and some are underwritten by larger title insurance companies. Also, the removal of regulatory barriers in the future might result in new competitors, including financial institutions entering the title insurance business. Intense competition among the more established title insurance companies and any such new entrants could have a material adverse effect on the business, financial condition and results of operations of the Company. See "Business--Competition." RISKS RELATED TO POSSIBLE ACQUISITIONS An element of the Company's business strategy is to expand its operations through the acquisition of complementary businesses. Except for the acquisition of National, the Company has no agreements, understandings or commitments and is not currently engaged in negotiations with respect to any additional acquisition. There can be no assurance that the Company will be able to identify, acquire, profitably manage or successfully integrate any businesses into the Company without incurring substantial expenses, delays or other operational or financial problems. Moreover, competition for acquisition candidates is intense, which could both increase the price of any acquisition targets and decrease the number of attractive companies available for acquisition. Furthermore, acquisitions involve a number of special risks, including diversion of management's attention, failure to retain key acquired personnel, increased costs to improve managerial, operational, financial and administrative systems, legal liabilities, and amortization of acquired intangible assets, some or all of which could materially and adversely affect the Company's business, operating results and financial condition. The Company may have to issue additional equity securities or incur indebtedness in order to finance the acquisition of other businesses. In addition, there can be no assurance that acquired businesses, if any, will achieve anticipated revenues and earnings or performance at levels historically enjoyed by the Company. The failure of the Company to manage its acquisition strategy successfully could materially and adversely affect the Company's business, operating results and financial condition. See "Business--Business Strategy." MANAGEMENT OF GROWTH The Company is currently experiencing significant growth and intends to pursue further growth as part of its business strategy. The Company's ability to effectively manage the growth of its operations will require it to continue to improve its operational, financial and other internal systems and to attract, develop, motivate and retain its employees. The Company's rapid growth has presented and will continue to present numerous operational challenges, such as the assimilation of financial reporting systems and will increase the demands on the Company's senior management and the Company's systems and internal controls. In addition, the Company's success depends in large part upon its ability to attract, develop, motivate and retain talented employees with significant industry experience and contacts. Such employees are currently in great demand and there is significant competition for employees with the requisite skills and experience from other national and regional title companies. There can be no assurance that the Company will be able to attract and retain the qualified personnel necessary to pursue its growth strategy. 7 There can be no assurance that the Company will be able to maintain or accelerate its current growth, effectively manage its expanding operations or achieve planned growth on a timely or profitable basis. To the extent the Company is unable to manage its growth effectively and efficiently, the Company's business, financial condition and results of operations could be materially and adversely affected. See "Business-- Business Strategy." GOVERNMENT REGULATION OF SUBSIDIARIES The Company's underwritten title company subsidiaries, ATC, Nations Title Insurance of Arizona, Inc. and Santa Barbara Title Company, are subject to regulation by the state insurance authorities of the various states in which they transact business. The regulation of underwritten title companies is generally limited to requirements to maintain specified levels of net worth and working capital, and to obtain and maintain a license in each of the counties in which it operates. If ATC acquires National, it will be subject to more extensive regulations by such authorities applicable to title insurance underwriters. The nature and extent of such regulation of title insurance underwriters vary from jurisdiction to jurisdiction, but typically involve regulation of dividend payments, prior approval of the acquisition and control of a title company or of any company controlling a title company, certain transactions entered into by a title company with any of its affiliates, standards of solvency and minimum amounts of capital surplus which must be maintained, limitations on types and amounts of investments, restrictions on the size of risks which may be insured, approval of policy forms and premium rates, methods of accounting, establishing reserves for losses and loss adjustment expenses, underwriting and marketing practices, and reinsurance. These regulations may impede, or impose burdensome conditions on, rate increases or other actions that the Company might want to take to enhance its operating results. Such regulation is generally intended for the protection of policyholders rather than security holders. In addition, state regulatory examiners perform periodic examination of title underwriters. The insurance underwriter regulatory framework has recently been subject to increased scrutiny by the National Association of Insurance Commissioners, state legislators and insurance regulators in the United States Congress. No assurance can be given that future legislative or regulatory changes resulting from such activity will not adversely affect the Company or its subsidiaries. DEPENDENCE ON KEY PERSONNEL The success of the Company is highly dependent on the efforts of William P. Foley, II, Chairman of the Board, Michael C. Lowther, Chief Executive Officer, Wayne D. Diaz, President, Barbara A. Ferguson, Executive Vice President, Dennis R. Duffy, Executive Vice President, and Carl A. Strunk, Executive Vice President and Chief Financial Officer. The loss of services of Messrs. Foley, Lowther, Diaz, Duffy, or Strunk, or Ms. Ferguson, or any of the Company's key executives, for any reason, could materially and adversely affect the Company's business, operating results and financial condition. The Company has entered into five-year employment agreements with Mr. Lowther, Mr. Diaz, Ms. Ferguson and Mr. Duffy. The Company does not maintain key man insurance on any of its executive officers. HOLDING COMPANY STRUCTURE; RELIANCE ON DIVIDENDS FROM SUBSIDIARIES As a holding company whose principal assets include the securities of its underwritten title company subsidiaries, the Company's ability to meet debt service obligations and pay operating expenses and dividends, if authorized by its Board of Directors, depends primarily on the receipt of sufficient dividends from its subsidiaries. The insurance statutes and related regulations of California and Arizona, among other states, require the maintenance of minimum amounts of net worth, which may affect the underwritten title company's ability to pay dividends to the Company. 8 VARIABILITY IN QUARTERLY RESULTS The Company may experience significant fluctuations in future quarterly operating results due to a number of factors, including differences in the timing of the recognition of revenues and expenses, changes in the mix of title orders relating to refinancing transactions and real estate sale transactions, the seasonality of the real estate industry, the fluctuation of interest rates and general economic conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." BROAD DISCRETION AS TO USE OF PROCEEDS The Company has allocated a substantial portion of the net proceeds to be received in connection with this offering to increase the Company's funds available for working capital and general corporate purposes. The Company's management will have broad discretion to allocate the proceeds of the offering and the purposes for which such funds are used may vary significantly depending on a number of factors, including the amount of future revenues, the amount of cash generated or used by the Company's operations and acquisition opportunities presented to the Company. CONTROL BY PRINCIPAL SHAREHOLDERS Following the consummation of the offering, FNFI will beneficially own approximately 34.1% of the Company's outstanding Common Stock (approximately 33.0% if the Underwriters' over-allotment option is exercised in full), and will have the ability to control or significantly influence the election of directors and the results of other matters submitted to a vote of shareholders. In addition, Messrs. Lowther and Diaz, who are executive officers of the Company, will collectively own approximately 31.7% of the Company's outstanding Common Stock (approximately 30.7% if the Underwriters' over-allotment option is exercised in full) after the consummation of the offering. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company and may adversely affect the voting or other rights of other holders of Common Stock. See "Management" and "Principal Shareholders." SUBSTANTIAL DILUTION The initial public offering price for the shares of Common Stock in this offering is substantially higher than the net tangible book value per share of Common Stock. Purchasers of the Common Stock offered hereby will therefore incur an immediate substantial dilution in the amount of $7.73 per share in pro forma net tangible book value. See "Dilution." NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after the offering. The initial public offering price will be determined by negotiations among the Company and the Representative of the Underwriters and may bear no relationship to the Company's book value, earnings history or other investment criterion or to the price at which the Common Stock will trade after the offering. See "Underwriting" for factors to be considered in determining the initial public offering price. The Company believes that factors such as announcements of developments related to the Company's business, the Company's failure to meet securities analysts' expectations, general conditions in the real estate market and the economy, acquisitions, and changes in government regulations could cause the price of the Company's Common Stock to fluctuate, perhaps substantially. In addition, in recent years the stock market has experienced extreme price and volume fluctuations which have affected the market price of many service based companies and which have at times been unrelated to the operating performance of the specific companies whose stocks were affected. Such fluctuations could adversely affect the market price of the Company's Common Stock. Pursuant to the Bylaws of the NASD, the Common Stock will be 9 offered at a price no greater than that recommended by a qualified independent underwriter. See "Underwriting." POTENTIAL ANTI-TAKEOVER EFFECTS OF PREFERRED STOCK The Company's Articles of Incorporation authorize the issuance of 5,000,000 shares of "blank check" preferred stock, which will have such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Company's Common Stock. In the event of such issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. See "Description of Securities-- Preferred Stock." SHARES ELIGIBLE FOR FUTURE SALE; EFFECT OF OUTSTANDING OPTIONS Sales of a substantial number of shares of Common Stock including shares of Common Stock issued upon the exercise of outstanding options and warrants in the public market following the offering could adversely affect the market price for the Common Stock. The officers, directors and substantially all other shareholders of the Company have agreed not to sell or otherwise transfer any Common Stock for 180 days following the date of this Prospectus without the consent of the Representative on behalf of the Underwriters. The Company has outstanding options to purchase 332,904 shares of Common Stock at an exercise price of $0.66 per share. The Company intends to grant options to certain directors and employees to purchase 320,000 shares of Common Stock at the initial public offering price and subject to certain vesting requirements pursuant to the Company's 1998 Stock Incentive Plan. The Company intends to register all of such shares, as well as options to purchase an additional 330,000 shares reserved for issuance under the 1998 Stock Incentive Plan, on a registration statement on Form S-8, shortly after the date of this Prospectus. The possibility that substantial amounts of Common Stock may be sold in the public market would likely have a material adverse effect on prevailing market prices of the Common Stock and could impair the Company's ability to raise capital through the sale of its equity securities. See "Shares Eligible for Future Sale." YEAR 2000 ISSUE Many existing 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. As a result, any computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major system failure or miscalculations. The Company has performed a review of its internal systems to identify and resolve the effect of Year 2000 software issues on the integrity and reliability of its financial and operational systems. The Company has a plan to correct and test the programs affected by the conversion of a two digit year to a four digit year. The final phase of the project is scheduled to be completed by mid-1999. In addition, the Company is also communicating with its principal service providers to ensure Year 2000 issues will not have an adverse impact on the Company. Based upon its internal review and communications with its principal service providers, the Company believes that the costs of achieving Year 2000 compliance will not have a material adverse impact on the Company's business, operations or financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Issues." FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This Prospectus contains certain forward-looking statements that involve substantial risks and uncertainties. Such forward-looking statements are principally contained in the sections "Prospectus Summary," 10 "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and include, without limitation, (i) the Company's expectation and estimates as to the Company's business operations (including the introduction of new products or services) and future financial performance (including growth in revenues and net income and cash flows); (ii) the ability of the Company to finance its working capital requirements; (iii) the Company's business strategy for expanding its presence in the title insurance and real estate related services markets; and (iv) the Company's ability to distinguish itself from its current and future competitors. In addition, in those and other portions of this Prospectus, the words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. These forward-looking statements are based largely on the Company's current expectations and are subject to a number of risks and uncertainties. The Company's actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. In addition to the other risks described elsewhere in this "Risk Factors" discussion, factors that could cause or contribute to such differences include, but are not limited to (i) those relating to conducting operations in a competitive and regulated environment; (ii) the effect of fluctuations in the volume of, and the seasonal nature of, real estate transactions; (iii) the relatively high costs of producing title evidence when premiums are subject to regulatory and competitive restraints; (iv) changes in external competitive market factors or in the Company's internal budgeting process which might impact trends in the Company's results of operations; (v) unanticipated working capital or other cash requirements; (vi) changes in the Company's business strategy or an inability to execute its strategy due to unanticipated changes in the title insurance and real estate services markets; and (vii) various other factors that may prevent the Company from competing successfully in the marketplace. 11 THE COMPANY The Company provides title insurance services as well as other real estate related financial and informational services including escrow, real estate information, trustee sale guarantees and appraisals. In addition, the Company obtains specialized services for its customers, which include, but are not limited to, tax reporting services, exchange intermediary services and courier services. The Company presently maintains 57 offices in 13 counties throughout California and one county in Arizona. ATC, the Company's primary subsidiary, commenced business in 1989, and was acquired by FNFI in December 1995, at which time ATC's operations had been conducted solely in Kern County, California. Following the acquisition by FNFI, ATC pursued an expansion strategy that included acquiring and opening offices in selected other counties located throughout California. In January 1997, FNFI contributed to ATC all of the outstanding stock of Nations Title Insurance of Arizona, Inc., which is an underwritten title company in Phoenix, Arizona, and Landmark REO Management Services, Inc., a property management company. The Company was incorporated in November 1996 by its current management, and in July 1997 acquired 60% of the outstanding stock of ATC from FNFI for $6.0 million in cash. The purchase price was funded with debt incurred by the Company, all of which will have been repaid from operations or as a result of the Reorganization. In August 1997, under the control of the Company, ATC purchased all of the outstanding common stock of Santa Barbara Title Company. The Company also formed its other subsidiaries, American Document Services, Inc., West Point Appraisal Services, Inc., West Point Support Services, Inc., and West Point Properties, Inc., in 1997. In March 1998, the Company agreed to acquire National, a New York underwriter, from a subsidiary of FNFI for $3.25 million. This acquisition is intended to permit an expansion of the products and services offered by the Company. Additionally, National is licensed to issue title insurance in 35 states and the U.S. Virgin Islands. The completion of this transaction is subject to, and currently awaiting, receipt of approval from the New York Department of Insurance. See "Risk Factors--Risks Associated with the Acquisition of National" and "Business--Acquisition of National." REORGANIZATION In August 1998, the Company agreed to acquire the remaining 40% of the Company's outstanding common stock of ATC from FNFI in exchange for shares of Common Stock representing approximately 43% of the Company's outstanding shares immediately prior to this offering. This transaction is subject to the approval of the California Department of Insurance. In connection with this exchange, the shareholders of the Company, other than FNFI, will assume approximately $1.2 million of acquisition debt from the Company, and the remaining unpaid balance of the acquisition indebtedness, in the amount of approximately $3.5 million, will be repaid from the proceeds of a dividend to the Company from ATC. (These transactions are collectively referred to as the "Reorganization"). 12 The following diagram illustrates the Company's corporate structure before giving effect to the Reorganization. [GRAPHIC] [Graphic consists of organizational chart showing subsidiaries and classes of shareholders of American Title Company, before reorganization.] (1) Includes American Document Services, Inc., West Point Appraisal Services, Inc., West Point Support Services, Inc. and West Point Properties, Inc. 13 The following diagram illustrates the corporate structure of the Company after giving effect to the Reorganization. [GRAPHIC] [Graphic consists of organizational chart showing subsidiaries and classes of shareholders of American National Financial, Inc. and American Title Company, after reorganization.] (1) Includes American Document Services, Inc., West Point Appraisal Services, Inc., West Point Support Services, Inc. and West Point Properties, Inc. 14 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,250,000 shares of Common Stock offered hereby, after deducting underwriting discounts and commissions and other offering expenses (estimated to be approximately $570,000), all of which are payable by the Company, are estimated to be approximately $12.1 million ($14.0 million if the Underwriters' over-allotment option is exercised in full). The Company intends to use $3.25 million of the net proceeds to finance the acquisition of National. See "Business-- Acquisition of National." The remainder will be used for general corporate purposes, which may include strategic acquisitions. Except for the acquisition of National, the Company has no agreements, understandings or commitments and is not currently engaged in negotiations with respect to any acquisitions. Management will have broad discretion with respect to the expenditure of such proceeds. See "Risk Factors--Broad Discretion as to Use of Proceeds." In addition to providing the Company with funds to finance the purchase of National and other possible strategic acquisitions, the purposes of this offering are to increase the Company's working capital and equity base, to provide a public market for its Common Stock, to provide liquidity for its shareholders and to permit the use of publicly tradeable Common Stock in future acquisitions. Pending their application by the Company, the net proceeds of the offering not immediately required for the purposes described above will be invested principally in U.S. Government securities, short-term certificates of deposit, money market funds or other short-term, interest-bearing securities. DIVIDEND POLICY The Company has not declared or paid any cash dividends on its capital stock since its inception and for the foreseeable future intends to follow a policy of retaining all of its earnings, if any, to finance the development and continued expansion of its business. There can be no assurance that dividends will ever be paid by the Company. Any future determination as to payment of dividends will depend upon the Company's financial condition, results of operations and such other factors as the Board of Directors deems relevant. The Company's underwritten title company subsidiaries are subject to certain governmental regulations requiring the maintenance of minimum amounts of net worth, which may affect their ability to pay dividends to the Company and, accordingly, the Company's ability to pay dividends to its shareholders. See "Risk Factors--Holding Company Structure; Reliance on Dividends from Subsidiaries." 15 DILUTION The pro forma net tangible book value of the Company at June 30, 1998 after giving effect to the Reorganization was approximately $8.0 million or $1.31 per share. Pro forma net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the receipt by the Company of the estimated net proceeds from the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share, the pro forma as adjusted net tangible book value of the Company at June 30, 1998 would have been approximately $20.2 million, or $3.27 per share. This represents an immediate increase in pro forma net tangible book value of $1.96 per share to the existing shareholders and an immediate dilution of $7.73 per share to new investors purchasing shares in the offering. The following table illustrates this per share dilution: Assumed initial public offering price per share of Common Stock.................................................... $ 11.00 Pro forma net tangible book value per share as of June 30, 1998.......................................... $ 1.31 Increase in pro forma net tangible book value per share attributable to new investors.......................... 1.96 ----- Pro forma net tangible book value per share after the offering................................................. 3.27 ----------- Dilution per share to new investors........................ $ 7.73 ----------- -----------
The following table summarizes on a pro forma basis as of June 30, 1998, after giving effect to the Reorganization, the differences between the existing shareholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ----------------------- -------------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ----------- ------------- ----------- ----------- Existing shareholders......................... 4,917,096 79.7% $ 6,818,649(1) 33.2% $ 1.39 New investors................................. 1,250,000 20.3 $ 13,750,000 66.8 $ 11.00 ---------- ----- ------------- ----- Total....................................... 6,167,096 100.0% $ 20,568,649 100.0% ---------- ----- ------------- ----- ---------- ----- ------------- -----
- ------------------------ (1) Includes approximately $5.6 million, representing the book value of the minority interest associated with the shares of ATC owned by FNFI, which are to be exchanged for 2,099,996 shares of Common Stock in connection with the Reorganization, and $1.2 million, representing the principal amount of indebtedness of the Company to be assumed by the existing shareholders (other than FNFI) in connection with the Reorganization. 16 CAPITALIZATION The following table sets forth the capitalization of the Company: (i) at June 30, 1998, (ii) on a pro forma basis to give effect to the Reorganization and the repayment of acquisition debt since June 30, 1998, and (iii) pro forma as adjusted, to give effect to the Reorganization and the repayment of acquisition debt since June 30, 1998 and to reflect the sale of 1,250,000 shares of Common Stock offered by the Company hereby and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds" and "Reorganization." The following table should be read in conjunction with the Consolidated Financial Statements of the Company and related notes thereto appearing elsewhere in this Prospectus.
JUNE 30, 1998 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- ----------- ----------- (DOLLARS IN THOUSANDS) Cash and cash equivalents.................................................... $ 6,154 $ 2,454 $ 14,602 --------- ----------- ----------- --------- ----------- ----------- Acquisition debt(1).......................................................... $ 4,900 $ -- $ -- Note payable, secured by building(2)......................................... 473 473 473 Obligations under capital leases with affiliates(3).......................... 1,751 1,751 1,751 --------- ----------- ----------- Total long term debt and capital lease obligations........................... 7,124 2,224 2,224 Minority interest in consolidated subsidiary................................. 5,619 -- -- Shareholders' equity: Preferred Stock, no par value, 5,000,000 shares authorized; no shares issued and outstanding................................................... -- -- -- Common Stock, no par value, 50,000,000 shares authorized; 2,875,092 shares issued and outstanding, actual; 4,917,096 shares issued and outstanding, pro forma; and 6,167,096 shares issued and outstanding, pro forma as adjusted(4).............................................................. -- -- -- Additional paid-in-capital................................................. -- 6,819 18,967 Retained earnings.......................................................... 4,209 4,209 4,209 --------- ----------- ----------- Total shareholders' equity............................................... 4,209 11,028 23,176 --------- ----------- ----------- Total capitalization................................................... $ 16,952 $ 13,252 $ 25,400 --------- ----------- ----------- --------- ----------- -----------
- ------------------------ (1) Acquisition debt bears interest at the prime rate (8.5% per annum as of June 30, 1998), matures in November 2002, and includes current maturities of $400,000. (2) Note payable, secured by building, bears interest at the prime rate (8.5% per annum as of June 30, 1998) and matures in December 1999. (3) Includes current maturities of $697,273. (4) Excludes (i) 125,000 shares issuable upon exercise of the Representative's Warrants; (ii) 332,904 shares issuable upon exercise of outstanding options at an exercise price of $0.66 per share; and (iii) 650,000 shares reserved for issuance under the Company's 1998 Stock Incentive Plan, of which 320,000 shares will be issuable, subject to certain vesting requirements, pursuant to options to be granted upon consummation of this offering at an exercise price equal to the initial public offering price. See "Management--Stock Incentive Plan." 17 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA) The Predecessor financial information included in this Prospectus includes the historical financial information of the operations previously owned by FNFI and acquired by the Company on July 1, 1997. The Company's financial information included herein includes only the historical financial information of the Company since its formation in 1996. All Predecessor information excludes the impact of the goodwill and minority interest associated with the Company's acquisition of 60% of the common stock of ATC from FNFI on July 1, 1997. The Company income statement data for the year ended December 31, 1997, and the balance sheet data at December 31, 1997, have been derived from the Company's consolidated financial statements and Notes thereto, which statements have been audited by KPMG Peat Marwick LLP, independent auditors, and are included elsewhere in this Prospectus. The Predecessor balance sheet data at December 31, 1996 and the Predecessor income statement data for each of the two fiscal years ended December 31, 1995 and 1996 and the six months ended June 30, 1997 have been derived from the Predecessor's Financial Statements, which statements are included elsewhere in this Prospectus. The Company's data for the six months ended June 30, 1998 have been derived from unaudited Financial Statements also appearing elsewhere herein and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of interim periods presented. Results for the period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the entire year. The following information should be read in conjunction with the Financial Statements and the Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
PREDECESSOR ------------------------------------------------------------- COMPANY --------------- YEAR ENDED DECEMBER 31, YEAR ENDED ------------------------------------------ SIX MONTHS ENDED DECEMBER 31, 1993 1994 1995 1996 JUNE 30, 1997 1997 --------- --------- --------- --------- ----------------- --------------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Title premiums....................... $ 10,719 $ 12,650 $ 21,974 $ 36,600 $ 16,773 $ 20,641 Escrow fees.......................... 6,205 4,470 5,527 9,672 5,581 7,352 Other fees and income................ 1,652 1,173 2,220 5,460 2,787 5,532 --------- --------- --------- --------- ------- ------- Total revenue...................... $ 18,576 $ 18,293 $ 29,721 $ 51,732 $ 25,141 $ 33,525 Personnel costs...................... 9,810 13,917 18,512 29,216 14,364 16,185 Other operating expenses............. 5,782 7,649 9,963 14,473 5,623 8,084 Title plant rent and maintenance..... 1,215 1,538 2,405 4,107 2,009 2,664 Fees to underwriters................. 1,282 1,503 2,628 4,151 1,852 2,614 Income before minority interest...... 280 (3,909) (2,400) (174) 743 2,204 Net income (loss)(3)................. 280 (3,909) (2,400) (174) 743 1,123 PER SHARE DATA: Earnings per share: Basic.............................. $ 0.38 Diluted............................ $ 0.38 Weighted average common shares outstanding: Basic.............................. 2,972 Diluted............................ 2,972 PRO FORMA DATA (5): Net income........................... 3,108 Earnings per share: Basic.............................. $ 0.61 Diluted............................ $ 0.61 Weighted average common shares outstanding: Basic.............................. 5,072 Diluted............................ 5,072 OTHER OPERATING DATA: Files opened......................... 60,600 93,900 40,700 46,800 Files closed......................... 36,700 63,000 28,200 32,600 Average fee per file(6).............. $ 786 $ 773 $ 835 $ 886 Period end number of employees....... TOTAL YEAR SIX MONTHS ENDED JUNE ENDED 30, DECEMBER 31, ------------------------ 1997 1997(1) 1998(2) --------------- ----------- ----------- (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Title premiums....................... $ 37,414 $ 16,773 $ 27,421 Escrow fees.......................... 12,933 5,581 10,716 Other fees and income................ 8,319 2,787 7,138 ------- ----------- ----------- Total revenue...................... $ 58,666 $ 25,141 $ 45,275 Personnel costs...................... 30,549 14,364 22,522 Other operating expenses............. 13,707 5,623 7,775 Title plant rent and maintenance..... 4,673 2,009 3,016 Fees to underwriters................. 4,466 1,852 3,300 Income before minority interest...... 2,947 743 5,131 Net income (loss)(3)................. N/A(4) 743 3,086 PER SHARE DATA: Earnings per share: Basic.............................. $ 1.06 Diluted............................ $ 1.01 Weighted average common shares outstanding: Basic.............................. 2,918 Diluted............................ 3,060 PRO FORMA DATA (5): Net income........................... 5,339 Earnings per share: Basic.............................. $ 1.06 Diluted............................ $ 1.03 Weighted average common shares outstanding: Basic.............................. 5,018 Diluted............................ 5,160 OTHER OPERATING DATA: Files opened......................... 87,500 40,700 65,600 Files closed......................... 60,800 28,200 44,500 Average fee per file(6).............. $ 863 $ 835 $ 834 Period end number of employees.......
DECEMBER 31, ------------------------ 1996(1) 1997(2) ----------- ----------- BALANCE SHEET DATA: Cash and cash equivalents................................................................... $ 26 $ 7,224 Working capital............................................................................. 4,426 5,718 Total assets................................................................................ 10,015 22,365 Due to affiliates........................................................................... -- 1,411 Shareholders' equity........................................................................ 6,753 1,123 BALANCE SHEET DATA: Cash and cash equivalents................................................................... $ 6,154 Working capital............................................................................. 8,612 Total assets................................................................................ 27,532 Due to affiliates........................................................................... 197 Shareholders' equity........................................................................ 4,209
- ---------------------------------- (1) Reflects only Predecessor financial information which has been audited. The Company's historical operating results for the six months ended June 30, 1997 were not significant. (2) Reflects historical financial information of the Company. (3) The statutory tax rate was 40% (combined federal and state) for each of the periods presented. The effective tax rate fluctuates from period to period based on the components of taxable income. The effective tax rate for the six months ended June 30, 1998 was 41%, for the six months ended June 30, 1997 was 43% and for the twelve months ended December 31, 1997 (combined Company and Predecessor) was 44.1%. (4) Not applicable because the second six months of this period excludes the 40% minority interest in ATC. (5) To give effect to the Reorganization (see "Reorganization") and assumes ATC had been acquired on January 1, 1997. (6) Average fee per file information consists of revenue divided by number of closed files (not including revenue generated by, or closed files relating to, the Company's STAR Product, which are excluded due to the abbreviated characteristics of the policy). See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company and the Predecessors and the related Notes thereto appearing elsewhere herein. The discussion set forth below includes both historical financial information relating to the Company and financial information relating to the Company's Predecessors. All amounts and related information for 1995 and 1996 relate solely to Predecessor operations, which consisted of the operations that are now ATC. The predecessor operations are those of ATC since it was acquired by FNFI and other operations of FNFI contributed to ATC as of June 30, 1997 that were operated as separate profit centers but not separate legal entities. As separate profit centers or divisions of FNFI, only operating activities of these divisions were segregated in FNFI's accounting records. Cash balances and other balance sheet information was co-mingled within the accounts of FNFI's subsidiaries that owned the respective divisions. As such, the balance sheet and statements of shareholders' equity and cash flows present the operations of ATC. The statements of combined operations present operations of ATC and the divisions of FNFI, which were later contributed to ATC, as if the combined operations were a single entity throughout the periods presented. For 1997, these amounts and related information include both Predecessor operations (for January 1, 1997 through June 30, 1997) and actual operations of the Company for the year ended December 31, 1997 (which includes ATC for July 1, 1997 through December 31, 1997). The information for the six months ended June 30, 1997 and June 30, 1998 consist of Predecessor information for the earlier period, and actual historical information for the Company for the latter period. Operations during the latter period included both the ATC, NTA and WPSS operations as well as the results of operations of the Company's other subsidiaries, which had not been in operation during the earlier period. See "The Company." OVERVIEW The following table sets forth certain financial and other data of the Company and its Predecessor operations for the periods indicated:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, OTHER THAN FEE PER FILE) Total revenue....................... $ 29,721 $ 51,732 $ 58,666 $ 25,141 $ 45,275 Total expenses...................... 33,508 51,947 53,395 23,848 36,613 Income before minority interest.......................... (2,400) (174) 2,947 743 5,131 Net income (loss)................... $ (2,400) $ (174) N/A(1) $ 743 $ 3,086 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Orders opened(2).................... 60,600 93,900 87,500 40,700 65,600 Orders closed(2).................... 36,700 63,000 60,800 28,200 44,500 Average fee per file(2)............. $ 786 $ 773 $ 863 $ 835 $ 834
- ------------------------ (1) Not applicable because the second six months of this period excludes the 40% minority interest in ATC. (2) Excludes orders and fees related to STAR products. 19 The Company's revenue is closely related to the level of real estate activity and the average price of real estate sales. Real estate sales are directly affected by the availability of funds to finance purchases. Other factors affecting real estate activity include demand, mortgage interest rates, family income levels and general economic conditions. While the level of sales activity was relatively depressed in certain geographical areas during the period 1991 through mid-1993, reductions in mortgage interest rates beginning in the latter part of 1991 triggered an increase in refinancing activity, which continued at record levels through 1993 and into the first quarter of 1994. During 1994 and early 1995, steady interest rate increases caused by actions taken by the Federal Reserve Board resulted in a significant decline in refinancing transactions and a stagnation in residential resales and new home sales. Since late 1995, decreases in mortgage interest rates and the resulting improvement in the real estate market have had a favorable effect on the level of real estate activity, including refinancing transactions, new home sales and resales. The overall economic environment, stable mortgage interest rates and strength in the California and West Coast real estate market contributed to very positive conditions for the industry throughout the second half of 1996, all of 1997 and into the first half of 1998. It is impossible to predict the direction interest rates and the real estate market may move in the future. The Company's revenues include revenues from title insurance premiums (which also includes trustee sale guarantee fees), escrow fees, and other fees and revenues. The Company's operations generate escrow fees from holding and disbursing funds and documents in connection with the closing of real estate transactions. Escrow fees generally fluctuate in a pattern consistent with the fluctuation in title insurance premiums. Other fees and revenue primarily consist of real estate information fees, reconveyance fees, recording fees and appraisal fees, in connection with real estate transactions, and include fees related to the Company's STAR product. Other fees and revenue trend closely with the level of title insurance and escrow business. The Company's principal costs include personnel costs, fees to underwriters, title plant rent and maintenance costs, and other operating expenses. Personnel costs include both base salaries and commissions paid to employees, and are the most significant operating expense incurred by the Company. Fees to underwriters represent the portion of gross title policy premiums paid by the Company's underwritten title companies to FNTIC pursuant to the terms of Issuing Agency Agreements with that underwriter, and similar fees paid by the Company's other underwritten title company subsidiaries. Prior to 1997, the Predecessor operations were charged a 12% underwriting fee by its underwriters. Beginning in January 1997, ATC entered into an Issuing Agency Agreement with FNTIC under which ATC pays FNTIC an underwriting fee equal to 11% of the title insurance premiums received. In addition, ATC pays FNTIC a fee equal to 1% of title insurance premiums for certain accounting, human resources and legal services provided by FNFI. Title plant rent and maintenance costs consist of payments for access to title plants, and costs of updating these title plants. Title plant rent and maintenance costs includes daily update expenses that are dependent on the volume of real estate transaction activity in the market generally and a rental charge that is based on actual utilization. Other operating expenses consist of facilities expenses, postage and courier services, computer services, professional services, advertising expenses, general insurance, trade and notes receivable allowances, depreciation and amortization. Title insurance premiums and escrow fee revenue are recognized as income at the time the underlying real estate transaction closes. Expenses directly related to the title and escrow process are recognized as they are incurred, throughout the time of the escrow. As a result, the Company's recognition of revenue relating to a given escrow lags approximately 60-90 days behind the opening of that escrow and the recognition of the corresponding expenses. These factors may result in fluctuations in gross margins from quarter to quarter. 20 While the number of orders that close affects the Company's revenue, the largest component of the Company's expenses are personnel costs. Since personnel costs are relatively fixed over the short-term, in a rapidly declining market, reductions in the number of orders can adversely affect margins. Gross margins are also affected by the relative numbers of orders that relate to refinancing transactions, as compared to those relating to real estate sale transactions. The average fee per file and corresponding gross margins are higher for real estate sale and resale transactions than refinance transactions for three principal reasons: (i) a larger percentage of sale and resale orders close as compared to refinance orders, (ii) typically two policies are issued in a resale transaction (one each to the buyer and lender) whereas only one is issued in a refinance transaction and (iii) the base rate charged on sale and resale transactions is typically higher than that charged on refinance transactions. Because title insurance premiums are calculated with regard to the purchase price of the property or the amount of the lender's mortgage, average fees per file will also increase during periods in which real estate prices, and corresponding mortgage loans, are increasing. RESULTS OF OPERATIONS--INTERIM PERIODS The following table presents information regarding the components of the Company's revenue for the periods presented. The percentages shown reflect the dollar amounts shown expressed as a percentage of total revenues for the corresponding period.
SIX MONTHS ENDED JUNE 30, ------------------------------------------ 1997 1998 -------------------- -------------------- (DOLLARS IN THOUSANDS) AMOUNT % AMOUNT % --------- --------- --------- --------- Title insurance premiums............................... $ 16,773 66.7 $ 27,421 60.6 Escrow fees............................................ 5,581 22.2 10,716 23.7 Other fees and revenue................................. 2,787 11.1 7,138 15.7 --------- --------- --------- --------- Total revenue...................................... $ 25,141 100.0% $ 45,275 100.0% --------- --------- --------- --------- --------- --------- --------- --------- Personnel costs........................................ $ 14,364 57.1 $ 22,522 49.7 Other operating expenses............................... 5,623 22.4 7,775 17.2 Title plant rent and maintenance....................... 2,009 8.0 3,016 6.7 Fees to underwriters................................... 1,852 7.4 3,300 7.3 --------- --------- --------- --------- Total expenses..................................... $ 23,848 94.9% $ 36,613 80.9% --------- --------- --------- --------- --------- --------- --------- ---------
REVENUE TITLE INSURANCE PREMIUMS. Revenues from title insurance premiums were $27.4 million for the six months ended June 30, 1998 (the "1998 Period") as compared to $16.8 million for the same period in 1997 (the "1997 Period"), an increase of $10.6 million or 63.1%. This growth is a result of increases in both home prices and the number of sale and refinancing transactions that occurred in the 1998 Period. During this time period the number of orders closed increased by 57.8%. The average fee per file, defined as total revenues net of abbreviated title policies issued primarily to lenders, divided by the number of orders closed, was $834 for the 1998 Period, as compared to $835 for the 1997 Period. ESCROW FEES. Revenues from escrow fees were $10.7 million for the 1998 Period as compared to $5.6 million for the 1997 Period, an increase of $5.1 million or 91.1%. This increase is a result of a continuing favorable market for real estate transactions as well as continuing efforts by the Company to expand its escrow operations in Southern California. 21 OTHER FEES AND REVENUE. Other fees and revenue were $7.1 million for the 1998 Period, as compared to $2.8 million for the 1997 Period, an increase of $4.3 million or 153.6%. This increase is a result of the increased number of real estate transactions handled by the Company during the 1998 Period, as described above, as well as an expansion of the services offered by the Company between the periods. EXPENSES PERSONNEL COSTS. Personnel costs were $22.5 million for the 1998 Period as compared to $14.4 million for the 1997 Period, an increase of $8.1 million or 56.3%. Personnel costs were 49.7% of total revenues for the 1998 Period as compared to 57.1% for the 1997 Period. This decrease of personnel costs as a percentage of revenues is a result of increased productivity and operating efficiencies resulting from the implementation of automated escrow and title systems. Management does not expect the improvement in productivity to continue at the same rate in the future. OTHER OPERATING EXPENSES. Other operating expenses were $7.8 million for the 1998 Period as compared to $5.6 million for the 1997 Period, an increase of $2.2 million or 39.3%. As a percentage of total revenues, other operating expenses decreased to 17.2% during the 1998 Period from 22.4% for the 1997 Period. This reduction as a percentage of revenues resulted from the implementation of improved information systems and cost control programs by the Company during 1997. TITLE PLANT RENT AND MAINTENANCE EXPENSES. Title plant rent and maintenance expenses were $3.0 million for the 1998 Period as compared to $2.0 million for the 1997 Period, an increase of $1.0 million or 50.0%. This increase is primarily due to the variable expenses relating to the volume of orders, which increased during the 1998 Period. FEES TO UNDERWRITERS. Fees to underwriters were $3.3 million for the six months ended June 30, 1998 as compared to $1.9 million for the same period of the prior year, an increase of $1.4 million or 73.7%. Fees to underwriters are calculated as a fixed percentage of title insurance premiums received, and therefore increased from period to period in direct proportion to the increase in title insurance premium revenue during these periods. RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 The following table presents information regarding the components of the Company's revenue for the periods presented.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 1995 1996 1997 -------------------- -------------------- -------------------- AMOUNT % AMOUNT % AMOUNT % --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Title insurance premiums........... $ 21,974 73.9 $ 36,600 70.7 $ 37,414 63.8 Escrow fees........................ 5,527 18.6 9,672 18.7 12,933 22.0 Other fees and revenue............. 2,220 7.5 5,460 10.6 8,319 14.2 --------- --------- --------- --------- --------- --------- Total revenue.................... $ 29,721 100.0% $ 51,732 100.0% $ 58,666 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Personnel costs.................... $ 18,512 62.3 $ 29,216 56.5 $ 30,549 52.0 Other operating expenses........... 9,963 33.5 14,473 28.0 13,707 23.4 Title plant rent and maintenance... 2,405 8.1 4,107 7.9 4,673 8.0 Fees to underwriters............... 2,628 8.8 4,151 8.0 4,466 7.6 --------- --------- --------- --------- --------- --------- Total expenses................. $ 33,508 112.7% $ 51,947 100.4% $ 53,395 91.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
22 COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 REVENUE TITLE INSURANCE PREMIUMS. Revenues from title insurance premiums was $37.4 million for 1997, as compared to $36.6 million for 1996, an increase of $0.8 million or 2.2%. This increase resulted from increases in both refinancing and real estate sale transactions during 1997, which largely resulted from stable mortgage interest rates and improvements in the overall economic environment in the California real estate market, offset in part by a reduction in revenues related to the counter-cyclical trustee sale guarantee and foreclosure business. The Company's average fee per file for orders closed in 1997 was $863 compared to $773 in 1996, an increase of $90 or 11.6%. ESCROW FEES. Revenues from escrow fees were $12.9 million for 1997, as compared to $9.7 million for 1996, an increase of $3.2 million or 33.0%. The increase in escrow fees, which occurred despite the more modest increase in title premiums during the same period, is primarily related to the establishment of new operations in Southern California, which contributed approximately $2.0 million. OTHER FEES AND REVENUE. Other fees and revenue were $8.3 million for 1997 as compared to $5.5 million for 1996, an increase of $2.8 million or 50.9%. This increase is a result of both the increased volume of real estate transactions occurring in 1997 and the Company's development of additional service offerings during this time period. EXPENSES PERSONNEL COSTS. Personnel costs were $30.5 million for 1997, as compared to $29.2 million for 1996, an increase of $1.3 million or 4.5%. As a percentage of total revenue, personnel costs decreased to 56.5% in 1997 from 52.0% in 1996. This decrease of personnel costs as a percentage of revenues is a result of increased productivity and operating efficiencies resulting from the implementation of automated escrow and title systems. Management does not expect the improvement in productivity to continue at the same rate in the future, however. OTHER OPERATING EXPENSES. Other operating expenses were $13.7 million in 1997 as compared to $14.5 million in 1996, a decrease of $0.8 million or 5.5%. As a percentage of total revenue, other operating expenses decreased to 23.4% in 1997 from 28% in 1996. This decrease resulted from cost control programs implemented in 1997. TITLE PLANT RENT AND MAINTENANCE EXPENSES. Title plant rent and maintenance expenses were $4.7 million for 1997 as compared to $4.1 million for 1996, an increase of $0.6 million or 14.6%. This increase is primarily due to the variable expenses relating to the volume of orders, which increased during 1997. FEES TO UNDERWRITERS. Fees to underwriters increased to $4.5 million in 1997 from $4.2 million in fiscal 1996, an increase of $0.3 million or 7.1%. Fees paid to underwriters are a fixed percentage of title insurance premiums, and therefore increased for the same reasons applicable to the increases in title insurance premiums from year to year. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 REVENUE TITLE INSURANCE PREMIUMS. Revenue from title insurance premiums was $36.6 million for 1996, as compared to $22.0 million for 1995, an increase of $14.6 million or 66.4%. This increase resulted from increases in both refinancing and real estate sale transactions during fiscal 1996, which resulted in large part from decreases in mortgage interest rates in late 1995. ESCROW FEES. Revenue from escrow fees were $9.7 million for 1996, as compared to $5.5 million for 1995, an increase of $4.2 million or 76.4%. This increase is a result of year to year improvement in the real 23 estate market described above, as well as focused efforts by the Predecessor to expand its escrow business in certain markets, such as Southern California, during 1996. OTHER FEES AND REVENUES. Other fees and revenues increased to $5.5 million for 1996 as compared to $2.2 million for 1995, an increase of $3.3 million or 150.0%. This increase is a result of the introduction of the STAR product. EXPENSES PERSONNEL COSTS. Personnel costs were $29.2 million for 1996, as compared to $18.5 million for 1995, an increase of $10.7 million or 57.8%. As a percentage of total revenue, personnel costs decreased to 56.5% in 1996 from 62.3% in 1995, due principally to the year to year growth in revenues. OTHER OPERATING EXPENSES. Other operating expenses increased to $14.5 million in 1996 from $10.0 million in 1995. The increase resulted from growth in the Predecessor's existing operations, the acquisition of Nations Title and the introduction of STAR division products. As a percentage of total revenue, other operating expenses decreased to 28.0% in 1996 from 33.5% in 1995. This decrease resulted from the fixed nature of certain of the other operating expenses which were covered by a larger revenue base. TITLE PLANT RENT AND MAINTENANCE EXPENSES. Title plant rent and maintenance expenses were $4.1 million for 1996 as compared to $2.4 million for 1995, an increase of $1.7 million or 70.8%. This increase is primarily due to the variable expenses relating to the volume of orders, which increased during 1996. FEES TO UNDERWRITERS. Fees to underwriters increased to $4.2 million in 1996 from $2.6 million in 1995, an increase of $1.6 million or 61.5%. Fees paid to underwriters are a fixed percentage of title insurance premiums, and therefore increased for the same reasons applicable to the increases in title insurance premiums from year to year. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $5.1 million and $4.1 million for the six months ended June 30, 1998 and June 30, 1997, respectively. At June 30, 1998, the Company held cash and cash equivalents of $6.2 million. At that date, the Company had long term debt of $7.1 million which consisted of capitalized leases, real estate indebtedness and debt (the "Acquisition Debt") incurred in connection with the acquisition by the Company of 60% of the outstanding common stock of ATC from FNFI. Upon consummation of the Reorganization, all of the Company's Acquisition Debt will be repaid or extinguished. See "Reorganization." The repayment of the Acquisition Debt will reduce the Company's cash balances by $3.7 million. Cash provided by (used in) operating activities was $2.8 million and $(4.5) million for the years ended December 31, 1997 and 1996, respectively. At December 31, 1997, the Company had $7.2 million of cash and cash equivalents and long term debt of $8.5 million. The Company's cash requirements include debt service, operating expenses and taxes. The Company believes that all anticipated cash requirements for current operations will be met from internally generated funds. Two significant sources of the Company's funds are dividends and distributions from its subsidiaries. As a holding company, the Company receives cash from its subsidiaries in the form of dividends and as reimbursement for operating and other administrative expenses it incurs. The Company's underwritten title companies collect premiums and fees and pay underwriting fees and operating expenses. These companies are restricted only to the extent of maintaining minimum levels of working capital and net worth, but are not restricted by state regulations or banking authorities in their ability to pay dividends and make distributions. The Company's other subsidiary operations collect revenue and pay operating expenses; however, they are not regulated by insurance regulatory or banking authorities. Positive cash 24 flow from the underwritten title companies and other subsidiary operations is invested primarily in cash and cash equivalents. At December 31, 1997, the Company was not in compliance with certain covenants in the agreements relating to the Acquisition Debt, which covenants related to minimum tangible net worth and capital expenditure restrictions. The lender has waived the minimum tangible net worth covenant through June 30, 1998 and the Company believes it is in compliance with this covenant at June 30, 1998. The lender has also agreed to waive the capital expenditure restriction through October 31, 1998. SEASONALITY Historically, the greatest volume of residential resale activity has usually occurred in the spring and summer months. However, events during the past five years, including numerous actions taken by the Federal Reserve Board, have caused unusual fluctuations in real estate activity, particularly in the seasonal pattern of residential resale and refinance activity. The Company cannot predict whether this pattern will continue to be affected by such factors. INFLATION To the extent real estate prices or mortgage interest rates increase due to inflationary factors, the Company's title insurance premium revenue generally increases because premiums are determined in part by the value of property or the amount of the mortgage loan. The Company's personnel costs and other operating expenses are also sensitive to inflation. YEAR 2000 ISSUES The Company is currently reviewing its information system hardware, operations and applications software relative to their compliance with potential Year 2000 issues. The Company believes that it has identified substantially all of the application software programs which require modification in order to become Year 2000 compliant and has a plan to correct and test the programs affected by the conversion of a two-digit year to a four-digit year. The Company expects the early phases of the project to be completed by the end of 1998. The final phase of the project is scheduled to be completed by mid-1999. The review of systems also includes the identification of vendors that may have a significant impact on the Company's operations and their expected completion of any conversions. The Company believes that its information systems operations and those of its significant vendors are or will become Year 2000 compliant such that there will not be any material adverse impact on the Company's results of operations or financial condition. The Year 2000 compliance changes are being made concurrently with planned systems upgrades and conversions in the normal course of business as such expenses associated with Year 2000 conversions are not expected to materially impact the Company. 25 BUSINESS INTRODUCTION The Company provides title insurance services as well as other real estate related financial and informational services including escrow, real estate information, trustee sale guarantees, and appraisals. In addition, the Company obtains specialized services for its customers, which include, but are not limited to, tax reporting services, exchange intermediary services and courier services. The Company's business is focused on the residential real estate market and it generates the majority of its revenues from issuing title insurance policies as an independent agent on behalf of a title underwriter. For the year ended December 31, 1997 and the six months ended June 30, 1998, title insurance premiums represented approximately 63.8% and 60.6% of the Company's revenues, respectively. The title insurance industry consists of insurers ("underwriters") who issue policies through direct operations or through agents. The Company's principal subsidiary, ATC, is an agent, known in California as an "underwritten title company." ATC has entered into an Issuing Agency Agreement to issue policies on behalf of FNTIC, an insurer which is licensed in California and Arizona, among other states. The Company has agreed to acquire National, a New York underwriter licensed in 35 states and the U.S. Virgin Islands. The Company's planned acquisition of National is expected to facilitate the Company's expansion into new markets and permit the Company to directly underwrite the title insurance policies that it issues in geographic areas not covered by the Company's exclusive relationship with FNTIC. The Company's operations are conducted through 14 branches, consisting of 57 offices, located in major counties throughout California and in Maricopa County, Arizona (Phoenix and surrounding areas). REAL ESTATE INDUSTRY Title insurance revenue is closely related to the level of real estate purchase and financing activity and the average price of real estate sales. Real estate sales are directly affected by the availability of funds to finance purchases. Other factors affecting real estate activity include demand, mortgage interest rates, family income levels and general economic conditions. While the level of sales activity was relatively depressed in certain geographical areas during the early 1990's, decreases in mortgage interest rates since late 1995 and the resulting improvement in the real estate market have had a favorable effect on the level of real estate activity, including refinancing transactions, new home sales and resales. The overall economic environment, stable mortgage interest rates and strength in the real estate market, especially in California, contributed to very positive conditions for the industry throughout 1996 and 1997 and into the first half of 1998. It is impossible to predict the future direction interest rates and the real estate market may move or fluctuate. According to Corporate Development Services, title insurance premiums in the United States were approximately $6.0 billion in 1997, representing an 11.8% compound annual growth rate since 1995. The Company believes that the increase in title premiums is primarily a result of an increase in new home sales and an increase in refinancing transactions, both of which resulted in large part from a decrease in mortgage interest rates during this period. The Mortgage Bankers Association estimates that refinancing transactions during the first four months of 1998 were four times higher than during the same period in 1997. In addition, the National Association of Realtors anticipates record sales of 4.35 million residential units in 1998, as compared to 4.22 million units in 1997. 26 Historically, as interest rates decrease, the number of housing starts typically rise in following periods. The following chart displays this relationship between national housing starts and interest rates. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
NATIONAL HOUSING STARTS & INTEREST RATES 1988 1989 1990 1991 1992 1993 Total Housing Starts 1,488,000 1,376,000 1,193,000 1,014,000 1,200,000 1,288,000 Fixed Mortgage Interest Rates 10.33% 10.32% 10.13% 9.25% 8.40% 7.33% Sources: Fixed Mortgage Rates: Freddie Mac Lender Survey; fixed rate; 80% loan-to-value mortgages. Does not incorporate points. Housing Starts: U.S. Bureau of the Census NATIONAL HOUSING STARTS & INTEREST RATES 1994 1995 1996 1997 Total Housing Starts 1,457,000 1,354,000 1,477,000 1,476,000 Fixed Mortgage Interest Rates 8.36% 7.95% 7.81% 7.10% Sources: Fixed Mortgage Rates: Freddie Mac Lender Survey; fixed rate; 80% loan-to-value mortgages. Does not incorporate points. Housing Starts: U.S. Bureau of the Census
Historical data shows the correlation between mortgage interest rates and title policy premiums: as interest rates decrease, the volume of title policies typically increases. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
NATIONAL MORTGAGE RATES AND TITLE PREMIUMS 1993 1994 1995 1996 1997 Fixed Interest Rates 7.33% 8.36% 7.95% 7.81% 7.10% Title Insurance Premiums $6,000,000 $5,800,000 $4,800,000 $5,500,000 $6,000,000 Sources: Mortgage Rates: Freddie Mac Lender Survey; Contract rate on commitments for fixed-rate; 80% loan-to-value mortgages. Does not incorporate points. Statutory Title Premiums: Corporate Development Services.
27 TITLE INDUSTRY TITLE POLICIES Title insurance policies insure title to real estate. The beneficiaries of title insurance policies are generally buyers of real property or mortgage lenders. The policy protects the insured against title defects, liens and encumbrances not specifically excepted from its coverage. Most mortgage lenders require title insurance as a condition to making loans secured by real estate. Title insurance is different from other types of insurance because it relates to past events which affect title to property at the time of closing and not unforeseen future events. Prior to issuing policies, underwriters can reduce or eliminate future losses by accurately performing searches and examinations. Title insurance policies are issued on the basis of a preliminary title 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 or survey of the property may also be made prior to the issuance of certain title insurance policies. Copies of public records, maps and other relevant historical documents are compiled and indexed in a "title plant" in order to facilitate the preparation of preliminary reports without the necessity of manually searching public records. Each title plant relates to a particular county and is kept current on a daily or other periodic basis by the continual addition of copies of recorded documents which affect 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. The major expense of a title company is the cost of the search and examination function performed in preparing preliminary title reports, commitments and title policies, rather than the claim losses associated with the issuance of these policies. The premium for title insurance is due in full at the closing of the real estate transaction and is based upon the purchase price of the property insured or the amount of the mortgage loan, and upon the type of coverage. Coverage under the policy generally terminates upon resale or refinance of the property. The terms of coverage have become relatively standardized in accordance with forms approved by state or national trade associations, such as the American Land Title Association, The California Land Title Association and the Land Title Association of Arizona. Among the most commonly issued title insurance policies are standard or extended coverage policies for owners and lenders and trustee sale guarantees which provide assurances to trustees concerning certain information in connection with nonjudicial foreclosures. THE TITLE POLICY AND UNDERWRITING PROCESS A brief description of the process of issuing a title insurance policy, which usually occurs over a thirty to ninety day period, 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) After the relevant historical data on the property is compiled, the title officer prepares a preliminary title report which documents (a) the current status of title and conditions affecting the property, (b) any exclusions, exceptions and/or limitations which the title underwriter might include in the policy and (c) specific issues which need to be addressed and resolved by the parties to the transaction before the title policy will be issued. The preliminary report is circulated to all the parties for consideration of any specific issues. (iii) After the specific issues identified in the preliminary report are resolved, an escrow agent closes the transaction in accordance with the instructions of the parties and the title underwriter's conditions. 28 (iv) Once the transaction is closed and all monies have been released, the title underwriter or agent issues the policies (a) to the owner and the lender on a new home sale or resale transaction or (b) to the lender only, on a refinance transaction. The terms and conditions upon which title to real property will be insured are determined in accordance with the standards, policies and procedures of the title underwriter. The underwriter may have a relationship with a third party agent, under which the agent issues the title insurance policy on behalf of the underwriter. The agent performs the search and examination function and retains a majority of the title premium as a commission. The underwriter receives the remainder of the premium collected by the agent in exchange for assuming the risk on the policy. Underwriting practices in California and Arizona are generally dictated by the California and Arizona Land Title Associations, although the underwriter's personnel interpret the application of these rules to specific circumstances. An underwriter, such as FNTIC, also maintains and distributes current information on title practices and procedures to its issuing agents. A third party agent that issues title insurance on behalf of an insurer is not subject to the same liability that the insurer faces under the policy. The agent is not assuming risk on the title policy and its liability with respect to the issuance of the policy is typically limited to a specific amount, pursuant to an agreement with the insurer. COMPETITIVE FACTORS A key competitive factor in the title insurance business is the ability to develop and maintain a qualified and experienced group of professionals through which services are delivered to customers. Title insurance business is typically generated through relationships with persons in the real estate industry such as independent escrow companies, real estate brokers and agents, developers, mortgage brokers, mortgage bankers, financial institutions and attorneys. Thus, the relationships and contacts maintained by sales personnel are critical to generating such business. In addition, the quality of a title company's service, its responsiveness, and its ability to adapt to customer's needs are important in attracting and maintaining customers. Other competitive factors include the financial strength and reputation of the insurer. The Company believes that the price of title insurance is typically not an important competitive factor. In both California and Arizona, where the Company's operations are currently conducted, the minimum price of title insurance is posted by the title underwriter and is regulated by the Department of Insurance in California, and by the State Banking Commission in Arizona. In the event the Company expands its operations into states where regulatory authorities do not control prices, the price of title insurance may also become an important competitive factor. REAL ESTATE RELATED SERVICES In addition to title insurance, real estate transactions often require other services such as escrow, appraisals, property management, trustee sale guarantees, and document preparation. The demand for faster closings and more cost effective transactions has resulted in a trend toward purchasing real estate related services on a "one stop" basis from vendors who offer the full array of such services. Because title companies occupy a central role in the process of closing a real estate transaction they are in a unique position to provide these services. The demand for some of these real estate related services is also countercyclical to the title insurance business. For example, as the economy declines, interest rates rise and residential housing sales drop, which causes foreclosures and the corresponding demand for trustee sale guarantees and property management services to increase. 29 EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
NATIONAL HOUSING STARTS AND DELINQUENCY RATES 1988 1989 1990 1991 1992 1993 Delinquency Rates 4.79% 4.81% 4.66% 5.03% 4.57% 4.22% Housing Starts 1,488,000 1,376,000 1,193,000 1,014,000 1,200,000 1,288,000 Sources: Housing Starts: U.S. Bureau of the Census Delinquency Rates: National Delinquency Survey, Mortgage Bankers Association NATIONAL HOUSING STARTS AND DELINQUENCY RATES 1994 1995 1996 1997 Delinquency Rates 4.10% 4.24% 4.33% 4.31% Housing Starts 1,457,000 1,354,000 1,477,000 1,476,000 Sources: Housing Starts: U.S. Bureau of the Census Delinquency Rates: National Delinquency Survey, Mortgage Bankers Association
COMPANY OPERATIONS TITLE OPERATIONS The Company's largest subsidiary, ATC, is an underwritten title company licensed by the State of California. ATC is not a title underwriter, but rather issues policies as an agent on behalf of FNTIC, a subsidiary of FNFI. ATC acts exclusively as an agent for FNTIC with respect to the procurement of title insurance policies in 13 selected counties in California and one county in Arizona, subject to certain exceptions. ATC retains 88% of the title premium collected on policies issued pursuant to its agreement with FNTIC. The remaining 12% is comprised of an 11% underwriting fee and a 1% administrative service fee, both paid to FNTIC. As an agent, ATC is not subject to the loss and reserve requirements applicable to insurers, and pursuant to its agreement with FNTIC, ATC's liability is limited to the first $5,000 of loss under any policy issued by it on behalf of FNTIC, except in the case of negligence, or willful or reckless conduct. To date, the amounts paid by the Company to FNTIC in reimbursement of FNTIC's claims losses under this arrangement have not been material. See "Business--Title Industry and--Relationship With Fidelity National Financial, Inc." However, ATC has agreed to purchase National, which is a licensed title underwriter. Although it has not recently written any significant amount of business, National is licensed to issue title insurance in 35 states. The acquisition, if successfully completed, is expected to provide the Company with an opportunity to underwrite title insurance policies and expand its operations through both direct and agency relationships. See "Business--Acquisition of National" and "Risk Factors--Risks Associated with the Acquisition of National." The maximum amount of liability for an insurer, such as National, under a title insurance policy is usually the face amount of the policy plus the cost of defending the insured'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, claim loss history, legal environment, geographic considerations, expected recoupments and the types of policies written. The title underwriter establishes a reserve for each known claim based on a review and evaluation of potential liability. 30 ATC's trustee sale guarantee ("TSG") division provides a central location for all trustee sale guarantee requests throughout California. The Company's services include providing ten-day letter information, customized accounting and reporting documents, fast track messenger services, and electronic file transfers. TSG services provide assurances to trustees concerning certain information in connection with nonjudicial foreclosures of property secured by a deed of trust. Because the number of foreclosures tends to increase as the real estate market and the economy decline, the Company's TSG division tends to be countercyclical to its title insurance business. The Company, through its subsidiaries, maintains 14 branches consisting of 57 offices located in major counties throughout California and in Maricopa County, Arizona (Phoenix and surrounding areas). Each of the Company's branches processes real estate transactions within the geographical area of the branch, usually a county boundary. Each branch is operated as a separate profit center. In the calendar years 1996 and 1997 and the six months ended June 30, 1998, the following branch operations of the Company and the Predecessor accounted for the indicated percentages of total title insurance premium revenues:
YEAR ENDED DECEMBER 31, ------------------------------------------------------ SIX MONTHS ENDED JUNE 30, 1996 1997 1998 -------------------------- -------------------------- -------------------------- BRANCH OPERATIONS PREMIUMS PERCENT PREMIUMS PERCENT PREMIUMS PERCENT - --------------------------------------- ------------- ----------- ------------- ----------- ------------- ----------- Alameda, CA............................ $ 2,801,290 7.7 $ 2,340,155 6.3 $ 2,074,325 7.6 Contra Costa, CA....................... 878,216 2.4 1,422,190 3.8 1,455,815 5.3 Fresno, CA............................. 494,605 1.4 -- -- -- -- Inland Empire, CA (Riverside and San Bernardino).......................... 2,887,014 7.9 3,239,259 8.7 1,498,223 5.5 Kern, CA............................... 2,593,224 7.1 2,569,164 6.9 1,466,678 5.3 Los Angeles, CA........................ 5,909,103 16.1 6,622,961 17.6 3,934,997 14.4 Orange, CA............................. 10,606,365 29.1 9,310,389 24.8 7,441,289 27.2 Phoenix, AZ............................ 1,912,400 5.2 2,680,274 7.2 1,815,447 6.6 Sacramento, CA......................... 764,427 2.1 348,751 0.9 268,469 1.0 San Diego, CA.......................... 2,946,284 8.0 2,279,367 6.1 2,170,902 7.9 San Mateo, CA.......................... 1,005,697 2.7 899,866 2.4 368,133 1.3 Santa Barbara, CA...................... -- -- -- 0.0 230,415 0.8 Santa Clara, CA........................ 3,529,743 9.6 2,863,894 7.7 2,474,388 9.0 Ventura, CA............................ 271,626 0.7 2,837,472 7.6 2,222,074 8.1 ------------- ----- ------------- ----- ------------- ----- Totals............................... $ 36,599,994 100.0% $ 37,413,743 100.0% $ 27,421,155 100.0% ------------- ----- ------------- ----- ------------- ----- ------------- ----- ------------- ----- ------------- -----
TITLE PLANTS To facilitate the preparation of title reports without the necessity of manually searching official public records, copies of public records, maps and other relevant historical documents are sometimes 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 which affect real property. Title companies often subscribe to independent title information services to assist in the updating of their title plants and the maintenance of title records. The Company leases title plants from FNTIC in Kern, San Mateo and Santa Clara counties for an aggregate payment of $10,000 per month. At the expiration of the lease, the Company will have an option to acquire these title plants for nominal consideration. See "Business--Relationship With Fidelity National Financial, Inc." The Company has also entered into a lease with Title Records, Inc. for the use of a title plant in Los Angeles County, and has the right to acquire a copy of that plant. The Company accesses title plants in the other counties in which it operates through joint plant user agreements with Experian Group and Security Union Title Insurance Company. 31 Maintenance activities constitute a significant item of expense, since each document must be reviewed and indexed. These costs plus the costs of subscribing to various title information services and other plant expenses range from approximately $2,000 to $21,000 per month per branch. ESCROW SERVICES The escrow services provided by the Company include all of those typically required in connection with residential and commercial real estate purchase and finance activities. Fees from escrow services represented approximately 22.0% of the Company's and the Predecessor's revenues in 1997 and 23.7% of the Company's revenues for the six months ended June 30, 1998. This higher growth rate is primarily attributable to the opening of 10 new escrow offices by the Company in California during 1998. Escrow operations are regulated by state insurance authorities, and the Company has the flexibility to establish different fee schedules in different counties. The Company believes that the acquisition of National, if completed, will enable the Company to expand its escrow operations into counties in which it does not presently hold the necessary licenses. The Company intends to evaluate these expansion opportunities on a county by county basis. OTHER REAL ESTATE RELATED SERVICES In addition to issuing title insurance policies and providing escrow services, the Company provides other real estate related services, including those described below. Such services accounted for approximately 14.2% of the Company's and the Predecessor's revenues in 1997, and 15.8% of the Company's revenue for the six months ended June 30, 1998. PROPERTY MANAGEMENT SERVICES. ATC's subsidiary, Landmark REO Management Services, Inc., provides quality property management and disposition services for foreclosure properties throughout the United States. These services include the initial property inspection, eviction coordination, property maintenance, the retention of a local broker, and the supervision of escrow for the sale of the property. The Company's property management services are provided in connection with foreclosures and therefore tend to be countercyclical to its title insurance business. DOCUMENT PREPARATION SERVICES. The Company also offers a variety of services relating to the documentation of real estate transactions. Such services include (i) the preparation of reconveyance and assignment documents, (ii) file research and document retrieval services, and (iii) recording services, including retrieval of recorded documents. The Company is capable of providing these services in every county and township in the United States. The Company's provision of these services is facilitated by independent abstract companies, title companies and law firms. APPRAISAL SERVICES. The Company's subsidiary, West Point Appraisal Services, Inc., is an appraisal management company offering a variety of residential appraisal services to meet the varying needs of its customers. The appraisal services are provided through independent approved fee appraisers. SHORTENED TITLE ASSURANCE REPORTS. The Company's STAR Product serves as a low-cost, limited form of title protection for the benefit of lenders in subordinate loan transactions where the primary lending criteria is the borrower's creditworthiness rather than the security interest in the real property. CENTRAL ORDER PROCESSING UNIT. The Company's Central Order Processing Unit ("COP Unit") provides customers with a centralized location through which they can order title and escrow services. The services offered through the COP Unit can be provided on a nationwide basis. 32 BUSINESS STRATEGY The Company's objective is to become a leading supplier of title insurance and related real estate financial and informational services. The key elements in the Company's strategy to achieve this objective are to: - EXPAND TO KEY GEOGRAPHIC MARKETS. A large percentage of title insurance policies are generated in a relatively small number of markets throughout the United States. The Company believes it can maximize its growth opportunities by expanding into these key real estate markets, initially in the western region of the United States. In 1997, premiums paid in California, Arizona, Texas, Oregon, Washington and New Mexico together represented 36.7% of the policy premiums written in the United States according to Corporate Development Services, Inc. The Company intends to pursue such expansion through a combination of opening new offices, teaming with local companies, and acquiring established operations. - EXPAND PROVISION OF REAL ESTATE RELATED SERVICES. The Company's complementary real estate related services, such as trustee sale services, property management and disposition services and document services, provide an additional source of revenue to the Company, much of which is countercyclical to the title insurance business. The Company believes it can leverage its relationships developed through the issuance of title insurance to generate additional business for these services. The provision of these value-added services to escrow companies, lenders, real estate brokers and agents, also increases their familiarity with and reliance upon the Company's title insurance services. - RECRUIT HIGHLY QUALIFIED PERSONNEL. The Company believes that the development of personal relationships between the Company's personnel and its customers is crucial to the expansion of the Company's business. For this purpose, the Company seeks to recruit experienced and talented personnel who the Company believes have substantial business contacts in relevant markets. The Company has implemented a Stock Incentive Plan and intends to implement a Stock Purchase Plan to provide additional incentives for its employees. - LEVERAGE ACQUISITION OF NATIONAL. The Company has recently agreed to acquire National in order to facilitate its entry into the markets in which National is licensed and to permit the Company to directly underwrite the title insurance policies in geographic areas not covered by the Company's exclusive relationship with FNTIC. In addition, the Company anticipates that National will provide the opportunity to create agency relationships in a variety of geographic locations and generate revenues through underwriting title policies issued by those agents and expand escrow operations in other areas. - PURSUE STRATEGIC ACQUISITIONS. The Company intends to pursue strategic acquisitions of title insurance and real estate service companies in order to penetrate new markets, increase its diversity of service offerings, and add qualified personnel to its existing staff. MARKETING AND SALES The Company attempts to increase the volume of its title insurance and real estate related services business primarily through customer solicitation by sales personnel. The primary source of this business is from independent escrow companies, real estate brokers and agents, developers, mortgage brokers, mortgage bankers, financial institutions and attorneys. The Company believes that the personal contacts maintained by its sales personnel with these customers are critical to generating title insurance business. The Company therefore actively encourages its branch personnel to continually develop new business relationships with persons in the real estate business community. In addition to generating business through direct solicitation and general advertising, the Company believes that excellent service is an 33 important competitive factor in attracting and retaining customers, and measures customer service in terms of quality and timeliness in the delivery of services. RELATIONSHIP WITH FIDELITY NATIONAL FINANCIAL, INC. The Company has a relationship with FNFI, resulting from FNFI's involvement in the organization and growth of the Company, FNFI's equity ownership position in the Company and existing business and contractual relationships between the two companies. The Company's principal subsidiary, ATC, was a wholly owned subsidiary of FNFI until July 1, 1997, when the Company acquired 60% of ATC's outstanding common stock. As a result of the Reorganization, FNFI will own approximately 43% of the outstanding Common Stock of the Company prior to this offering. See "Reorganization" and "Principal Shareholders." Operationally, the Company and FNTIC, a subsidiary of FNFI, continue to have a close working relationship. FNTIC and ATC have entered into an Issuing Agency Agreement pursuant to which ATC has agreed that until June 30, 2002 it will act exclusively as an agent for FNTIC with respect to the procurement of title insurance policies in 14 selected counties in California and Arizona, subject to certain exceptions. This exclusive arrangement does not apply to other counties into which the Company may expand in the future. Under the Issuing Agency Agreement, in addition to furnishing title insurance products and services, FNTIC provides a wide variety of administrative services for ATC, including accounting, legal and human resources services. ATC pays FNTIC a management fee of 1% of gross premiums for these services. This administrative services arrangement is terminable by ATC upon 90 days notice to FNTIC. ACQUISITION OF NATIONAL ATC has agreed to purchase all of the outstanding capital stock of National from a subsidiary of FNFI for a purchase price of $3.25 million, payable $1.25 million in cash and the remainder with interest at 10% over five years. The Company intends to pay the purchase price with the proceeds of this offering. See "Use of Proceeds." The closing of this acquisition is currently awaiting, and is conditioned upon, approval from the New York State Department of Insurance. See "Risk Factors--Risks Associated with the Acquisition of National." National is a title insurance underwriter, licensed to issue title insurance in the State of New York and 34 other states and the U.S. Virgin Islands. National does not currently underwrite title insurance policies through direct operations or agency relationships and the Company will be required to commit resources to establish direct operations and agency relationships in order to realize the benefits of this acquisition. The primary purpose of the acquisition is to acquire an underwriter, which will enable the Company to generate underwriting fees and permit the Company to expand geographically into counties and states in which the Company is not presently licensed. The Company believes this expansion can be accomplished more quickly and cost-effectively through the acquisition than through other means. The Company also believes that the acquisition will expand the business opportunities for its current and potential employees and affiliates, which will aid in the Company's recruitment efforts, and will permit the Company to generate additional revenue by writing title insurance policies in those geographic areas which are not covered by ATC's exclusive agency arrangement with FNTIC. See "Relationship with Fidelity National Financial, Inc." COMPETITION The title insurance industry is highly competitive in the attraction and retention of customers and independent agents. The number of competing companies and the size of such companies varies in the different geographic areas in which the Company conducts its business. Generally, the Company is in competition with many other title insurers and agents, with the most effective competition coming from 34 companies which possess greater capital resources. Approximately 4,800 title companies, less than 150 of which are underwriters, are members of the American Land Title Association, the title insurance industry's national trade association. The title insurance industry, however is heavily concentrated; for example, it is estimated that the seven largest title insurance underwriters, either directly or through their agents, accounted for approximately 89% of the policy premium revenue in the United States in 1997. In the Company's principal markets, competitors currently include direct operations and agents of the title insurance subsidiaries of FNFI, Chicago Title Corporation, The First American Financial Corporation, LandAmerica Financial Group, Inc., Old Republic International Corporation and Stewart Information Services Corporation, as well as numerous independent agency operations at the local level. The Company may also face competition from entrants into the industry and the markets it plans to service. The industry for escrow and other real estate related services provided by the Company is also highly competitive and extremely fragmented. The Company's competition with respect to such services includes not only other title underwriters and title agents in the insurance industry, but also companies, both local and national, that specialize in the provision of a particular service. Because the parties to a real estate transaction are usually concerned with time schedules and costs associated with delays in closing the transaction, competition is based primarily on the quality and timeliness of service. The Company believes that its competitive position is enhanced by its quality customer service. The Company believes that the price of title insurance is typically not an important competitive factor. GOVERNMENT REGULATION Title companies, including underwriters, underwritten title companies and independent agents, are subject to regulation under applicable state laws. As an agent, the Company is subject to regulation in California and Arizona. Such regulations include licensing requirements for the counties in which the Company operates, and regulations relating to minimum levels of net worth and working capital. Upon acquiring National, the Company will become subject to regulation by the New York Department of Insurance and the regulatory requirements of those states in which National is licensed to do business. The laws of most states in which the Company presently transacts or will transact business establish supervisory agencies with broad administrative powers relating to issuing and revoking licenses to transact business, licensing agents, approving policy forms, regulatory accounting principles, financial practices, establishing reserve and capital and surplus requirements, defining suitable investments for reserves, capital and surplus and approving rate schedules. Current regulations require that ATC maintain a minimum net worth of $400,000. The net worth of ATC was $10.4 million as of December 31, 1997, and $14.0 million as of June 30, 1998. As a condition to continued authority to issue policies in the states in which the ATC conducts its business, ATC is required to pay certain fees and file information regarding its officers, directors and financial condition. EMPLOYEES As of July 31, 1998, the Company, including its subsidiaries, had 766 full-time employees. The Company believes its success depends significantly on attracting and retaining talented and experienced personnel. The Company locates and recruits its personnel primarily through personal contacts in the industry, and the Company's executive officers are actively involved in the recruitment process. The Company offers competitive packages of base and incentive compensation and benefits in order to attract and motivate its employees. The Company believes that its relations with employees are good. 35 PROPERTIES The Company's executive offices are located in Irvine, California. All offices of the Company are leased except for an approximately 11,000 square foot branch office in Phoenix, Arizona, which the Company owns. The Company believes that its facilities are adequate for its current level of operations. LEGAL PROCEEDINGS The Company in the ordinary course of business is subject to claims made under, and from time to time is named as defendants in legal proceedings relating to, policies of insurance it has issued or other services performed on behalf of insured policyholders and other customers. The Company also is involved from time to time in routine litigation incidental to the conduct of its business, apart from claims made under title insurance policies. There are currently no material pending litigation proceedings to which the Company is a party or to which any of its property is subject. 36 MANAGEMENT The following table sets forth certain information regarding the Company's directors and executive officers.
NAME AGE POSITION - -------------------------------------------- --- -------------------------------------------------------------- William P. Foley, II........................ 53 Chairman of the Board of Directors Michael C. Lowther.......................... 56 Chief Executive Officer and Director Wayne D. Diaz............................... 50 President and Director Carl A. Strunk.............................. 60 Executive Vice President and Chief Financial Officer Dennis R. Duffy............................. 55 Executive Vice President and Director Barbara A. Ferguson......................... 42 Executive Vice President and Director M'Liss Jones Kane........................... 45 Executive Vice President, Secretary and General Counsel Bruce Elieff(1)(2).......................... 42 Director Robert Majorino(1)(2)....................... 43 Director
- ------------------------ (1) Member of the Audit Committee. (2) Member of the Compensation Committee. All directors hold office until the next annual meeting of shareholders or the election and qualification of their successors. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. There are no family relationships among any of the Company's directors or executive officers. The business experience, principal occupations and employment, as well as periods of service, of each of the directors and executive officers of the Company during at least the last five years are set forth below. WILLIAM P. FOLEY, II joined the Company as its Chairman of the Board in June, 1997. He has been Chairman of the Board of ATC since 1996. Mr. Foley is the Chairman of the Board and Chief Executive Officer of FNFI and has been since its formation in 1984. Mr. Foley was President of FNFI from its formation in 1984 until December 31, 1994. Mr. Foley is currently serving as Chairman of the Board and Chief Executive Officer of CKE Restaurants, Inc., as Chairman of the Board of Rally's Hamburgers, Inc., Checkers Drive-In Restaurants, Inc., GB Foods Corporation, and Star Buffet, Inc. Additionally, he is a member of the Board of Directors of Data Works Corporation, Fresh Foods, Inc. and Micro General Corporation. MICHAEL C. LOWTHER has been Chief Executive Officer and a director of the Company since its formation in November 1996, and of ATC since 1995. For approximately 15 years prior to joining ATC, Mr. Lowther served as Chairman of the Board and Chief Executive Officer of World Title Company which he co-founded in 1980. He has 34 years of experience in the title industry. WAYNE D. DIAZ has been President and a director of the Company since its formation. During the five years prior to joining the Company, Mr. Diaz held the position of Executive Vice President of FNTIC. Mr. Diaz has 18 years of experience in the title industry. CARL A. STRUNK joined the Company as its Executive Vice President and Chief Financial Officer in August 1998. Mr. Strunk has been the Executive Vice President and Chief Financial Officer of CKE Restaurants, Inc. since February 1997. Mr. Strunk is the Executive Vice President/Finance for FNFI and GB Foods and has been with FNFI since 1992 and GB Foods since December 1997. Mr. Strunk previously served as President of Land Resources Corporation from 1986 to 1991. Mr. Strunk is a Certified Public Accountant and is also a member of the Board of Directors of Micro General Corporation. DENNIS R. DUFFY has held his position of Executive Vice President and director of the Company since 1996, and has over 30 years of experience in the title industry. From 1995 to 1996, he was Regional Vice 37 President--Operations of Gateway Title Company. Mr. Duffy was the owner of Duffy's Pacific Enterprises, a property management company, from 1993 to 1995. From 1985 to 1993, Mr. Duffy was affiliated with a wholly-owned subsidiary of SAFECO, initially as President, and subsequently as a consultant. Prior to that time, he worked in various management positions with both Title Insurance and Trust Company (TICOR) and SAFECO. BARBARA A. FERGUSON joined the Company in August 1997 as Executive Vice President and a director. From 1988 to 1997, Ms. Ferguson held various positions with FNTIC, including Trust Accounting Manager, Banking Administrator, and Senior Vice President and Manager of two separate divisions. M'LISS JONES KANE was appointed Executive Vice President, General Counsel and Secretary of the Company in August 1998. Ms. Kane has held various positions with FNFI since March 1995. She has been Senior Vice President since March 1995 and Corporate Secretary since April 1995. Ms. Kane also held the position of Corporate Counsel until September 1997, at which time she was appointed as General Counsel of FNFI. From March 1990 to March 1995, Ms. Kane served as the Vice President and General Counsel of SPI Pharmaceuticals, Inc. and ICN Biomedicals, Inc., affiliates of ICN Pharmaceuticals, Inc. From February 1988 to March 1990, Ms. Kane was the Senior Vice President, Corporate Counsel and Secretary for Countrywide Credit Industries, Inc. Ms. Kane has also served as Senior Vice President and Corporate Counsel for ICN Pharmaceuticals, Inc. BRUCE ELIEFF was elected to the Company's Board of Directors in August 1998. Mr. Elieff is a principal of Sun Cal Companies, a real estate development firm located in Southern California. He has held this position since 1977. ROBERT L. MAJORINO was appointed to the Company's Board of Directors in August 1998. Mr. Majorino is currently President of G.E.M.M.M. Corporation, a residential real estate brokerage located in Southern California, which position he has held since 1993. Prior to that time, he was the owner of Century 21 Ambassador Realty, a residential real estate brokerage company. DIRECTOR COMPENSATION Directors who are not employees of the Company will be paid a fee of $2,000 per meeting they attend, plus reimbursement of reasonable expenses. Directors who are employees of the Company will not receive compensation for their services as directors. EMPLOYMENT AGREEMENTS In August 1998, the Company entered into an employment agreement with each of Michael C. Lowther, Wayne D. Diaz, Dennis R. Duffy, and Barbara A. Ferguson. Each employment agreement provides for a five year term and a possible merit bonus granted at the sole discretion of the Board. The minimum base salary of Messrs. Lowther, Diaz and Duffy under their respective employment agreements is $260,000, $260,000 and $160,000, respectively. The minimum base salary for Ms. Ferguson under her employment agreement is $160,000. In the event of the termination of the employee by the Company without "cause," each employment agreement provides that the Company shall pay to the employee an amount equal to the product of the employee's minimum base salary in effect upon termination plus the total bonus paid or payable to the employee for the most recently ended calendar year multiplied by the greater of either the number of years remaining thereunder or two years. Upon termination of employment either by the employee or by the Company (in breach of the employment agreement or without cause) following a "change in control" of the Company, the employee would be entitled to receive (i) his or her full salary through the date of termination; and (ii) an amount equal to the product of the employee's minimum base salary in effect upon termination plus the total bonus paid or payable to the employee for the most recently ended calendar year multiplied by the greater 38 of either the number of years remaining hereunder or two years. In addition, upon termination due to a "change in control," the employee is entitled to continue to participate in all employee benefit plans and programs in which such employee was entitled to participate prior to the date of termination provided that such continuation is possible under the terms of the plan or program for a period equal to either (i) the greater of the number of years remaining in the term of employment or (ii) two years. If, however, any payment required to be made by the Company to an employee upon termination due to a "change in control," constitutes a "parachute payment" (as defined in section 280G of the Internal Revenue Code), such payment shall be limited to the highest amount of such payment which can be paid without constituting a "parachute payment." The employee may only elect to terminate the employment agreement due to a "change in control" of the Company during the period commencing 60 days and expiring 365 days after such "change in control." BOARD COMMITTEES The Board's Audit Committee will consist of Mr. Elieff and Mr. Majorino. The Audit Committee will meet periodically with management and the Company's independent accountants to review the results and scope of the audit and other services provided by the Company's independent auditors and the need for internal auditing procedures and the adequacy of internal controls. The Compensation Committee will consist of Mr. Elieff and Mr. Majorino. The Compensation Committee will establish salaries, incentives and other forms of compensation for officers, directors and certain key employees, administer the Company's various incentive compensation and benefit plans, including the Company's 1998 Stock Incentive Plan, and recommend policies relating to such plans. EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation paid by the Company for the fiscal year ended December 31, 1997 to the Chief Executive Officer and executive officers of the Company whose annual compensation exceeded $100,000 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1) --------------------- ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION - ---------------------------------------------------------------------------- ---------- --------- ------------- Michael C. Lowther, Chief Executive Officer................................. $ 200,568 $ 87,703 $ 3,150(2) Wayne D. Diaz, President.................................................... $ 195,000 $ 87,703 $ 15,711(3) Dennis R. Duffy, Executive Vice President................................... $ 124,133 $ 25,000 $ 6,578(4)
- ------------------------ (1) Excludes perquisites and other personal benefits, securities and properties otherwise categorized as salary or bonuses which in the aggregate, for each of the named persons did not exceed the lesser of either $50,000 or 10% of the total annual salary reported for such person. (2) Consists of $900 in premiums paid on a life insurance policy of which Mr. Lowther is the beneficiary and $2,250 in automobile allowance. (3) Consists of $261 in premiums paid on a life insurance policy of which Mr. Diaz is the beneficiary, $8,700 in matching contributions made by FNFI pursuant to FNFI's employee stock purchase plan and $6,750 in automobile allowance. (4) Consists of $578 in premiums paid on a life insurance policy of which Mr. Duffy is the beneficiary and $6,000 in automobile allowance. 39 STOCK OPTIONS The Company did not grant stock options to any Named Executive Officer during fiscal year ended December 31, 1997. None of the Named Executive Officers exercised or held stock options during the fiscal year ended December 31, 1997. STOCK INCENTIVE PLAN The Company's 1998 Stock Incentive Plan (the "Stock Incentive Plan") authorizes up to 650,000 shares of Common Stock for issuance under the terms of the Stock Incentive Plan. The authorized number of shares is subject to adjustment in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. The Stock Incentive Plan provides for grants of "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), nonqualified stock options and rights to purchase shares of Common Stock ("Purchase Rights"). Incentive stock options, nonqualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates, non-employee directors and officers, consultants and other service providers. The Board of Directors, or a committee consisting of two or more members of the Board of Directors, will administer the Stock Incentive Plan (the "Administrator"). The Administrator has full power and authority to interpret the Stock Incentive Plan, select the recipients of options and Purchase Rights, determine and authorize the type, terms and conditions of, including vesting provisions, and the number of shares subject to, grants under the Stock Incentive Plan, and adopt, amend and rescind rules relating to the Stock Incentive Plan. The term of options may not exceed 10 years from the date of grant (5 years in the case of an incentive stock option granted from the date of grant (5 years in the case of an incentive stock option granted to a person who owns more than 10% of the combined voting power of all classes of stock of the Company). The option exercise price for each share granted pursuant to an incentive stock option may not be less than 100% of the fair market value of a share of Common Stock at the time such option is granted (110% of fair market value in the case of an incentive stock option granted to a person who owns more than 10% of the combined voting power of all classes of stock of the Company). There is no minimum purchase price for shares of Common Stock purchased pursuant to a Purchase Right, and any such purchase price shall be determined by the Administrator. The maximum number of shares for which options or Purchase Rights may be granted to any one person during any one calendar year under the Stock Incentive Plan is 100,000 and in no event shall the aggregate number of shares subject to incentive stock options exceed 650,000. The aggregate fair market value of the Common Stock (determined as of the date of grant) with respect to which incentive stock options granted under the Stock Incentive Plan or any other stock option plan of the Company become exercisable for the first time by any optionee during any calendar year may not exceed $100,000. Except as otherwise provided by the Administrator, neither options nor Purchase Rights granted under the Stock Incentive Plan may be transferred other than by will or by the laws of descent and distribution. Shares purchased pursuant to Purchase Rights generally shall be restricted for a period of time, during which such shares may be repurchased by the Company, and therefore these shares may not be sold, assigned, pledged or transferred until such time as the Company no longer has the right to reacquire any such shares. In the event that the outstanding shares of Common Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of merger, consolidation or reorganization in which the Company is the surviving corporation, or of a recapitalization, stock split, combination of shares, reclassification, reincorporation, stock dividend (in excess of 2%) or other change in the corporate structure of the Company while the Stock Incentive Plan is in effect, appropriate adjustments shall be made by the Board of Directors to the aggregate number and kind of shares subject to the Stock Incentive Plan, and the number and kind of shares and the price per 40 share subject to outstanding incentive options, nonqualified the price per share subject to outstanding incentive options, nonqualified options and restricted shares in order to preserve, but not to increase, the benefits to persons then holding incentive options, nonqualified options or restricted shares. In the event of a Change of Control (as defined below) of the Company the time period relating to the exercise or realization of all outstanding options and Purchase Rights shall automatically accelerate immediately prior to the consummation of such Change of Control. For purposes of the Stock Incentive Plan, "Change in Control" means (i) the acquisition, directly or indirectly, by any person or group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) of the beneficial ownership of securities of the Company possessing more than fifty percent (50%) of the total combined voting power of all outstanding securities of the Company; (ii) a merger or consolidation in which the Company is not the surviving entity, except for a transaction in which the holders of the outstanding voting securities of the Company immediately prior to such merger or consolidation hold, in the aggregate, securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the surviving entity immediately after such merger or consolidation; (iii) a reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the Company are transferred to or acquired by a person or persons different from the persons holding those securities immediately prior to such merger; (iv) the sale, transfer or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (v) the approval by the stockholders of a plan or proposal for the liquidation or dissolution of the Company. The Board of Directors may alter, amend, suspend or terminate the Stock Incentive Plan at any time. Unless sooner terminated by the Board of Directors, the Stock Incentive Plan will terminate on August , 2008. Upon completion of this offering, the Company intends to grant options to purchase, subject to certain vesting requirements, an aggregate of 320,000 shares of Common Stock pursuant to the Stock Incentive Plan, at an exercise price per share equal to the initial public offering price, of which options to purchase an aggregate of 175,280 shares of Common Stock are to be granted to the following directors or executive officers of the Company:
NUMBER OF NAME SHARES - ---------------------------------------------------------------------------------- ----------- Michael C. Lowther................................................................ 27,640 Wayne D. Diaz..................................................................... 27,640 Carl A. Strunk.................................................................... 50,000 Dennis R. Duffy................................................................... 10,000 Barbara A. Ferguson............................................................... 10,000 M'Liss Jones Kane................................................................. 30,000 Bruce Elieff...................................................................... 10,000 Robert Majorino................................................................... 10,000 ----------- 175,280 ----------- -----------
INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Articles of Incorporation provide that the liability of the Company's directors for monetary damages shall be eliminated to the fullest extent permissible under California law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of the Company for breach of a director's duties to the Company or its shareholders except for liability: (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (ii) for acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the director; (iii) for any transaction for which a director derived an improper personal benefit; (iv) for acts or omission that show a 41 reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Company or its shareholders; (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders; (vi) with respect to certain transactions, or the approval of transactions in which a director has a material financial interest; and (vii) expressly imposed by statute, for approval of certain improper distributions to shareholders or certain loans or guarantees. The Articles also provide that the Company is authorized to provide indemnification to its agents (as defined in Section 317 of the California Corporations Code), through the Company's Bylaws or through agreements with such agents or both, for breach of duty to the Company and its shareholders, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. The Bylaws of the Company provide for indemnification of the Company's officers, directors, employees, and other agents to the extent and under the circumstances permitted by California law. The Bylaws further provide that no indemnification shall be made in the case of a derivative suit in respect to any claim as to which such person has been adjudged to be liable to the corporation, except with court approval, nor shall indemnification be made for amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval, or for expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval. Indemnification under the Bylaws is mandatory in the case of an agent of the Company (present or past) who is successful on the merits in defense of a suit against him or her in such capacity. In all other cases where indemnification is permitted by the Bylaws, a determination to indemnify such person must be made by a majority of a quorum of disinterested directors, a majority of disinterested shareholders, or the court in which the suits is pending. The Company has entered into agreements to indemnify its directors in addition to the indemnification provided for in the Articles of Incorporation and Bylaws. Among other things, these agreements provide that the Company will indemnify, subject to certain requirements, each of the Company's directors for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in the right of the Company, on account of services by such person as a director or officer of the Company, or as a director or officer of any other company or enterprise to which the person provides services at the request of the Company. The above provisions may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter shareholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the Company and its shareholders. At present, there is no litigation or proceeding pending involving a director of the Company as to which indemnification is being sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification by any director. 42 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock and as adjusted to reflect the sale of Common Stock offered hereby, by (i) each person known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers, and (iv) all directors and executive officers of the Company as a group. Except as otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
PERCENT OF OUTSTANDING SHARES COMMON STOCK OWNED BENEFICIALLY ---------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED BEFORE OFFERING AFTER OFFERING - -------------------------------------------------- ----------- ----------------- --------------- Fidelity National Financial, Inc.................. 2,099,996 42.7% 34.1% William P. Foley, II.............................. 332,904(2) 6.3% 5.1% Michael C. Lowther................................ 981,106(3) 19.9% 15.9% Wayne D. Diaz..................................... 981,106(3) 19.9% 15.9% Dennis R. Duffy................................... 104,124(4) 2.1% 1.7% Barbara A. Ferguson............................... 154,653(4) 3.1% 2.6% Bruce Elieff...................................... 3,333(4) * * Robert Majorino................................... 3,333(4) * * All directors and executive officers as a group (9 persons)........................................ 2,587,226(5) 48.7% 39.5%
- ------------------------ * Less than 1%. (1) The address of each of Messrs. Foley, Lowther, Duffy and Diaz and Ms. Ferguson is 17911 Von Karman Avenue, Suite 200, Irvine, California 92614. The address for Fidelity National Financial, Inc. is 17911 Von Karman Avenue, Suite 300, Irvine, California 92614. (2) Consists solely of shares issuable under presently exercisable options. Mr. Foley is the Chairman of the Board of Directors and Chief Executive Officer of FNFI. (3) Includes 9,213 shares issuable under options to become exercisable within 60 days. (4) Includes 3,333 shares issuable under options to become exercisable within 60 days. (5) Includes 391,329 shares issuable under options presently exercisable or to become exercisable within 60 days. 43 CERTAIN TRANSACTIONS The Company has a relationship with FNFI, resulting from FNFI's involvement in the organization and growth of the Company, FNFI's equity ownership position in the Company and existing business and contractual relationships between the two companies. Upon consummation of this offering (assuming no exercise of the Underwriters' over-allotment option) FNFI will own approximately 34.1% of the outstanding Common Stock of the Company. Mr. Foley, the Company's Chairman of the Board, is the Chairman of the Board and Chief Executive Officer and a principal shareholder of FNFI. In July 1997, the Company acquired 60% of the outstanding common stock of ATC from FNFI in exchange for $6.0 million. In August 1998, the Company agreed to acquire the remaining 40% of the outstanding common stock of ATC from FNFI in exchange for shares of Common Stock representing approximately 43% of the Company's outstanding shares. In connection with that exchange, the shareholders of the Company, other than FNFI, will assume approximately $1.2 million of Acquisition Debt from the Company, and the remaining unpaid balance of the Acquisition Debt, in the amount of approximately $3.5 million, will be repaid from the proceeds of a dividend to the Company from ATC. Consummation of this transaction is subject to receipt of approval from the California Development of Insurance. See "Reorganization." In July 1997, the Company issued options to purchase 332,904 shares of Common Stock to William P. Foley, II, the Company's Chairman of the Board. The options are exercisable for a period of five years at an exercise price of $0.66 per share. FNTIC, a subsidiary of FNFI, and ATC have entered into an Issuing Agency Agreement pursuant to which ATC has agreed that until June 30, 2002 it will act exclusively as an agent for FNTIC with respect to the procurement of title insurance policies in 14 selected counties in California and Arizona, subject to certain exceptions. FNTIC receives 11% of the title premium as consideration for underwriting the policies. ATC paid FNTIC approximately $4.1 million in 1997 and $3.0 million in the first six months of 1998 under this agreement. Under the Issuing Agency Agreement, FNTIC also provides a wide variety of administrative services for ATC, including accounting and legal and human resources services. ATC pays FNTIC a management fee of 1% of gross title premiums for these services. This administrative services arrangement is terminable by ATC upon 90 days prior notice to FNTIC. The amounts of administrative fees paid to FNTIC under this arrangement for 1997 and the first six months of 1998 were approximately $375,000 and $274,000, respectively. On March 16, 1998, ATC agreed to purchase all of the outstanding capital stock of National from a subsidiary of FNFI for a purchase price of $3.25 million, payable $1.25 million in cash and the remainder with interest at 10% over five years. The Company intends to pay the deferred portion of the purchase price in full upon the completion of this offering. See "Use of Proceeds." When the acquisition is closed, National will be a wholly-owned subsidiary of ATC. The closing of this acquisition is currently awaiting, and is conditioned upon, approval from the New York State Department of Insurance. See "Business-- Acquisition of National." On January 28, 1998, ATC and FNTIC entered into a sublease pursuant to which ATC subleases the Company's principal executive office from FNTIC. Such lease provides for monthly rental payments to FNTIC of $33,494 and expires on July 11, 2000. In August 1997, Messrs. Lowther, Diaz and Duffy and Ms. Ferguson guaranteed, in the aggregate, approximately 34.5% of the Company's obligations under a promissory note in the original principal amount of $6.0 million which was incurred to finance the acquisition of the Company. The note bears interest annually at the prime rate. Messrs. Lowther, Diaz, and Duffy founded the Company in November 1996. In March 1997, the Company issued 976,093, 976,093 and 100,791 shares of Common Stock to Messrs. Lowther, Diaz, and Duffy, respectively. In consideration for the issuance of the shares, each such founding shareholder 44 guaranteed indebtedness of the Company in the amount of approximately $1.98 for each share that was issued to him. The Company issued Common Stock to other employees of the Company in March 1997 on the same terms and conditions. In August 1998, the Company entered into Indemnification Agreements with all of its directors and executive officers providing for indemnification rights in certain circumstances. See "Management-- Indemnification of Officers and Directors." 45 DESCRIPTION OF CAPITAL STOCK The following description of the Company's capital stock and selected provisions of its Articles of Incorporation and Bylaws is a summary and is qualified in its entirety by the Company's Articles of Incorporation and Bylaws, copies of which have been filed with the Securities and Exchange Commission as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK The Company is authorized to issue 50,000,000 shares of Common Stock, no par value. Shareholders have no preemptive rights and no right to convert their Common Stock into any other securities. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders, except that holders of Common Stock are entitled to cumulative voting with respect to the election of directors upon giving notice as required by law. In cumulative voting, the holders of Common Stock are entitled to cast for each share held the number of votes equal to the number of directors to be elected. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Stock. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares are, and all shares to be sold and issued as contemplated hereby will be, fully paid and nonassessable and legally issued. The Board of Directors is authorized to issue additional shares of Common Stock within the limits authorized by the Company's charter and without shareholder action. As of August 21, 1998 there were 2,817,100 shares of Common Stock outstanding held by 25 holders of record. PREFERRED STOCK The Company's authorized preferred stock consists of 5,000,000 shares, no par value (the "Preferred Stock"). The Board of Directors has the authority, without further action by the shareholders, to issue from time to time shares of Preferred Stock in one or more series and to fix the dividend rights and terms, conversion rights, voting rights (whole, limited or none), redemption rights and terms, liquidation preferences, sinking funds and any other rights, preferences, privileges and restrictions applicable to each such series of Preferred Stock. The purpose of authorizing the Board of Directors to determine such rights and preferences is to eliminate delays associated with a shareholder vote on specific issuances. The issuance of the Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of Common Stock and, under certain circumstances, could make it more difficult for a third party to gain control of the Company. Such issuance of Preferred Stock could also adversely affect the distributions on and liquidation preference of the Common Stock by creating more series of Preferred Stock with distribution or liquidation preferences senior to the Common Stock. No shares of Preferred Stock are currently outstanding and the Company currently has no plans or proposals to issue any Preferred Stock. TRANSFER AGENT The Transfer Agent for the Company's Common Stock is U.S. Stock Transfer Corporation. 46 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, the Company will have 6,167,096 shares of Common Stock outstanding (excluding approximately 652,904 shares of Common Stock issuable upon exercise of outstanding stock options). The 1,250,000 shares sold by the Company in the offering will be freely tradeable without restriction or further registration under the Securities Act, unless held by an "affiliate" of the Company within the meaning of Rule 144 adopted under the Securities Act. Any such affiliate would be subject to the resale limitations of Rule 144. The remaining shares of outstanding Common Stock are "restricted securities" (the "Restricted Shares") within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of a registration under the Securities Act unless an exemption from registration is available, including an exemption contained in Rule 144. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated for purposes of Rule 144) who has beneficially owned "restricted securities," as that term is defined in Rule 144, for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock of the Company, or (ii) the average weekly trading volume in Common Stock during the four calendar weeks preceding such sale, provided that certain public information about the Company, as required by Rule 144, is then available and the seller complies with the manner of sale and notification requirements of the rule. A person who is not an affiliate and has not been an affiliate within three months prior to the sale and has, together with any previous owners who were not affiliates, beneficially owned restricted securities for at least two years is entitled to sell such shares under Rule 144(k) without regard to any of the volume limitations described above. None of the Restricted Shares are presently eligible for sale upon compliance with Rule 144(k). The officers, directors and substantially all shareholders of the Company have agreed not to sell or otherwise transfer any shares of Common Stock, or any securities convertible into or exercisable for shares of Common Stock, for the 180 days following the effective date of this Prospectus without the consent of the Representative on behalf of the Underwriters. In addition, for the next 180 days such persons have also agreed not to sell or otherwise transfer shares of Common Stock in excess of the amounts eligible for sale under Rule 144 and in any event to effectuate any such sales or dispositions through Cruttenden Roth Incorporated. No predictions can be made of the effect, if any, that future sales of shares of Common Stock, and grants of options to acquire shares of Common Stock, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market prices of the Common Stock. See "Principal Shareholders," "Description of Securities" and "Underwriting." 47 UNDERWRITING Upon the terms and subject to the conditions set forth in an underwriting agreement (the "Underwriting Agreement), the Underwriters named below, for whom Cruttenden Roth Incorporated is acting as manager and representative (the "Representative"), have severally agreed to purchase from the Company an aggregate of 1,250,000 shares of Common Stock. The number of shares of Common Stock that each Underwriter has agreed to purchase is set forth opposite its name below:
NUMBER OF UNDERWRITER SHARES - --------------------------------------------------------------------------------- ---------- Cruttenden Roth Incorporated..................................................... ---------- Total.......................................................................... 1,250,000 ---------- ----------
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase shares of Common Stock are subject to the approval of certain legal matters by counsel and to certain other conditions. If any of the shares of Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, all such shares of Common Stock (other than the shares of Common Stock covered by the overallotment option described below) must be so purchased. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the Underwriters may be required to make in respect thereof. The Underwriters propose to offer the shares of Common Stock directly to the public at the initial public offering price set forth on the coverage page of this Prospectus and to certain dealers (who may include the Underwriters) at such price less a concession not to exceed $. per share. The Underwriters may allow, and such dealers may reallow, a concession not to exceed $. per share to any other Underwriter and certain other dealers. After the initial public distribution of the shares offered hereby, the offering price and other selling terms may be changed by the Representative. The Representative has advised the Company that the Underwriters do not intend to confirm any shares to any accounts over which they exercise discretionary control. The Company has granted to the Underwriters an option, exercisable for 45 days from the date of this Prospectus, to purchase up to an aggregate of 187,500 additional shares of Common Stock at the initial public offering price less underwriting discounts and commissions. Such option may be exercised solely for the purpose of converting overallotments, if any, in connection with the offering of the shares offered hereby. To the extent that the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase a number of additional shares proportionate to such Underwriter's initial commitment as indicated in the preceding table. The offering of the shares offered hereby is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company has agreed to pay the Representative a nonaccountable expense allowance of 2% of the gross proceeds of the offering to cover certain underwriting costs and due diligence expenses related to this offering and to sell to the Representative for nominal consideration the Representative's Warrants to purchase from the Company up to 125,000 shares of Common Stock (subject to certain antidilution 48 adjustments) at an exercise price per share equal to 120% of the initial public offering price per share. The exercise price may be paid in cash or on a cashless net issuance basis by foregoing receipt of a number of shares otherwise issuable upon exercise having a fair market value equal to the aggregate exercise price. The Representative's Warrants will be exercisable for a period beginning one year from the date of this Prospectus until five years from the date of this Prospectus. The Representative's Warrants may not be sold, transferred, assigned, pledged or hypothecated by the Representative for a period of one year from the date of issuance except to officers and partners of the Representative, the Underwriters or officers and partners of the Underwriters. In addition, the Company has granted certain demand and piggyback registration rights to the holders of the Representative's Warrants, which enable them to register the resale of the Common Stock underlying the Representative's Warrants under the Securities Act. The Company, all directors and executive officers of the Company, and certain stockholders and option holders of the Company have agreed that, without the prior written consent of the Representative, they will not, with certain limited exceptions, directly or indirectly, offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or, in any manner, transfer all or a portion of the economic consequences associated with the ownership of the Common Stock, for a period of 180 days after the Effective Date, other than the shares of Common Stock offered hereby. See "Shares Eligible for Future Sale." In connection with this offering, certain Underwriters and selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M under the Securities Exchange Act of 1934, as amended, pursuant to which such persons may bid for or purchase shares of Common Stock for the purpose of stabilizing the market price for shares of Common Stock. The Underwriters also may create a short position for the account of the Underwriters by selling more shares of Common Stock in connection with this offering than they are committed to purchase from the Company and in such case may purchase shares of Common Stock in the open market following the completion of this offering to cover all or a portion of the shares of Common Stock or by exercising the Underwriters' over-allotment option referred to above. In addition, the Representative, on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the other Underwriters whereby it may reclaim for an Underwriter (or a dealer participating in this offering) for the account of the other Underwriters, the selling concession with respect to shares of Common Stock that are distributed in this offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the Common Stock at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if they are undertaken, may be discontinued at any time. Prior to this offering, there has been no public market for the Common Stock. The initial public offering price for the Common Stock offered hereby has been determined by negotiation between the Company and the Representative. Among the factors considered in determining the initial public offering price were prevailing market conditions, revenues and earnings of the Company, market valuations of other companies engaged in activities similar to the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the history of and prospects for the Company's business and the industry in which it competes, the Company's management and other factors deemed relevant. FNFI beneficially owns 2,099,996 shares of Common Stock, or approximately 43% of the outstanding shares of the Company, as well as more than 10% of the outstanding common stock of Cruttenden Roth Incorporated. Under the Bylaws of the NASD, when a member of the NASD, such as the Underwriter, participates in the public distribution of securities of a company in which it or its affiliates own 10% or more of the outstanding voting securities, and where there is no "bona fide independent market" for such 49 securities, the public offering price can be no higher than recommended by a qualified independent underwriter. The independent investment banking firm of , which may participate as a member of the selling group in this offering (but will offer for sale more than 10% of the Common Stock offered hereby), has recommended a maximum initial public offering price of $ per share. performed its "due diligence" with respect to the information contained in the registration statement of which this Prospectus is a part. The NASD and the Securities and Exchange Commission have indicated that, in their view, may be deemed to be an underwriter as that term is defined in the Securities Act. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered by this Prospectus will be passed upon for the Company by Rutan & Tucker, LLP, Costa Mesa, California. Certain matters in connection with the sale of Common Stock offered hereby will be passed on for the Underwriters by Stradling Yocca Carlson & Rauth, Newport Beach, California. EXPERTS The consolidated financial statements of American National Financial, Inc. as of and for the year ended December 31, 1997, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The balance sheet of ANFI Predecessor as of December 31, 1996, and the related statements of combined operations for each of the years in the two-year period ended December 31, 1996 and for the six-month period ended June 30, 1997, and the statements of shareholders' equity and cash flows for the year ended December 31, 1996 and the six months ended June 30, 1997, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission, Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act, and the rules and regulations promulgated thereunder, with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. While all material elements of the contracts and documents referenced in this Prospectus are contained herein, statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the full text of such contract or other document which is filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement and the exhibits and schedules thereto. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 50 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such documents may be obtained from the Commission at its principal office in Washington, D.C. upon the payment of the charges prescribed by the Commission. 50 The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The Commission's address on the World Wide Web is http://www.sec.gov. The Company intends to distribute to its shareholders annual reports containing financial statements audited by the Company's independent accountants and quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. 51 INDEX TO FINANCIAL STATEMENTS FINANCIAL STATEMENTS FOR AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
PAGE ----- Independent Auditors' Report............................................................................... F-2 Consolidated Balance Sheet at December 31, 1997............................................................ F-3 Consolidated Statement of Operations for the Year Ended December 31, 1997.................................. F-4 Consolidated Statement of Cash Flows for the Year Ended December 31, 1997.................................. F-5 Consolidated Statement of Shareholders' Equity for the Year Ended December 31, 1997........................ F-6 Notes to Financial Statements.............................................................................. F-7
FINANCIAL STATEMENTS FOR ANFI PREDECESSOR (NOTE 1) Independent Auditors' Report......................................................... F-16 Balance Sheet at December 31, 1996................................................... F-17 Statement of Combined Operations for the Years Ended December 31, 1995 and 1996 and for the six months ended June 30, 1997............................................. F-18 Statement of Shareholder's Equity for the Year Ended December 31, 1996 and for the six months ended June 30, 1997..................................................... F-19 Statement of Cash Flows for the Year Ended December 31, 1996 and for the six months ended June 30, 1997................................................................ F-20 Notes to Financial Statements........................................................ F-21
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheet at June 30, 1998 (unaudited).................... F-27 Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 1998 (unaudited)........................................................................ F-28 Condensed Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1998 (unaudited)........................................................................ F-29 Notes to Financial Statements (unaudited)............................................ F-30
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors American National Financial, Inc.: We have audited the consolidated balance sheet of American National Financial, Inc. and subsidiaries as of December 31, 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 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 financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American National Financial, Inc and subsidiaries as of December 31, 1997 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Orange County, California August 26, 1998 F-2 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 ------------ PRO FORMA TO REFLECT REORGANIZATION (NOTE 12) ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents......................................................... $ 7,223,635 $ 2,423,635 Accounts receivable, net of an allowance for doubtful accounts of $1,100,449...... 6,809,177 6,809,177 Deferred income taxes............................................................. 832,732 832,732 Prepaid expenses and other current assets......................................... 903,002 903,002 ------------ ------------- Total current assets.......................................................... 15,768,546 10,968,546 Property and equipment, net....................................................... 2,723,670 2,723,670 Title plants...................................................................... 815,310 815,310 Deposits with Insurance Commissioner.............................................. 105,000 105,000 Intangibles, net of accumulated amortization of $257,349.......................... 2,952,417 2,952,417 ------------ ------------- Total assets.................................................................. $22,364,943 $17,564,943 ------------ ------------- ------------ ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................. $ 1,958,813 1,958,813 Other accrued expenses, including $587,750 to affiliate........................... 3,403,219 3,403,219 Customer advances................................................................. 1,155,536 1,155,536 Current portion of long-term debt................................................. 266,672 -- Current portion of obligations under capital leases with affiliates............... 660,176 660,176 Income taxes payable.............................................................. 1,195,581 1,195,581 Due to affiliate.................................................................. 1,411,170 1,411,170 ------------ ------------- Total current liabilities..................................................... 10,051,167 9,784,495 Long-term debt...................................................................... 6,205,828 472,500 Obligations under capital leases with affiliates.................................... 1,411,001 1,411,001 ------------ ------------- Total liabilities............................................................. 17,667,996 11,667,996 Minority interest in consolidated subsidiary........................................ 3,574,100 -- Shareholders' equity: Preferred stock, no par value, authorized, 5,000,000 shares; issued and outstanding, none.................................................... -- -- Common stock, no par value; authorized, 50,000,000 shares; issued and outstanding, 2,910,416 shares (5,010,416 pro forma after reorganization)..................... -- -- Additional paid in capital........................................................ -- 4,774,100 Retained earnings................................................................. 1,122,847 1,122,847 ------------ ------------- Total shareholders' equity.................................................... 1,122,847 5,896,947 ------------ ------------- Total liabilities and shareholders' equity.................................... $22,364,943 $17,564,943 ------------ ------------- ------------ -------------
See accompanying notes to consolidated financial statements. F-3 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
Revenues: Gross title insurance premiums................................................................... $ 20,640,707 Escrow fees...................................................................................... 7,352,399 Other service charges............................................................................ 5,532,203 ------------- Total revenues................................................................................. 33,525,309 ------------- Expenses: Personnel costs.................................................................................. 16,185,144 Other operating expenses, includes $1,184,136 with affiliate..................................... 8,083,626 Fees to affiliated underwriters.................................................................. 2,614,410 Title plant rent and maintenance................................................................. 2,664,201 ------------- Total expenses................................................................................. 29,547,381 ------------- Earnings before income taxes and minority interest in net earnings of consolidated subsidiary...... 3,977,928 Provision for income taxes......................................................................... 1,774,417 ------------- Earnings before minority interest in net earnings of consolidated subsidiary....................................................................................... 2,203,511 Minority interest in net earnings of consolidated subsidiary....................................... (1,080,664) ------------- Net earnings....................................................................................... $ 1,122,847 ------------- ------------- Basic and diluted net earnings per share........................................................... $ 0.38
See accompanying notes to consolidated financial statements. F-4 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 Cash flows from operating activities: Net earnings.................................................................. $ 1,122,847 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization............................................... 644,720 Minority interest in net income of consolidated subsidiary.................. 1,080,664 Changes in: Accounts receivable, net.................................................. (2,493,048) Prepaid expenses and other assets......................................... 94,379 Income taxes.............................................................. 341,909 Accounts payable and other accrued expenses............................... 2,156,510 Customer advances......................................................... (340,140) Due to affiliate.......................................................... 233,544 ------------ Total cash provided by operating activities........................... 2,841,385 ------------ Cash flows from investing activities: Collection of notes receivable................................................ 27,844 Purchases of property and equipment........................................... (999,087) Acquisition of consolidated subsidiary, net of cash acquired.................. (816,584) ------------ Total cash used in investing activities............................... (1,787,827) ------------ Cash flows from financing activities: Borrowings.................................................................... 6,472,500 Payments under capital lease obligations...................................... (302,423) ------------ Total cash provided in financing activities........................... 6,170,077 ------------ Increase in cash and cash equivalents................................. 7,223,635 Cash and cash equivalents at beginning of year.................................. -- ------------ Cash and cash equivalents at end of year........................................ $ 7,223,635 ------------ ------------ Supplemental disclosure of cash flow information: Cash paid during the year: Interest.................................................................... $ 473,285 Income taxes................................................................ 1,585,105 ------------ ------------
See accompanying notes to consolidated financial statements. F-5 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1997
COMMON STOCK ADDITIONAL TOTAL ----------------------- PAID IN RETAINED SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ---------- ----------- ------------- ---------- ------------- Balance, December 31, 1996......................... -- $ -- $ -- $ -- $ -- Issuance of common stock........................... 3,026,400 -- -- -- -- Forfeiture of common stock issued.................. (115,984) -- -- -- -- Net earnings....................................... -- -- -- 1,122,847 1,122,847 ---------- ----- ----- ---------- ------------- Balance, December 31, 1997......................... 2,910,416 $ -- $ -- 1,122,847 $ 1,122,847 ---------- ----- ----- ---------- ------------- ---------- ----- ----- ---------- -------------
See accompanying notes to consolidated financial statements. F-6 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (1) DESCRIPTION OF BUSINESS American National Financial, Inc., formerly ATC Holdings, Inc., was incorporated in the state of California in November 1996 as a holding company for certain investments in title and real estate related service companies. In March 1997, 3,026,400 of shares were issued to founding shareholders. Prior to 1997, American National Financial, Inc. and subsidiaries (collectively, "the Company") had substantially no operations. In April, 1997, the Company received $6,000,000 in proceeds from the issuance of short-term notes payable, of which $870,000 was due to certain members of management and the remainder was due to a financial institution, in connection with an agreement with Fidelity National Financial, Inc. ("FNFI") to acquire a 60% interest in American Title Company ("ATC"). Upon consummation of the sale in July 1997, the Company paid FNFI $6,000,000 for the 60% interest in ATC. In August 1997, the Company refinanced all of the debt issued in April 1997. The Company's principal operations are those of ATC. ATC is an underwritten title company in the state of California and is engaged in the business of providing title insurance services and other related services in connection with real estate transactions. The Company operates throughout California and in Maricopa County, Arizona. ATC functions as an exclusive agent of Fidelity National Title Insurance Company ("FNTIC"), an affiliate and a wholly owned subsidiary of FNFI. Title insurance policies are underwritten by FNTIC for an underwriting fee. The underwriting agreement generally provides that ATC is liable under any single policy for only the first $5,000 of losses. As a result of the July 1997 transaction with the Company, FNFI agreed to make no claim on ATC for claims arising from policies written prior to January 1, 1997. The Company's other subsidiaries include Nations Title Insurance of Arizona, Inc.; Landmark REO Management Services, Inc.; American Document Services, Inc.; West Point Appraisal, Inc.; West Point Properties, Inc. and West Point Support Services, Inc. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All material intercompany profits, transactions and balances have been eliminated. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, highly liquid instruments purchased with original maturities of three months or less are considered cash equivalents. The carrying amounts reported in the consolidated balance sheet for these instruments approximate their fair value. ACCOUNTS RECEIVABLE The carrying amounts reported in the consolidated balance sheet for accounts receivable approximate their fair value. Accounts receivable is reported net of allowance for doubtful accounts which represents management's estimates of those balances that are uncollectible as of the balance sheet date. F-7 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost, less depreciation and amortization. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets which range from three to 30 years. Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the applicable lease or the estimated useful lives of such assets. TITLE PLANT Title plant is historical title information organized and maintained for use in performing title searches. The December 31, 1997 title plant balance relates to a capital lease. See note 9. Costs incurred to maintain, update and operate title plants are expensed as incurred. Title plant is not amortized as it is considered to have an indefinite life if maintained. INTANGIBLES Intangible assets include acquired licenses to operate within various counties and the cost in excess of net assets acquired in connection with the ATC acquisition. Intangibles are amortized on a straight-line basis over a composite life of 25 years. Impairment of intangible assets is monitored on a continual basis and is assessed based on an analysis of the cash flows generated by the underlying assets. No impairment of intangible assets has been recognized. CAPITAL LEASE OBLIGATION Capital lease obligation with affiliates is recorded at the present value of the minimum lease payments at the beginning of the lease term. The monthly payments under the leases are allocated between a reduction of the obligation and interest expense so as to produce a constant periodic rate of interest on the remaining balance of the obligation. REVENUE RECOGNITION Title insurance premiums, escrow fees and other service charges are recognized as revenue at the time of closing of the related real estate transaction. Premiums from title policies written are presented at their gross amount on the accompanying consolidated statements of operations, and the portion of this premium that is remitted to the underwriter is reflected as fees to affiliated underwriters. Related expenses are recognized when incurred. A provision for claim losses on title policies is provided at the time of closing of the related real estate transaction to cover anticipated losses up to $5,000 per policy under the underwriting agreement with FNTIC. INCOME TAXES Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and expected benefits of utilizing net operating loss and credit 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. The impact on deferred taxes of changes in tax rates and laws, if any, F-8 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) are applied to the years during which temporary differences are expected to be settled and reflected in the consolidated financial statements in the period enacted. EARNINGS PER SHARE Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the period. Dilutive earnings per share is calculated by dividing net earnings available to common shareholders plus the assumed conversions by dilutive potential securities. The Company has granted certain options which have been treated as common share equivalents for purposes of calculating diluted earnings per share. The number of weighted average shares outstanding used in both basic and diluted earnings per share was 2,971,983, as the options granted during 1997 are not in the money and therefore are antidilutive at December 31, 1997. MANAGEMENT ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (3) ACQUISITION On July 1, 1997, the Company acquired 60% of the outstanding stock of ATC for a purchase price of $6 million. The $6 million purchase price was paid in cash and financed by a bank loan in the same amount. This transaction has been accounted for as a purchase. Accordingly, assets and liabilities of ATC have been reflected at their fair values at the date of acquisition for the 60% of outstanding stock acquired and at historical cost for the 40% minority interest. The earnings of ATC have been included in the accompanying consolidated statement of operations since July 1, 1997, for the Company's 60% ownership interest. See note 12. Assets and liabilities of ATC at acquisition were as follows:
Cash and cash equivalents...................................................... $ 5,288,000 Accounts receivable............................................................ 4,316,129 Other Assets................................................................... 1,583,107 ------------- ------------- Amounts due to affiliates...................................................... 1,178,000 Payables and accrued expenses assumed at fair value............................ 4,100,000 ------------- -------------
Intangibles resulting from the 60% acquisition amounted to $2,460,000 and are being amortized over a composite life of 25 years. F-9 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (CONTINUED) (3) ACQUISITION (CONTINUED) Selected unaudited pro forma combined results of operations for the year ended December 31, 1997, assuming that the ATC acquisition occurred on January 1, 1997 is presented as follows:
Total revenue.................................................. $ 58,666,458 Net earnings................................................... 1,542,008 Basic and diluted earnings per share........................... .52
(4) PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31, 1997:
Furniture, fixtures and equipment............................... $ 2,044,598 Leasehold improvements.......................................... 429,406 Office building................................................. 667,888 ------------ 3,141,892 Accumulated depreciation and amortization....................... (418,222) ------------ $ 2,723,670 ------------ ------------
(5) INCOME TAXES Income tax expense (benefit) for year ended December 31, 1997 consists of the following:
--------------------------------------- CURRENT DEFERRED TOTAL ------------ ----------- ------------ Federal.............................................. $ 1,608,578 $ (240,469) $ 1,368,109 State and local...................................... $ 476,756 $ (70,448) $ 406,308 ------------ ----------- ------------ $ 2,085,334 $ (310,917) $ 1,774,417 ------------ ----------- ------------ ------------ ----------- ------------
The effective tax rate for the period reported differs from the Federal statutory income tax rate as follows:
Statutory Federal income tax rate................................... 35.0% Non-deductible meals and entertainment.............................. 1.8 Amortization of intangibles......................................... 1.6 State taxes, net of Federal benefit................................. 6.6 Other............................................................... (.4) --------- 44.6% --------- ---------
F-10 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (CONTINUED) (5) INCOME TAXES (CONTINUED) The deferred tax assets and liabilities at December 31, 1997 consist of the following:
DEFERRED TAX DEFERRED TAX ASSETS LIABILITIES ------------ ------------- Excess state income tax.......................................... $ 44,302 $ -- Excess book over tax provision for bad debts..................... 440,178 -- Employee benefit and vacation accruals........................... 701,925 -- Excess tax depreciation over book................................ -- (24,239) Other............................................................ -- (329,434) ------------ ------------- Total deferred taxes............................................. $1,186,405 $ (353,673) ------------ ------------- ------------ -------------
Based upon the Company's current and historical pre-tax earnings, management believes it is more likely than not that the Company will realize the benefit of its existing deferred tax assets. Management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. However, there can be no assurance that the Company will generate any earnings or any specific level of continuing earnings in future years. Certain tax planning or other strategies could be implemented, if necessary, to supplement income from operations to fully realize recorded tax benefits. (6) NOTES PAYABLE The Company has a $6,000,000 note payable to a financial institution that bears interest at the institution's prime lending rate (8.50% at December 31, 1997) and is due in November 2002. The note requires monthly payments in the amount of $33,334 beginning in May 1998. Interest is payable monthly. The note is collateralized by a first priority lien on all the Company's assets and all of its outstanding common stock. The Company is also required to maintain tangible net worth of at least $200,000 and working capital of at least $250,000 on a quarterly basis. As of December 31, 1997, the Company is out of compliance with certain covenants related to minimum tangible net worth and capital expenditure restrictions. The financial institution has agreed to waive the minimum tangible net worth covenant through June 30, 1998. The financial institution has agreed to waive, through October 31, 1998, the capital expenditure restriction. In April 1998, the Company voluntarily prepaid $1 million on the note. The Company also has a $472,500 note payable to the same financial institution that bears interest at the institution's prime lending rate (8.50% at December 31, 1997) and is due in full in December 1999 with interest payable monthly. The note is collateralized by a deed of trust of the office building. Future principal maturities of these notes payable are as follows for the years ending December 31:
1998............................................................................ $ 266,672 1999............................................................................ 872,508 2000............................................................................ 400,008 2001............................................................................ 400,008 2002............................................................................ 4,533,304 ------------ $ 6,472,500 ------------ ------------
F-11 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (CONTINUED) (6) NOTES PAYABLE (CONTINUED) The carrying value of the Company's notes payable approximate fair value. (7) SHAREHOLDERS' EQUITY STOCK SPLIT In August 1998, the Company declared a 6.0528 for 1 stock split. All share and per share information has been retroactively adjusted to reflect this stock split. CAPITAL RESTRICTIONS Underwritten title companies are subject to certain regulation by insurance regulatory or banking authorities, primarily relating to minimum net worth and working capital. Minimum net worth of $400,000 and minimum working capital of $10,000 is required for ATC. STOCK ISSUANCE The Company issued 3,026,400 shares to several key executives in March, 1997. The shares were deemed to have no value as of the date of issuance. Subsequently, certain of these executives surrendered a total of 115,984 shares. (8) EMPLOYEE BENEFIT PLANS STOCK OPTION PLAN In August 1998, the stockholders approved the adoption of the 1998 Stock Incentive Plan (1998 Incentive Plan). Under the terms of the 1998 Incentive Plan, the Company may grant incentive or nonqualified stock options to certain key employees and non-employee directors or officers. The number of shares issuable under the 1998 Incentive Plan is 650,000 shares at not less than 100% and 85% of fair market value on the date of the grant for incentive options and nonqualified options respectively. Officers and other key employees of the Company or of an affiliated company are eligible to receive incentive stock options. Officers and other key employees of the Company or of an affiliated company, members of the Board and other service providers are eligible to receive nonqualified stock options. The term and provision for the termination of each option shall be fixed by the Board of Directors, but no option may be exercisable more than 10 years after the date it is granted. An incentive option granted to a person who is a 10% shareholder on the date of the grant shall not be exercisable more than 5 years after the date it is granted. Each option shall vest and become exercisable in one or more installments at such time or times and subject to such conditions, including within limitation the achievement of specified performance goals or objectives, as shall be determined by the Board of Directors. No options have been granted under the 1998 Incentive Plan. Concurrent with the acquisition of ATC, the chief executive officer of FNFI was granted fully vested options for 332,904 shares of the Company's common stock at an exercise price of $0.66 per share. The options expire in 10 years. Such exercise price was considered in excess of the fair market value of the common stock at the date of grant. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (Opinion 25) and related Interpretations in accounting for its 1997 Incentive F-12 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (CONTINUED) (8) EMPLOYEE BENEFIT PLANS (CONTINUED) Plan. As discussed below, in management's opinion, the alternative fair value accounting provided for under Statement of Accounting Standards No. 123, "Accounting for Stock Based Compensation (Statement 123) requires use of option valuation models that were not developed for use in valuing employee stock options. Under Opinion 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Pro forma information regarding net earnings 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 minimum fair value method of that Statement. The minimum 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. The risk free interest rate used for options granted during 1997 was 6.45%. The expected dividend yield used for 1997 was 0%. A weighted average expected life of 10 years was used. For purpose of pro forma disclosures, the estimated fair value of the options is amortized into expense over the options' vesting period. The Company's pro forma information for the year ended December 31, 1997 follows:
Pro forma basic and diluted net earnings........................ $1,018,377 Pro forma basic and diluted earnings per share.................. $ .34 --------- ---------
(9) COMMITMENTS AND CONTINGENCIES LITIGATION From time to time, the Company is subject to legal proceedings associated with claims made under policies of insurance they have issued or other services performed on behalf of insured policyholders and other customers. Management believes that no such actions depart from customary litigation incidental to the business of the Company and that resolution of all such litigation will not have a material adverse effect on the Company. TRUST DEPOSITS In conducting its operations, ATC routinely holds customers' assets in trust, pending completion of real estate transactions. Such amounts are maintained in segregated bank accounts and have not been included in the accompanying consolidated balance sheets. ATC has contingent liability relating to proper disposition of these balances for its customers, which amounted to $63,735,628 at December 31, 1997. DEPOSITS WITH INSURANCE COMMISSIONER ATC is required to maintain certain amounts on deposit with the Insurance Commissioner in order to operate in certain counties. F-13 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 OPERATING LEASES ATC leases certain of its premises and equipment under operating leases that expire at various dates. Several of these agreements include escalation clauses and provide for purchases and renewal options for periods ranging from one to five years. Certain of those leases are with subsidiaries of FNFI. Future minimum operating lease payments are as follows:
TO TO NON TOTAL AFFILIATE AFFILIATE ------------ ---------- -------------- 1998............................................. $ 3,022,054 441,098 2,580,956 1999............................................. 2,454,143 517,200 1,936,943 2000............................................. 2,071,593 336,513 1,735,080 2001............................................. 1,357,519 39,617 1,317,902 2002............................................. 811,893 -- 811,893 Thereafter....................................... 323,454 -- 323,454 ------------ ---------- -------------- Total future minimum operating lease payments..................................... $ 10,040,656 1,334,428 8,706,228 ------------ ---------- -------------- ------------ ---------- --------------
Rent expense incurred under operating leases during 1997 totaled $2,373,097, including $207,708 paid to an affiliate. CAPITAL LEASES In 1997, ATC entered into a capital lease arrangement with a subsidiary of FNFI, which terminates in December 1999, for certain equipment. Also in 1997, ATC entered into a capital lease agreement with FNTIC, which expires in June 2007, for three title plants. The gross amount of title plants recorded under capital leases is $815,310 at December 31, 1997. The gross amount of equipment recorded under capital lease is $1,558,290 at December 31, 1997. Accumulated amortization related to this equipment is $311,658 as of December 31, 1997. Future minimum capital lease payments are as follows:
1998............................................................ $ 844,572 1999............................................................ 844,572 2000............................................................ 120,000 2001............................................................ 120,000 2002............................................................ 120,000 Thereafter...................................................... 540,000 ------------ Total future minimum capital lease payments................... $ 2,589,144 Portion relating to interest.................................. 517,967 ------------ Present value of minimum capital lease payments............... 2,071,177 ------------ ------------
Depreciation of the equipment held under capital leases is included in other operating expenses for the year ended December 31, 1997. F-14 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (10) RELATED PARTY TRANSACTIONS Fees to affiliated underwriters include a fee for underwriting services and management services under an exclusive agency agreement with FNTIC. Underwriting services are provided for five years commencing July 1997 for a fee of 11% of gross title insurance premiums. Management services are cancellable with 90 days notice and cost 1% of gross title insurance premiums. ATC leases office space, title plants, and certain equipment from subsidiaries of FNFI. See note 9. Additionally, the Company reimburses subsidiaries of FNFI for expenses incurred on its behalf. Such reimbursements aggregated $1,184,136 in 1997. (11) SUBSEQUENT EVENT ACQUISITIONS On March 16, 1998, the ATC signed a stock purchase agreement with Fidelity National Title Insurance Company of New York (FNNEW), a wholly-owned subsidiary of FNFI, and National Title Insurance of New York Inc. (National), a wholly-owned subsidiary of FNNEW, for the purchase of National. The sale is subject to regulatory approval and certain other conditions. The purchase price of $3,250,000 is payable in $1,250,000 cash and a note for $2,000,000. National was acquired in April 1996 by FNFI and has not been actively underwriting policies since the transaction closed. In connection with this transaction, ATC advanced $1,150,000 to FNNEW in May 1998, which FNNEW contributed to the capital of National. Such advances will be returned to ATC in the event the transaction does not close. On August 9, 1997, ATC signed a stock purchase agreement with Pacific Coast Title of Santa Barbara County (PCT) for the purchase of 100% of the issued and outstanding stock of Santa Barbara Title Company. The purchase price of $160,000 is payable in cash. The sale is subject to regulatory approval and certain other conditions. On January 9, 1998, the Insurance Commissioner of the State of California approved the transaction and the sale was consummated. (12) PROPOSED REORGANIZATION In August 1998, the Company agreed to acquire the remaining 40% of the outstanding common stock of ATC from FNFI in exchange for 43% of the outstanding common stock of the Company. The Company is currently awaiting regulatory approval. The agreement will automatically be consummated upon regulatory approval. The 40% interest will be accounted for at FNFI's cost basis. This transaction has no effect on the carrying value of the 40% interest in ATC. In connection with this transaction, the shareholders of the Company, other than FNFI, will assume approximately $1.2 million of the note payable incurred in connection with the Company's acquisition of ATC. The assumption of debt by the non-FNFI shareholders will be accounted for as a capital contribution. Additionally, the Company will use the proceeds of a dividend from ATC of approximately $3.5 million to repay the remaining balance of the note payable. The accompanying financial statements include a pro forma balance sheet as if this reorganization had occurred on December 31, 1997. The pro forma balance sheet adjustments include the elimination of minority interest, the repayment of debt that actually occurred subsequent to year end in the amount of $1,300,000, the assumption of $1,200,000 of debt by the founding shareholders and the $3.5 million repayment of debt from the ATC dividend. Had this reorganization taken place as of January 1, 1997, net earnings would have been $3,108,000. Basic and fully diluted earnings per share would have been $0.61. F-15 INDEPENDENT AUDITORS' REPORT The Board of Directors American National Financial, Inc.: We have audited the accompanying balance sheet of ANFI Predecessor, as defined in note 1 to the financial statements, as of December 31, 1996 and the related statements of combined operations for the years ended December 31, 1995 and 1996 and the six months ended June 30, 1997, and the statements of shareholder's equity and cash flows for the year ended December 31, 1996 and the six months ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ANFI Predecessor as of December 31, 1996 and the results of its operations for the years ended December 31, 1995 and 1996 and the six months ended June 30, 1997 and its cash flows for the year ended December 31, 1996 and the six months ended June 30, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Orange County, California August 26, 1998 F-16 ANFI PREDECESSOR BALANCE SHEET AS OF DECEMBER 31, 1996 ASSETS Current assets: Cash and cash equivalents.................................................... $ 25,667 Accounts receivable, net of an allowance for doubtful accounts of $885,150... 6,725,357 Prepaid expenses and other current assets.................................... 108,618 Deferred income tax asset.................................................... 688,716 Due from affiliates.......................................................... 138,835 ---------- Total current assets..................................................... 7,687,193 ---------- Other assets: Property and equipment, net.................................................. 136,968 Deposits with Insurance Commissioner......................................... 105,000 Intangibles, net of accumulated amortization of $112,000..................... 1,932,584 Other assets................................................................. 152,757 ---------- Total assets............................................................. $10,014,502 ---------- ---------- LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable............................................................. $ 979,149 Other accrued expenses....................................................... 1,322,176 Customer advances............................................................ 217,036 Income taxes payable......................................................... 742,899 ---------- Total liabilities.......................................................... 3,261,260 ---------- Shareholder's equity: Common stock, $100 par value. Authorized 1,000,000 shares; issued and outstanding 3,000 shares................................................... 300,000 Additional paid-in capital................................................... 6,669,497 Accumulated deficiency....................................................... (216,255) ---------- Total shareholder's equity............................................... 6,753,242 ---------- Total liabilities and shareholder's equity............................... $10,014,502 ---------- ----------
See accompanying notes to financial statements. F-17 ANFI PREDECESSOR STATEMENTS OF COMBINED OPERATIONS
FOR THE SIX FOR THE YEAR ENDED MONTHS ---------------------------- ENDED DECEMBER 31, DECEMBER 31, JUNE 30, 1995 1996 1997 ------------- ------------- ------------- Revenues: Gross title insurance premiums.................................... $ 21,974,435 $ 36,599,994 $ 16,773,036 Escrow fees....................................................... 5,526,478 9,672,389 5,581,285 Other service charges............................................. 2,220,055 5,459,547 2,786,828 ------------- ------------- ------------- Total revenues.................................................. 29,720,968 51,731,930 25,141,149 ------------- ------------- ------------- Expenses: Personnel costs................................................... 18,511,903 29,216,159 14,364,472 Other operating expenses.......................................... 9,962,476 14,472,708 5,622,823 Fees to affiliated underwriters................................... 2,628,195 4,151,343 1,851,918 Title plant rent and maintenance.................................. 2,405,134 4,106,803 2,009,188 ------------- ------------- ------------- Total expenses...................................................... 33,507,708 51,947,013 23,848,401 ------------- ------------- ------------- Earnings (losses) before income taxes............................... (3,786,740) (215,083) 1,292,748 Pro forma provision for income taxes................................ (1,387,186) 28,309 -- Provision for income taxes.......................................... -- (69,601) 549,902 ------------- ------------- ------------- Net earnings (losses)............................................... (2,399,554) (173,791) 742,846 Less: Net earnings (losses) of predecessors of American Title Company............................. (2,399,554) 42,464 -- ------------- ------------- ------------- Net earnings (losses) of American Title Company................... $ -- $ (216,255) $ 742,846 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to financial statements. F-18 ANFI PREDECESSOR STATEMENT OF SHAREHOLDER'S EQUITY
RETAINED COMMON STOCK ADDITIONAL EARNINGS TOTAL ----------------------- PAID-IN (ACCUMULATED SHAREHOLDER'S SHARES AMOUNT CAPITAL DEFICIENCY) EQUITY ----------- ---------- ------------ ------------ ------------- Balance, January 1, 1996......................... 3,000 $ 300,000 $ 472,000 $ -- $ 772,000 Capital contribution -- predecessors of American Title Company....................... -- -- 6,197,497 -- 6,197,497 Net losses..................................... -- -- -- (216,255) (216,255) ----- ---------- ------------ ------------ ------------- Balance, December 31, 1996....................... 3,000 300,000 6,669,497 (216,255) 6,753,242 Cash dividends................................. -- -- -- (1,500,000) (1,500,000) Capital contribution -- subsidiaries........... -- -- 1,348,494 -- 1,348,494 Capital contribution -- cash................... -- -- 292,577 -- 292,577 Net earnings................................... -- -- -- 742,846 742,846 ----- ---------- ------------ ------------ ------------- Balance, June 30, 1997........................... 3,000 $ 300,000 $ 8,310,568 $ (973,409) $ 7,637,159 ----- ---------- ------------ ------------ ------------- ----- ---------- ------------ ------------ -------------
See accompanying notes to financial statements. F-19 ANFI PREDECESSOR STATEMENT OF CASH FLOWS
FOR THE FOR THE SIX YEAR ENDED MONTHS ENDED DECEMBER 31, JUNE 30, 1996 1997 ------------ ------------- Cash flows from operating activities: Net earnings (losses)............................................................. $ (216,255) $ 742,846 Adjustments to reconcile net earnings (losses) to cash provided by operating activities: Depreciation and amortization................................................... 111,811 124,982 Changes in: Accounts receivable........................................................... (3,245,468) 2,204,038 Prepaid expenses and other assets............................................. (79,939) (562,648) Due from affiliates........................................................... -- 533,967 Payables and accruals......................................................... (1,086,587) 1,007,450 ------------ ------------- Total cash provided by (used in) operating activities....................... (4,516,438) 4,050,635 ------------ ------------- Cash flows from investing activities: Net sales (purchase) of property and equipment.................................... 79,182 (216,935) Net collection from notes receivable.............................................. 20,596 -- ------------ ------------- Total cash provided by investing activities....................................... 99,778 (216,935) Cash flows from financing activities: Contribution from Parent.......................................................... 4,365,076 292,577 Decrease (increase) in cash and cash equivalents.................................... (51,584) 4,126,277 Cash and cash equivalents at beginning of year...................................... 77,251 25,667 ------------ ------------- Cash and cash equivalents at end of year............................................ $ 25,667 4,151,944 ------------ ------------- ------------ -------------
See accompanying notes to financial statements. F-20 ANFI PREDECESSOR NOTES TO FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The accompanying financial statements present the financial position and results of operations of the divisions and/or subsidiaries of Fidelity National Financial, Inc. ("FNFI") which were subsequently merged into or acquired by American Title Company ("ATC" or "the Company"). ATC was acquired by FNFI in January 1996 for $772,000 from an unaffiliated party. The purchase price primarily represented the value of licenses to operate as an underwritten title company in various counties in California. At the time of acquisition, the operations of the acquired company were not significant. In July, 1997 60% of ATC was sold to American National Financial, Inc. ("ANFI") for $6,000,000. ANFI is owned by certain members of management of ATC. Reference to "ANFI Predecessor" in these financial statements refers to operations of these entities. The predecessor operations included in the accompanying financial statements are those of ATC since it was acquired by FNFI and other operations of FNFI contributed to ATC as of June 30, 1997 that were operated as separate profit centers but not separate legal entities. As separate profit centers or divisions of FNFI, only operating activities of these divisions were segregated in FNFI's accounting records. Cash balances and other balance sheet information was co-mingled within the accounts of FNFI's subsidiaries that owned the respective divisions. As such, the balance sheet and statements of shareholders' equity and cash flows present the operations of ATC. The statements of combined operations present operations of ATC and the divisions of FNFI, which were later contributed to ATC, as if the combined operations were a single entity throughout the periods presented. (2) DESCRIPTION OF BUSINESS ATC is an underwritten title company in the state of California and is engaged in the business of providing title insurance services and other related services in connection with real estate transactions. The Company operates throughout California and in Maricopa County, Arizona. ATC functions as an exclusive agent of Fidelity National Title Insurance Company ("FNTIC"), an affiliate and a wholly owned subsidiary of FNFI. Title insurance policies are underwritten by FNTIC for an underwriting fee. The underwriting agreement generally provides that ATC is liable under any single policy for only the first $5,000 of losses. As a result of the sale of 60% of ATC to ANFI, FNFI agreed to make no claim on ATC for claims arising from policies written prior to January 1, 1997. (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following briefly describes the significant accounting policies of the Company which have been followed in preparing the accompanying financial statements. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, highly liquid instruments purchased with original maturity dates of three months or less are considered cash equivalents. The carrying amounts reported in the balance sheets for these instruments approximate their fair value. ACCOUNTS RECEIVABLE The carrying amounts reported in the balance sheets for accounts receivable approximate their fair value. Accounts receivable is reported net of allowance for doubtful accounts and represents management's estimate of those balances that are uncollectible as of the balance sheet date. F-21 ANFI PREDECESSOR NOTES TO FINANCIAL STATEMENTS (CONTINUED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets, which range from three to five years. Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the applicable lease or the estimated useful lives of such assets. INTANGIBLES Intangible assets include acquired licenses to operate within various counties and cost in excess of net assets acquired in connection with certain acquisitions. Intangibles are amortized over a composite life of 25 years. Impairment of intangible assets is monitored on a continual basis and is assessed based on an analysis of the cash flows generated by the underlying assets. No impairment of intangible assets has been recognized. INCOME TAXES Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and expected benefits of utilizing net operating loss and credit 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. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period enacted. REVENUE RECOGNITION Title insurance premiums, escrow fees and other service charges are recognized as revenue at the time of closing of the related real estate transaction. Premiums from title policies written are presented at their gross amount on the accompanying statement of combined operations, and the portion of this premium that is remitted to the underwriter is reflected as fees to affiliated underwriters. Related expenses are recognized when incurred. A provision for losses on title policies is accrued at the time of closing of the related real estate transaction to cover anticipated losses up to $5,000 per policy under the underwriting agreement with FNTIC. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-22 ANFI PREDECESSOR NOTES TO FINANCIAL STATEMENTS (CONTINUED) (4) PROPERTY AND EQUIPMENT Property and equipment consists of the following:
1996 ---------- Leasehold improvements............................................................ $ 239,923 Furniture, fixtures and equipment................................................. 58,142 ---------- 298,065 Accumulated depreciation and amortization......................................... (161,097) ---------- $ 136,968 ---------- ----------
(5) INCOME TAXES ATC's operating results through July 1, 1997 are included in the income tax returns of FNFI. ATC has a formal tax allocation agreement with FNFI whereby if ATC has taxable income, ATC will pay FNFI a monthly amount equal to the GAAP book tax provision established for Federal and state income taxes. If ATC has a taxable loss, FNFI will pay to ATC an amount equal to the tax benefits received by FNFI from the inclusion of ATC in the consolidated Federal and state income tax returns even if ATC could not have utilized its losses and/or credits on a separate return basis. The operating results of the divisions of FNFI included in the statements of combined operations for the years ended December 31, 1995 and 1996 were included in the tax returns of FNFI. All tax benefits generated by the branches were utilized to offset taxable income generated by other FNFI subsidiaries. However, for purposes of these financial statements, a pro forma tax benefit has been provided in the statements of combined operations for 1995 and 1996 to reflect an estimate of the tax benefit that would have been available if these operations had been legally a part of ATC during these periods. The tax rate used for this estimate is a combination of the statutory Federal and state tax rates. Provision (benefit) for income taxes for the year ended December 31, 1996 and the six months ended June 30, 1997 consists of the following:
FOR THE YEAR ENDED DECEMBER 31, 1996 ------------------------------- CURRENT DEFERRED TOTAL --------- --------- --------- Federal.................................................... $ 495,191 $(550,860) $ (55,669) State and local............................................ 123,924 (137,856) (13,932) --------- --------- --------- $ 619,115 $(688,716) $ (69,601) --------- --------- --------- --------- --------- --------- FOR THE SIX MONTHS ENDED JUNE 30, 1997 ------------------------------- CURRENT DEFERRED TOTAL --------- --------- --------- Federal.................................................... $ 645,461 $(214,398) $ 431,063 State and local............................................ $ 177,947 $ (59,108) $ 118,839 --------- --------- --------- $ 823,408 $(273,506) $ 549,902 --------- --------- --------- --------- --------- ---------
F-23 ANFI PREDECESSOR NOTES TO FINANCIAL STATEMENTS (CONTINUED) (5) INCOME TAXES (CONTINUED) The effective tax rate for the periods reported differs from the Federal statutory income tax rate as follows:
FOR THE YEAR FOR THE ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1996 1997 --------------- ------------------- Statutory Federal income tax rate......................... (34.0%) 35.0% Non-deductible meals and entertainment.................... 13.4 .9 State taxes, net of Federal benefit....................... (6.0) 6.3 Amortization of intangibles............................... -- .5 Other..................................................... 2.3 (.2) ----- ----- (24.3%) 42.5% ----- ----- ----- -----
The deferred tax assets and liabilities at December 31, 1996 consist of the following:
DEFERRED DEFERRED TAX TAX ASSETS LIABILITIES ----------- ----------- Excess book over tax provision for bad debts....................... $ 410,944 $ -- Employee benefit and vacation accruals............................. 277,772 -- ----------- ----------- Total deferred taxes........................................... $ 688,716 $ -- ----------- ----------- ----------- -----------
Based upon the Company's current and historical pre-tax earnings, management believes it is more likely than not that the Company will realize the benefit of its existing deferred tax assets. Management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. However, there can be no assurance that the Company will generate any earnings or any specific level of continuing earnings in future years. Certain tax planning or other strategies could be implemented, if necessary, to supplement income from operations to fully realize recorded tax benefits. (6) SHAREHOLDER'S EQUITY The Company is subject to certain regulation by insurance regulatory authorities, primarily relating to minimum net worth and working capital requirements. In connection with the acquisition of the Company by FNFI in 1996, minimum net worth of $400,000 and working capital of $10,000 is required for ATC at December 31, 1996. (7) COMMITMENTS AND CONTINGENCIES LITIGATION From time to time the Company is subject to legal proceedings associated with claims made under policies of insurance they have issued or other services performed on behalf of insured policyholders and other customers. Management believes that no such actions depart from customary litigation incidental to the business of the Company and that resolution of all such litigation will not have a material adverse effect on the Company. F-24 ANFI PREDECESSOR NOTES TO FINANCIAL STATEMENTS (CONTINUED) (7) COMMITMENTS AND CONTINGENCIES (CONTINUED) TRUST DEPOSITS In conducting its operations, the Company routinely holds customers' assets in trust, pending completion of real estate transactions. Such amounts are maintained in segregated bank accounts and have not been included in the accompanying balance sheet. The Company has contingent liability relating to proper disposition of these balances for its customers, which amounted to $42,602,565 at December 31, 1996. DEPOSITS WITH INSURANCE COMMISSIONER The Company is required to maintain certain amounts on deposit with the Insurance Commissioner in order to operate in certain counties. The required deposit is reflected on the accompanying balance sheets at December 31, 1996. OPERATING LEASES The Company leases certain of its premises and equipment under leases that expire at various dates. Several of these agreements include escalation clauses and provide for purchases and renewal options for periods ranging from one to five years. Future minimum operating lease payments at December 31, 1996 are as follows: 1997............................................................ $2,439,937 1998............................................................ 1,894,742 1999............................................................ 922,414 2000............................................................ 545,747 2001............................................................ 298,664 Thereafter...................................................... 27,848 --------- Total future minimum operating lease payments................. $6,129,352 --------- ---------
Rent expense for the years ended December 31, 1995 and 1996 and the six months ended June 30, 1997 was $3,221,692, $3,998,555 and $2,011,781 respectively, of which $1,022,542, $1,374,308, and $630,753, respectively, are amounts paid to affiliates. UNDERWRITING AGREEMENT On July 1, 1997, the Company signed an exclusive underwriting agreement with FNTIC which is effective for five years. Under the agreement, the Company is generally limited to write policies only for FNTIC within certain geographic territories. Underwriting fees are based on a percentage of the gross title insurance premiums written and approximate 12%. The 12% underwriting fee includes a one percent fee paid to a FNFI affiliate for management services provided by these affiliates for ATC. (8) RELATED PARTY TRANSACTIONS Amounts due from affiliates at December 31, 1996 were $138,835 primarily related to amounts due under cost reimbursement agreements whereby a FNFI subsidiary pays certain expenses for ATC, and is later reimbursed by ATC. F-25 ANFI PREDECESSOR NOTES TO FINANCIAL STATEMENTS (CONTINUED) (9) SUBSEQUENT EVENTS ACQUISITIONS On March 16, 1998, the Company signed a stock purchase agreement with Fidelity National Title Insurance Company of New York ("FNNEW"), a wholly-owned subsidiary of FNFI, and National Title Insurance of New York Inc. ("National"), a wholly-owned subsidiary of FNNEW, for the purchase of National. The sale is subject to regulatory approval and certain other conditions. The purchase price of $3,250,000 is payable in $1,250,000 cash and a note for $2,000,000. National was acquired in April 1996 by FNFI and has not been actively underwriting policies since that transaction closed. In connection with this transaction, ATC advanced $1,150,000 to FNNEW in May 1998, which FNNEW contributed to the capital of National. Such advance will be returned to ATC in the event the transaction does not close. On August 9, 1997, ATC signed a stock purchase agreement with Pacific Coast Title of Santa Barbara County ("PCT") for the purchase of 100% of the issued and outstanding stock of Santa Barbara Title Company. The purchase price of $160,000 is payable in cash. The sale is subject to regulatory approval and certain other conditions. On January 9, 1998, the Insurance Commissioner of the State of California approved the transaction and the sale was consummated. F-26 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
PRO FORMA TO JUNE 30, REFLECT 1998 REORGANIZATION ------------ ------------- ASSETS Current assets: Cash and cash equivalents........................................................ $ 6,153,584 $ 2,453,586 Investments...................................................................... 1,982,398 1,982,398 Accounts receivable, net of an allowance for doubtful accounts of $1,103,051..... 8,713,496 8,713,496 Advance to related party......................................................... 1,531,169 1,531,169 Deferred income tax.............................................................. 832,732 832,732 Prepaid expenses and other current assets, including $1,536,679 with affiliate... 1,076,607 1,076,607 ------------ ------------- Total current assets......................................................... 20,289,986 16,589,988 Property and equipment........................................................... 3,342,378 3,342,378 Deposits with Insurance Commissioner............................................. 105,000 105,000 Title plants..................................................................... 815,310 815,310 Intangibles, net of accumulated amortization of $400,138......................... 2,979,106 2,979,106 ------------ ------------- Total assets................................................................. $27,531,780 $23,831,782 ------------ ------------- ------------ ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................................................. $ 6,762,585 $ 6,762,585 Other accrued expenses........................................................... 439,474 439,474 Customer advances................................................................ 1,591,730 1,591,730 Current portion of long-term debt................................................ 400,000 -- Current portion of obligations under capital leases with affiliates.............. 697,273 697,273 Income taxes payable............................................................. 1,589,866 1,589,866 Due to affiliates................................................................ 197,421 197,421 ------------ ------------- Total current liabilities.................................................... 11,678,349 11,278,341 Long-term debt..................................................................... 4,972,490 472,500 Obligations under capital leases with affiliates................................... 1,053,402 1,053,402 ------------ ------------- Total liabilities............................................................ 17,709,241 12,804,243 Minority interest in consolidated subsidiary....................................... 5,618,649 -- Shareholders' equity: Preferred stock, no par value; authorized, 5,000,000 shares; issued and outstanding, none.............................................................. -- -- Common stock, $0 par value; authorized 50,000,000 shares; issued and outstanding 2,875,092 shares............................................................... -- -- Additional paid-in capital....................................................... -- 6,818,649 Retained earnings................................................................ 4,208,890 4,208,890 ------------ ------------- Total shareholders' equity................................................... 4,208,890 11,027,539 ------------ ------------- Total liabilities and shareholders' equity................................... $27,531,780 $23,831,782 ------------ ------------- ------------ -------------
See accompanying notes to condensed consolidated financial statements. F-27 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) Revenues: Gross title insurance premiums............................................... $27,421,155 Escrow fees.................................................................. 10,716,185 Other service charges........................................................ 7,138,011 ---------- Total revenues............................................................. 45,275,351 ---------- Expenses: Personnel costs.............................................................. 22,522,387 Other operating expenses, includes $1,682,230 with affiliate................. 7,774,630 Fees to affiliated underwriters.............................................. 3,299,817 Title plant rent and maintenance............................................. 3,015,889 ---------- Total expenses............................................................. 36,612,723 ---------- Earnings before income taxes and minority interest in net earnings of consolidated subsidiary...................................................... 8,662,628 Provision for income taxes..................................................... 3,532,039 ---------- Earnings before minority interest in net earnings of consolidated subsidiary................................................................... 5,130,589 Minority interest in net earnings of consolidated subsidiary................... (2,044,546) ---------- Net earnings................................................................... $3,086,043 ---------- ---------- Basic net earnings per share................................................... $ 1.06 Diluted net earnings per share................................................. $ 1.01
See accompanying notes to condensed consolidated financial statements. F-28 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) Cash flows from operating activities: Net earnings.................................................................. $3,086,043 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization............................................... 560,060 Minority interest in net income of consolidated subsidiary.................. 2,044,546 Changes in: Accounts receivable, net.................................................. (1,904,319) Prepaid expenses and other assets......................................... (173,605) Short-term investments.................................................... (1,982,398) Income taxes.............................................................. 394,285 Accounts payable and other accrued expenses............................... 1,840,022 Customer advances 436,194 Due to affiliate.......................................................... (1,213,749) ---------- Total cash provided by operating activities............................. 3,087,079 ---------- Cash flows from investing activities: Advance to related party...................................................... (1,531,169) Purchases of property and equipment........................................... (1,205,457) ---------- Total cash used in investing activities................................. (2,736,626) ---------- Cash flows from financing activities: Payments on long term debt.................................................... (1,100,002) Payments under capital lease obligations...................................... (320,502) ---------- Total cash provided in financing activities............................. (1,420,504) ---------- Increase in cash and cash equivalents................................... (1,070,051) Cash and cash equivalents at beginning of year.................................. 7,223,635 ---------- Cash and cash equivalents at end of year........................................ $6,153,584 ---------- ---------- Supplemental disclosure of cash flow information: Cash paid during the year: Interest.................................................................... $ 261,099 Income taxes................................................................ 1,520,105 ---------- ----------
See accompanying notes to condensed consolidated financial statements. F-29 AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) (1) BASIS OF FINANCIAL STATEMENTS The condensed consolidated financial information includes the accounts of American National Financial, Inc. and Subsidiaries (collectively, the "Company") and has been prepared in accordance with generally accepted accounting principles and the instruction of Article 10 of Regulation S-X. All adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. Results for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the entire year. This information should be read in conjunction with the Company's Annual Report for the year ended December 31, 1997. (2) COMPREHENSIVE INCOME In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general- purpose financial statements. SFAS 130 requires all items that are necessary to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company has no other comprehensive income and accordingly the Statement has no impact on the presentation of the Company's financial statements. F-30 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY THE SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 6 The Company............................................................... 12 Reorganization............................................................ 12 Use of Proceeds........................................................... 15 Dividend Policy........................................................... 15 Dilution.................................................................. 16 Capitalization............................................................ 17 Selected Consolidated Financial and Operating Data........................ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 19 Business.................................................................. 26 Management................................................................ 37 Principal Shareholders.................................................... 43 Certain Transactions...................................................... 44 Description of Capital Stock.............................................. 46 Shares Eligible For Future Sale........................................... 47 Underwriting.............................................................. 48 Legal Matters............................................................. 50 Experts................................................................... 50 Available Information..................................................... 50 Index to Financial Statements............................................. F-1
------------------------ UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 1,250,000 SHARES [AMERICAN NATIONAL FINANCIAL, INC. LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- [CRUTTENDEN ROTH INCORPORATED LOGO] , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION It is estimated that the following expenses will be incurred in connection with the proposed offering hereunder. All of such expenses will be borne by the Company:
AMOUNT ---------- SEC filing fee.................................................................... $ 5,620 Legal fees and expenses........................................................... 125,000* Accounting fees and expenses...................................................... 75,000* Blue sky fees and expenses (including counsel fees)............................... 10,000* Printing expenses................................................................. 75,000* Nonaccountable Expense Allowance.................................................. 275,000* Miscellaneous..................................................................... 4,380* ---------- TOTAL........................................................................... $ 570,000* ---------- ----------
- ------------------------ * Estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification by the Underwriters of the Registrant and its officers and directors, and by the Registrant of the Underwriters for certain liabilities arising under the Securities Act or otherwise. The Registrant's Articles of Incorporation provide that the liability of the Registrant's directors for monetary damages shall be eliminated to the fullest extent permissible under California law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of the Registrant for breach of a director's duties to the Registrant or its shareholders except for liability: (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (ii) for acts or omissions that a director believes to be contrary to the best interests of the Registrant or its shareholders or that involve the absence of good faith on the part of the director; (iii) for any transaction for which a director derived an improper personal benefit; (iv) for acts or omission that show a reckless disregard for the director's duty to the Registrant or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Registrant or its shareholders; (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrant or its shareholders; (vi) with respect to certain transactions, or the approval of transactions in which a director has a material financial interest; and (vii) expressly imposed by statute, for approval of certain improper distributions to shareholders or certain loans or guarantees. The Articles also provide that the Registrant is authorized to provide indemnification to its agents (as defined in Section 317 of the California Corporations Code), through the Registrant's Bylaws or through agreements with such agents or both, for breach of duty to the Registrant and its shareholders, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. The Bylaws of the Registrant provide for indemnification of the Registrant's officers, directors, employees, and other agents to the extent and under the circumstances permitted by California law. The Bylaws further provide that no indemnification shall be made in the case of a derivative suit in respect to II-1 any claim as to which such person has been adjudged to be liable to the corporation, except with court approval, nor shall indemnification be made for amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval, or for expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval. Indemnification under the Bylaws is mandatory in the case of an agent of the Registrant (present or past) who is successful on the merits in defense of a suit against him or her in such capacity. In all other cases where indemnification is permitted by the Bylaws, a determination to indemnify such person must be made by a majority of a quorum of disinterested directors, a majority of disinterested shareholders, or the court in which the suits is pending. The Registrant has entered into agreements to indemnify its directors in addition to the indemnification provided for in the Articles of Incorporation and Bylaws. Among other things, these agreements provide that the Registrant will indemnify, subject to certain requirements, each of the Registrant's directors for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in the right of the Registrant, on account of services by such person as a director or officer of the Registrant, or as a director or officer of any other company or enterprise to which the person provides services at the request of the Registrant. The above provisions may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter shareholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the Registrant and its shareholders. At present, there is no litigation or proceeding pending involving a director of the Registrant as to which indemnification is being sought, nor is the Registrant aware of any threatened litigation that may result in claims for indemnification by any director. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In March 1997, the Registrant issued 3,026,400 shares of common stock to its founding shareholders in connection with the initial capitalization of the Registrant. The Registrant incurred indebtedness of $6,000,000 which was guaranteed proportionately by the shareholders in exchange for their shares of Common Stock. These securities were issued to the Registrant's founding shareholders, who were also employees of the Registrant, pursuant to Section 4(2) of the Securities Act. In July 1997, the Registrant issued options to purchase 332,904 shares of common stock to William P. Foley, II, the Chairman of the Board of Directors. The options are exercisable for a period of five years at an exercise price of $0.66 per share. These securities were issued in a private transaction to a single accredited investor pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following exhibits are filed herewith:
EXHIBIT NUMBER DESCRIPTION - ------ -------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement. 1.2 Form of Representative's Warrant Agreement. 2.1 Stock Purchase Agreement dated January 1, 1997 by and among the Registrant, Fidelity National Financial, Inc. and American Title Company, together with amendment.
II-2
EXHIBIT NUMBER DESCRIPTION - ------ -------------------------------------------------------------------------- 2.2 Stock Purchase Agreement dated December 31, 1996 by and among American Title Company, Fidelity National Asset Recovery Services, Inc. and Fidelity National Financial, Inc. 2.3 Stock Purchase Agreement dated December 31, 1996 by and among American Title Company, Nations Title Insurance of Arizona, Inc. and Fidelity National Financial, Inc. 2.4 Stock Purchase Agreement dated March 16, 1998 by and among Fidelity National Title Insurance Company of New York, National Title Insurance of New York, Inc. and American Title Company. 2.5 Stock Purchase Agreement dated August 9, 1997 by and between Pacific Coast Title of Santa Barbara County and American Title Company. 2.6 Stock Exchange Agreement between the Registrant and Fidelity National Financial, Inc.* 3.1 Amended and Restated Articles of Incorporation. 3.2 Bylaws of the Registrant, as amended. 4.1 Form of Common Stock Certificate.* 5.1 Opinion of Rutan & Tucker, LLP.* 10.1 1998 Stock Incentive Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement.* 10.2 Employment Agreement between the Registrant and Michael C. Lowther.* 10.3 Employment Agreement between the Registrant and Wayne D. Diaz.* 10.4 Employment Agreement between the Registrant and Dennis R. Duffy.* 10.5 Employment Agreement between the Registrant and Barbara Ferguson.* 10.6 Issuing Agency Agreement dated July 1, 1997 between Fidelity National Title Insurance Company and American Title Company. 10.7 Issuing Agency Agreement dated August 25, 1997 between Fidelity National Title Insurance Company and Santa Barbara Title Company. 10.8 Credit Agreement dated August 7, 1997 between the Registrant and Imperial Bank. 10.9 Note dated August 7, 1997 of the Registrant in favor of Imperial Bank. 10.10 Addendum to Note dated August 7, 1997 between the Registrant and Imperial Bank. 10.11 Standard Sublease dated January 28, 1998 between American Title Company and Fidelity National Financial, Inc. 10.12 Form of Indemnification Agreement.* 21 List of Subsidiaries of Registrant. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of Rutan & Tucker, LLP (included in the opinion filed as Exhibit 5.1).* 24 Power of Attorney (included on the signature page hereof). 27 Financial Data Schedule.
- ------------------------ * To be filed by amendment. (b) The following financial statement schedules are filed herewith: SCHEDULE I -- Balance Sheet of American National Financial, Inc. (Parent Company only) as of December 31, 1997 and related Statements of Operations and Retained Earnings and Cash Flows for the year ended December 31, 1997, and accompanying notes. II-3 SCHEDULE II -- Valuation and Qualifying Accounts of American National Financial, Inc. and Subsidiaries for the year ended December 31, 1997 and of American National Financial, Inc. (Predecessor) for the year ended December 31, 1996 and the six months ended June 30, 1997. ITEM 17. UNDERTAKINGS The Registrant hereby undertakes to provide the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 24 hereof, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person thereof in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, California, on August 26, 1998. AMERICAN NATIONAL FINANCIAL, INC. By: /s/ MICHAEL C. LOWTHER ----------------------------------------- Michael C. Lowther, CHIEF EXECUTIVE OFFICER
II-5 POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints William P. Foley, II, Michael C. Lowther and Wayne D. Diaz his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, at any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, or any Registration Statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith or in connection with the registration of the Common Stock under the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming that each of said attorneys-in-fact and agents, acting along, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement was signed by the following persons in the capacities and on the dates stated. NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ MICHAEL C. LOWTHER Chief Executive Officer - ------------------------------ and Director (Principal August 26, 1998 Michael C. Lowther Executive Officer) Executive Vice President /s/ CARL A. STRUNK and Chief Financial - ------------------------------ Officer (Principal August 26, 1998 Carl A. Strunk Financial and Accounting Officer) /s/ WILLIAM P. FOLEY, II - ------------------------------ Director August 26, 1998 William P. Foley, II /s/ WAYNE D. DIAZ - ------------------------------ Director August 26, 1998 Wayne D. Diaz /s/ DENNIS R. DUFFY - ------------------------------ Director August 26, 1998 Dennis R. Duffy /s/ BRUCE ELIEFF - ------------------------------ Director August 26, 1998 Bruce Elieff /s/ BARBARA A. FERGUSON - ------------------------------ Director August 26, 1998 Barbara A. Ferguson /s/ ROBERT MAJORINO - ------------------------------ Director August 26, 1998 Robert Majorino II-6 SCHEDULE I AMERICAN NATIONAL FINANCIAL, INC. (PARENT COMPANY) BALANCE SHEET DECEMBER 31, 1997 Current assets: Cash and cash equivalents..................................................... $ 26,313 Receivables from subsidiary................................................... 900,000 Deferred tax asset............................................................ 127,108 ---------- Total current assets........................................................ 1,053,421 Property and equipment, net................................................... 667,888 Investment in subsidiary...................................................... 6,435,562 ---------- Total assets................................................................ $8,156,871 ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.............................................................. 11,792 Accounts payable to subsidiary................................................ 549,732 Current portion of long-term debt............................................. 266,672 ---------- Total current liabilities................................................... 828,196 Long-term debt.................................................................. 6,205,828 ---------- Total liabilities........................................................... 7,034,024 ---------- Shareholders' equity: Preferred stock, no par value, authorized, 5,000,000 shares; issued and outstanding, none........................................................... -- Common stock, no par value; authorized, 50,000,000 shares; issued, 2,910,416 shares...................................................................... -- Additional paid in capital.................................................... -- Retained earnings............................................................. 1,122,847 ---------- Total shareholders' equity.................................................. 1,122,847 ---------- Total liabilities and shareholders' equity.................................. $8,156,871 ---------- ----------
See accompanying notes to financial statements S-1 SCHEDULE I (continued) AMERICAN NATIONAL FINANCIAL, INC. (PARENT COMPANY) STATEMENT OF OPERATIONS AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1997 Revenues: Other service charges......................................................... $ 94,697 Expenses: Other operating expenses...................................................... 412,466 --------- Losses before income tax expense and equity in earnings of subsidiaries......... (317,769) Provision for income taxes...................................................... 127,108 --------- Losses before equity in earnings of subsidiaries................................ (190,661) Equity in earnings of subsidiaries.............................................. 1,313,508 --------- Net earnings.................................................................... $1,122,847 --------- --------- Basic and diluted net earnings per share........................................ $ .38 Retained earnings, beginning of year............................................ $ -- Net earnings.................................................................. 1,122,847 --------- Retained earnings, end of year.................................................. $1,122,847 --------- ---------
See accompanying notes to financial statements. S-2 SCHEDULE I (continued) AMERICAN NATIONAL FINANCIAL, INC. (PARENT COMPANY) STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 Cash flows from operating activities: Net earnings.................................................................. $1,122,847 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization............................................... -- Equity in earnings of subsidiaries.......................................... (1,313,508) Changes in: Income taxes payable...................................................... (127,108) Accounts payable.......................................................... 539,470 ---------- Total cash provided by operating activities............................. 221,701 ---------- Cash flows from investing activities: Purchase of property and equipment............................................ (195,388) Purchase of investment in subsidiary.......................................... (6,000,000) ---------- Total cash used in investing activities................................. (6,195,388) ---------- Cash flows from financing activities -- borrowings.............................. 6,000,000 ---------- Total cash provided in financing activities............................. 6,000,000 ---------- Increase in cash and cash equivalents................................... 26,313 Cash and cash equivalents at beginning of year.................................. -- ---------- Cash and cash equivalents at end of year........................................ $ 26,313 ---------- ---------- Supplemental disclosure of cash flow information: Cash paid during the year: Interest.................................................................... $ 412,466 ---------- Income taxes................................................................ $ -- ---------- ----------
See accompanying notes to financial statements. S-3 SCHEDULE I (continued) AMERICAN NATIONAL FINANCIAL, INC. (PARENT COMPANY) NOTES TO FINANCIAL STATEMENTS (1) AMERICAN American National Financial, Inc. (the "Company") transacts substantially all of its business through its subsidiaries. The Parent Company Financial Statements should be read in connection with the aforementioned Consolidated Financial Statements and Notes thereto included elsewhere herein. (2) NOTES PAYABLE The Company has a $6,000,000 note payable to a financial institution that bears interest at the institution's prime lending rate (8.5% at June 30, 1998) and is due in November 2002. The note requires monthly payments in the amount of $33,334 beginning in May 1998. Interest is payable monthly. The note is collateralized by a first priority lien on all the Company's assets and all of its outstanding common stock. The Company is also required to maintain tangible net worth of at least $200,000 and working capital of at least $250,000 on a quarterly basis. As of December 31, 1997, the Company is out of compliance with certain covenants related to minimum tangible net worth and capital expenditure restrictions. The financial institution has agreed to waive the minimum tangible net worth covenant through June 30, 1998. The financial institution has agreed to waive, through October 31, 1998, the capital expenditure restriction. In April 1998, the Company voluntarily prepaid $1 million on the note. The Company also has a $472,500 note payable to the same financial institution that bears interest at the institution's prime lending rate (8.50% at December 31, 1997) and is due in full in December 1999 with interest payable monthly. The note is collateralized by a deed of trust of the office building. Future principal maturities of these notes payable are as follows for the years ending December 31: 1998............................................................ $ 266,672 1999............................................................ 872,508 2000............................................................ 400,008 2001............................................................ 400,008 2002............................................................ 4,533,304 --------- $6,472,500 --------- ---------
The carrying value of the Company's notes payable approximate fair value. (3) SUPPLEMENTARY CASH FLOW INFORMATION The Company acquired certain property for use in operations in December 1997 for cash of $195,388 and a note in the amount of $472,500. A dividend in the amount of $900,000 was declared by American Title Company in December 1997, which is reflected as a receivable from subsidiary at December 31, 1997. S-4 SCHEDULE II AMERICAN NATIONAL FINANCIAL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED DECEMBER 31, 1997
COL. C ------------------------ COL. B ADDITIONS COL. E ----------- ------------------------ COL. D ---------- COL. A BALANCE AT CHARGED TO ----------- BALANCE AT - --------------------------------------------------- BEGINNING COSTS AND OTHER DEDUCTIONS END OF DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) PERIOD - --------------------------------------------------- ----------- ----------- ----------- ----------- ---------- Trade receivables allowance........................ -- 553,039 837,005(2) 289,595(1) 1,100,449 Amortization of intangibles........................ -- 180,870 76,479(2) -- 257,349
- ------------------------ (1) Represents uncollectible accounts written off, change in reserve due to reevaluation of specific items and change in reserve due to sale of certain assets. (2) Balances from July 1, 1997 acquisition of American Title Company and subsidiaries by American National Financial, Inc. S-5 SCHEDULE II ANFI PREDECESSOR VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED DECEMBER 31, 1996 AND SIX MONTHS ENDED JUNE 30, 1997
COL. B COL. C COL. E ------------ ------------------------- COL. D ---------- COL. A BALANCE CHARGED ----------- BALANCE - ------------------------------------------------ AT BEGINNING TO COSTS OTHER DEDUCTIONS AT END DESCRIPTION OF PERIOD AND EXPENSES (DESCRIBE) (DESCRIBE) OF PERIOD - ------------------------------------------------ ------------ ------------ ----------- ----------- ---------- Year ended December 31, 1995 Allowance for doubtful accounts............... -- 220,358 -- -- -- Year ended December 31, 1996 Allowance for doubtful accounts............... $ -- 406,323 478,827(1) -- $ 885,150 Accumulated amortization of intangibles....... -- 112,000 -- -- 112,000 Six months ended June 30, 1997 Allowance for doubtful accounts............... $ 885,150 348,512 -- 421,733(2) $ 811,929 Accumulated amortization of intangibles....... $ -- 81,870 -- $ 81,870
- ------------------------ (1) Represents amounts on the August 31, 1996 balance sheet of FNFI divisions acquired by American Title Company. (2) Represents uncollectible accounts written off. S-6 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - ------------- --------------------------------------------------------------------------------------------- --------- 1.1 Form of Underwriting Agreement. 1.2 Form of Representative's Warrant Agreement. 2.1 Stock Purchase Agreement dated January 1, 1997 by and among the Registrant, Fidelity National Financial, Inc. and American Title Company, together with amendment. 2.2 Stock Purchase Agreement dated December 31, 1996 by and among American Title Company, Fidelity National Asset Recovery Services, Inc. and Fidelity National Financial, Inc. 2.3 Stock Purchase Agreement dated December 31, 1996 by and among American Title Company, Nations Title Insurance of Arizona, Inc. and Fidelity National Financial, Inc. 2.4 Stock Purchase Agreement dated March 16, 1998 by and among Fidelity National Title Insurance Company of New York, National Title Insurance of New York, Inc. and American Title Company. 2.5 Stock Purchase Agreement dated August 9, 1997 by and between Pacific Coast Title of Santa Barbara County and American Title Company. 2.6 Stock Exchange Agreement between the Registrant and Fidelity National Financial, Inc.* 3.1 Amended and Restated Articles of Incorporation. 3.2 Bylaws of the Registrant, as amended. 4.1 Form of Common Stock Certificate.* 5.1 Opinion of Rutan & Tucker, LLP.* 10.1 1998 Stock Incentive Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement.* 10.2 Employment Agreement between the Registrant and Michael C. Lowther.* 10.3 Employment Agreement between the Registrant and Wayne D. Diaz.* 10.4 Employment Agreement between the Registrant and Dennis R. Duffy.* 10.5 Employment Agreement between the Registrant and Barbara Ferguson.* 10.6 Issuing Agency Agreement dated July 1, 1997 between Fidelity National Title Insurance Company and American Title Company. 10.7 Issuing Agency Agreement dated August 25, 1997 between Fidelity National Title Insurance Company and Santa Barbara Title Company. 10.8 Credit Agreement dated August 7, 1997 between the Registrant and Imperial Bank. 10.9 Note dated August 7, 1997 of the Registrant in favor of Imperial Bank. 10.10 Addendum to Note dated August 7, 1997 between the Registrant and Imperial Bank. 10.11 Standard Sublease dated January 28, 1998 between American Title Company and Fidelity National Financial, Inc. 10.12 Form of Indemnification Agreement.* 21 List of Subsidiaries of Registrant. 23.1 Consent of KPMG Peat Marwick LLP.
EXHIBIT NO. DESCRIPTION PAGE - ------------- --------------------------------------------------------------------------------------------- --------- 23.2 Consent of Rutan & Tucker, LLP (included in the opinion filed as Exhibit 5.1).* 24 Power of Attorney (included on the signature page hereof). 27 Financial Data Schedule.
- ------------------------ * To be filed by amendment. EX-1.1 2 EXHIBIT 1.1 1,250,000 SHARES (1) AMERICAN NATIONAL FINANCIAL, INC. COMMON STOCK UNDERWRITING AGREEMENT September __, 1998 CRUTTENDEN ROTH INCORPORATED As Representative of the several Underwriters 18301 Von Karman, Suite 100 Irvine, California 92612 Gentlemen: American National Financial, Inc., a California corporation (the "Company"), addresses you as the Representative of each of the persons, firms and corporations listed in Schedule A hereto (herein collectively called the "Underwriters") and hereby confirms its agreement with the several Underwriters as follows: 1. DESCRIPTION OF SHARES. The Company proposes to issue and sell 1,250,000 shares of its authorized and unissued Common Stock, no par value (the "Firm Shares"), to the several Underwriters. In addition, for the sole purpose of covering over-allotments in connection with the sale of the Firm Shares, the Company proposes to grant to the Underwriters an option to purchase up to 187,500 additional shares of the Company's Common Stock (the "Option Shares"), as provided in Section 4 hereof. The Company also proposes to sell to you, individually and not in your capacity as Representative, warrants (the "Representative's Warrants") to purchase up to 125,000 shares of Common Stock of the Company (the "Representative's Warrant Stock"), which sale will be consummated in accordance with the terms and conditions of the Representative's Warrant Agreement (the "Representative's Warrant Agreement"), the form of which is filed as an exhibit to the Registration Statement described below. As used in this Agreement, the term "Shares" shall include the Firm Shares and the Option Shares. All shares of Common Stock of the Company to be outstanding after giving effect to the sales contemplated hereby, including the sale of the Shares, are hereinafter referred to as "Common Stock." Unless the context otherwise requires, references herein to the "Company" include American National Financial, Inc., together with its predecessor and subsidiaries described in the Prospectus (hereinafter defined). 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The Company represents and warrants to and agrees with each that: (a) A registration statement on Form S-1 (File No. 333-______) with respect to the Shares, the Representative's Warrants and the Representative's Warrant Stock, including a prospectus subject to completion, has been prepared by the Company in conformity with the requirements of - -------------------------- (1) Plus an option to purchase up to 187,500 additional shares from the Company to cover over-allotments, if any. the Securities Act of 1933, as amended (the "Act"), and the applicable rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act and has been filed with the Commission; such amendments to such registration statement and such amended prospectuses subject to completion as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company will file such additional amendments to such registration statement and such amended prospectuses subject to completion as may hereafter be required. Copies of such registration statement and amendments and of each related prospectus subject to completion (the "Preliminary Prospectuses") have been delivered to you. If the registration statement relating to the Shares has been declared effective under the Act by the Commission, the Company will prepare and promptly file with the Commission the information previously omitted from the registration statement pursuant to Rule 430A(a) of the Rules and Regulations pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to the registration statement (including a final form of prospectus). If the registration statement relating to the Shares has not been declared effective under the Act by the Commission, the Company will prepare and promptly file an amendment to the registration statement, including a final form of prospectus. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations) and, in the event of any amendment thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares as included in such Registration Statement at the time it becomes effective (including, if the Company omitted information from the Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations), except that if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the prospectus on file with the Commission at the time the Registration Statement became or becomes, as the case may be, effective (whether or not such revised prospectus is required to be filed with the Commission pursuant to Rule 424(b)(3) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or instituted proceedings for that purpose, and each such Preliminary Prospectus, at the time of filing thereof, has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date (hereinafter defined) and on any later date on which Option Shares are to be purchased, (i) the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained and will contain all material information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, (ii) the Registration Statement, and any amendments or supplements thereto, did not and will 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 not misleading, and (iii) the Prospectus, and any -2- amendments or supplements thereto, did not and will not 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 none of the representations and warranties contained in this subparagraph (b) shall apply to information contained in or omitted from the Registration Statement or Prospectus, or any amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter specifically for use in the preparation thereof. (c) The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21 of the Registration Statement. The Company and each of its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Prospectus; the Company and each of its subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company taken as a whole; no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification; the Company is not in material violation of its charter or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness, or in any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which it or its properties or assets may be bound; and the Company is not in violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its properties or assets. (d) The Company holds such permits, licenses, consents, exemptions, franchises, authorizations and other approvals from insurance departments and other governmental or regulatory authorities (including, without limitation, insurance licenses from the insurance regulatory agencies of the various states or other jurisdictions where it conducts business), and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including, without limitation, under any applicable environmental laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business, and the Company has fulfilled and performed all material obligations necessary to maintain such authorizations and insurance licenses. Each such authorization and insurance license is valid and in full force and effect and the Company is in compliance with all of the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such authorization or insurance license or result in any other impairment of the rights of the holder of any such authorization or insurance license; such authorizations and insurance licenses contain no restrictions that are burdensome to the Company; and no insurance regulatory agency or body has issued any order or decree impairing, restricting or prohibiting the payment of dividends by any of the Company's subsidiaries to the Company. (e) The Company has full legal right, power and authority to enter into this Agreement and the Representative's Warrant Agreement and to perform the transactions -3- contemplated hereby and thereby. Each of this Agreement and the Representative's Warrant Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, except as rights to indemnification under this Agreement or the Representative's Warrant Agreement may be limited by applicable law and except as the enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; the performance of this Agreement and the Representative's Warrant Agreement and the consummation of the transactions herein or therein contemplated will not violate any provisions of the charter, bylaws or other organizational document of the Company and will not result in a breach or violation of any of the terms and provisions of, or constitute, either by itself or upon notice or the passage of time or both, a default under any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which its properties or assets may be bound, or any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its properties or assets. (f) No consent, approval, authorization, license, waiver, registration or order of, or qualification with, any governmental body or authority, regulatory or administrative agency (including, without limitation, any insurance regulatory body or agency), governmental commission, court or tribunal (or any department, bureau or division thereof) or any arbitral body having jurisdiction over the Company is required for (i) the execution and delivery of this Agreement or the Representative's Warrant Agreement; (ii) the consummation by the Company of the transactions contemplated herein and therein and in the Registration Statement; (iii) the valid authorization, issuance, sale and delivery of the Shares or the execution, delivery and performance of this Agreement; or (iv) for the use of proceeds to be received by the Company from such sale in the manner described under the caption "Use of Proceeds" contained in the Prospectus and in any Preliminary Prospectus, except such as may be required under the Act, the Exchange Act, or under state or other securities, Blue Sky or insurance laws, or such approvals from various state insurance departments that have been obtained, all of which requirements have been satisfied in all material respects. (g) There is not any pending or, to the best of the Company's knowledge, threatened action, suit, claim or proceeding against the Company, or any of its officers or any of its properties, assets or rights before any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its officers or properties or otherwise that (i) is reasonably likely to result in any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company or might materially and adversely affect its properties, assets or rights, (ii) might prevent consummation of the transactions contemplated hereby or (iii) is required to be disclosed in the Registration Statement or Prospectus and is not so disclosed; and there are no agreements, contracts, leases or documents of the Company of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement by the Act or the Rules and Regulations or by the Securities Exchange Act of 1934 (the "Exchange Act") or the rules and regulations of the Commission thereunder that have not been accurately described in all material respects in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement. (h) All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the authorized and outstanding capital stock of the -4- Company is as set forth in the Prospectus under the caption "Capitalization" and conforms to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company); the Firm Shares and the Option Shares have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable, and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of shareholders exists with respect to any of the Firm Shares or Option Shares or the issuance and sale thereof other than those that will automatically expire upon the consummation of the transactions contemplated on the Closing Date. No further approval or authorization of any shareholder, the Board of Directors of the Company or others is required for the issuance and sale or transfer of the Shares except as may be required under the Act, the Rules and Regulations or under state or other securities or Blue Sky laws. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, the Company has no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights under the Act and the Rules and Regulations. (i) KPMG Peat Marwick, LLP, which has expressed its opinion with respect to the financial statements of the Company filed with the Commission as a part of the Registration Statement, which are included in the Prospectus, are independent accountants within the meaning of the Act and the Rules and Regulations. The audited financial statements of the Company, together with the related schedules and notes, and the unaudited financial information, included in the Registration Statement and Prospectus, fairly present the financial position and the results of operations of the Company at the respective dates and for the respective periods to which they apply. Such financial statements of the Company, together with the related schedules and notes, filed with the Commission as part of the Registration Statement, have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods as certified by KPMG Peat Marwick, LLP. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (j) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, except as specifically disclosed or contemplated therein, there has not been (i) any material adverse change in the condition (financial or otherwise), earnings, operations or business of the Company, (ii) incurred by the Company any transaction that is material to the Company, (iii) any obligation, direct or contingent incurred by the Company that is material to the Company, (iv) any change in the capital stock or outstanding indebtedness of the Company that is material to the Company, (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (vi) any loss or damage (whether or not insured) to the property of the Company which has a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company. -5- (k) Except as set forth in the Registration Statement and Prospectus, (i) the Company has good and marketable title to all properties and assets described in the Registration Statement and Prospectus as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than such as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company, (ii) the agreements to which the Company is a party described in the Registration Statement are valid agreements, enforceable by the Company, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and, to the best of the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements, and (iii) the Company has valid and enforceable leases for all properties described in the Registration Statement and Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. Except as set forth in the Registration Statement and Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted and as described in the Registration Statement and the Prospectus. (l) The Company has timely filed all federal, state, local and foreign tax returns required to be filed by it and has paid all taxes shown thereon as due, and there is no tax deficiency that has been or, to the best of the Company's knowledge, is reasonably likely to be asserted against the Company, which might have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company, and all tax liabilities are adequately provided for on the books of the Company. (m) The Company maintains insurance with insurers of recognized financial responsibility of the types and in the amounts generally deemed adequate for its business including, but not limited to, insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect; the Company has not been refused any insurance coverage sought or applied for; and the Company does not have any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), earnings, operations or business of the Company. (n) To the best of Company's knowledge, no labor disturbance by the employees of the Company exists or is imminent. No collective bargaining agreement exists with any of the Company's employees and, to the best of the Company's knowledge, no such agreement is imminent. (o) Except as disclosed in or specifically contemplated by the Prospectus, the Company owns or possesses adequate rights to use all patent rights, trade secrets, mask works, know-how, trademarks, copyrights, licenses, service marks and trade names that are necessary to conduct its businesses as described in the Registration Statement and Prospectus; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent rights, trade secrets, mask works, know-how, trademarks, copyrights, licenses, service marks or trade names; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent rights, trade secrets, mask works, know-how, trademarks, copyrights, licenses, service marks or trade names which, singly or in the aggregate, in the event of an unfavorable decision, ruling or finding, would have a -6- material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (p) The Common Stock is registered pursuant to Section 12(g) of the Exchange Act and is approved for quotation on the Nasdaq National Market, and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from the Nasdaq National Market, nor has the Company received any notification that the Commission or the National Association of Securities Dealers, Inc. ("NASD") is contemplating terminating such registration or listing. (q) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. (r) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. (s) The Company has not at any time during the last five (5) years (i) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (t) The Company has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization in violation of law or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (u) Each officer, director and beneficial owner of the Company's Common Stock has agreed in writing that such person will not, without the prior written consent of Cruttenden Roth Incorporated, for a period of 180 days from the date hereof (the "Lock-up Period"), directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by such person or with respect to which such person has or hereafter acquires the power of disposition, or (ii) enter into any swap or any other arrangement, agreement or any transaction that transfer to another, in whole or in part, directly or indirectly, any of the economic consequences of ownership of the Common Stock, whether any transaction described in clause (i) or (ii) above is settled by delivery of Common Stock or other securities, in cash or otherwise. In addition, each such person has agreed that during the Lock-up Period, without the prior written consent of Cruttenden Roth Incorporated, such person will not file any registration statement under the Securities Act, or make any demand for or exercise any right with respect to the registration of any securities of the Company. In addition, such person has agreed that, during the Lock-up Period and during the 180-day period immediately following the Lock-up Period (i) no sales or other dispositions of Common Stock will be made in excess of the number of shares which such person is permitted to sell pursuant to Rule 144 under the Securities Act, and (ii) in any event, all sales or other dispositions of Common Stock by such person will be made through Cruttenden Roth Incorporated, which approval shall be based, in part, on an assessment of then existing market conditions, made by and at the sole discretion of Cruttenden Roth Incorporated. If Cruttenden Roth Incorporated determines that market conditions do not support the sale or other disposition of Common Stock by such person at any given time, such person has agreed not to proceed with such sale or other disposition until such time as Cruttenden Roth Incorporated determines market conditions to be appropriate to proceed with such sale or disposition, or until the expiration of such 180-day period, whichever occurs first. Furthermore, such person will also agree and consent to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. The Company has provided to counsel for the Underwriters a complete and accurate list of all shareholders of the Company and the number and type of securities held by each shareholder. The Company has provided to counsel for the -7- Underwriters true, accurate and complete copies of all of the agreements pursuant to which its officers, directors, director-nominees and shareholders have agreed to such restrictions (the "Lock-up Agreements"). The Company hereby represents and warrants that it will not release any of its officers, directors or director-nominees or other shareholders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of Cruttenden Roth Incorporated. (v) Except as set forth in the Registration Statement and Prospectus, (i) the Company is in material compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") that are applicable to its business, (ii) the Company has received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus, (iii) to its best knowledge, the Company is not likely to be required to make future material capital expenditures to comply with Environmental Laws and (iv) no property which is owned, leased or occupied by the Company has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, ET SEQ.), or otherwise designated as a contaminated site under applicable state or local law. (w) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, including without limitation cash receipts, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (x) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers, directors or director-nominees of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. (y) The Representative's Warrants have been duly and validly authorized by the Company and upon delivery to you in accordance with the Representative's Warrant Agreement will be duly issued and legal, valid and binding obligations of the Company. (z) The Representative's Warrant Stock has been duly authorized and reserved for issuance upon the exercise of the Representative's Warrants and when issued upon payment of the exercise price therefor will be validly issued, fully paid and nonassessable shares of Common Stock of the Company. 3. REPRESENTATION, WARRANTIES AND AGREEMENTS OF THE UNDERWRITERS. The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), in the second paragraph on page 2, concerning stabilization and over-allotment by the Underwriters, and in third and eighth paragraphs under the caption "Underwriting" in any Preliminary Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b) constitutes the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement, and you, on behalf of the respective Underwriters, represent and warrant to the Company that the statements made therein do not include any untrue statement of a material fact or omit -8- to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $ per share, the respective number of Firm Shares as hereinafter set forth. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of Firm Shares which is set forth opposite the name of such Underwriter in Schedule A hereto (subject to adjustment as provided in Section 10). Delivery of definitive certificates for the Firm Shares to be purchased by the Underwriters pursuant to this Section 4 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check or checks drawn in next-day funds, payable to the order of the Company (and the Company agrees not to deposit any such check in the bank on which it is drawn until the day following the date of its delivery to the Company) at the offices of the Representative or such other place as may be agreed upon between the Representative and the Company, at 7:00 A.M., California time, on the third (3rd) full business day following the first day that Shares are traded (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 10 hereof), such time and date of payment and delivery being herein called the "Closing Date." The certificates for the Firm Shares to be so delivered will be made available to you at such office or such other location as you may reasonably request for checking at least one (1) full business day prior to the Closing Date and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to the Closing Date. If the Representative so elects, delivery of the Firm Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representative. It is understood that you, individually, and not as the Representative of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the Closing Date for the Firm Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants to the several Underwriters, for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Shares only, a nontransferable option to purchase up to an aggregate of 187,500 Option Shares at the purchase price per share for the Firm Shares set forth in this Section 4. Such option may be exercised by the Representative on behalf of the several Underwriters on one or more occasions in whole or in part during the forty-five (45) day period after the date on which the Firm Shares are initially offered to the public, by giving written notice to the Company. The number of Option Shares to be purchased by each Underwriter upon the exercise of such option shall be the same proportion of the total number of Option Shares to be purchased as the number of Firm Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to the total number of Firm Shares purchased by the several Underwriters (set forth in Schedule A hereto), adjusted by the Representative in such manner as to avoid fractional shares. Delivery of definitive certificates for the Option Shares to be purchased by the several Underwriters pursuant to the exercise of the option granted by this Section 4 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check or -9- checks drawn in next-day funds, payable to the order of the Agent (and the Agent agrees not to deposit any such check in the bank on which it is drawn until the day following the date of its delivery). Such delivery and payment shall take place at the offices of the Representative, or at such other place as may be agreed upon by the Representative and the Agent (i) on the Closing Date, if written notice of the exercise of such option is received by the Agent at least three (3) full business days prior to the Closing Date, or (ii) on a date which shall not be later than the fifth (5th) full business day following the date the Agent receives written notice of the exercise of such option, if such notice is received by the Agent less than three (3) full business days prior to the Closing Date. The certificates for the Option Shares to be so delivered will be made available to you at such office or such other location as you may reasonably request for inspection at least two (2) full business days prior to the date of payment and delivery and will be in such names and denominations as you may request, such request to be made at least three (3) full business days prior to such date of payment and delivery. If the Representative so elect, delivery of the Option Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representative. It is understood that you, individually, and not as the Representative of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the date of payment and delivery for the Option Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. Upon exercise of any option provided for in this Section 4, the obligations of the several Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment and delivery for such Option Shares) to the accuracy of and compliance with the representations, warranties and agreements of the Company herein, to the accuracy of the statements of the Company and officers of the Company made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, and to the condition that all proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be reasonably satisfactory in form and substance to you and to Underwriters' Counsel, and you shall have been furnished with all such documents, certificates and opinions as you may reasonably request in order to evidence the accuracy and completeness of any of the representations, warranties or statements, the performance of any of the covenants or agreements of the Company or the compliance with any of the conditions herein contained in each case in all material respects. After the Registration Statement becomes effective, the several Underwriters intend to make an initial public offering (as such term is described in Section 12 hereof) of the Firm Shares at an initial public offering price of $ per share. After the initial public offering, the several Underwriters may, in their discretion, vary the public offering price. 5. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the several Underwriters that: -10- (a) The Company will use best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; it will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement or any subsequent amendment to the Registration Statement has become effective or any supplement to the Prospectus has been filed; if the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration Statement as originally declared effective which is declared effective by the Commission; if for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed; it will notify you promptly of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; promptly upon your request, it will prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus which, in the opinion of counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; it will promptly prepare and file with the Commission, and promptly notify you of the filing of, any amendments or supplements to the Registration Statement or Prospectus which may be necessary to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would 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; in case any Underwriter is required to deliver a prospectus nine (9) months or more after the effective date of the Registration Statement in connection with the sale of the Shares, it will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; and it will file no amendment or supplement to the Registration Statement or Prospectus which shall not previously have been submitted to you a reasonable time prior to the proposed filing thereof or to which you shall reasonably object in writing, subject, however, to compliance with the Act and the Rules and Regulations and the rules and regulations of the Commission thereunder and the provisions of this Agreement. (b) The Company will advise you promptly after it shall received notice or obtained knowledge of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. (c) The Company will use reasonable efforts to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares, except that the Company shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction in which it is not otherwise required to be so qualified or to so execute a general consent to service of process. In each jurisdiction in which the Shares shall have been qualified as above provided, the Company will make and file such statements and reports in each year as are or may be reasonably required by the laws of such jurisdiction. -11- (d) The Company will furnish to you, as soon as available, copies of the Registration Statement (three of which will be signed and which will include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the Act (three of which will include all exhibits) all in such quantities as you may from time to time reasonably request. (e) The Company will make generally available to its shareholders as soon as practicable, but in any event not later than the forty-fifth (45th) day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and covering a twelve (12) month period beginning after the effective date of the Registration Statement. (f) During a period of five (5) years after the date hereof and for so long as the Company is subject to Section 13 or 15 of the Exchange Act, the Company will furnish to its shareholders as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent certified public accountants) and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and will furnish to you and the other several Underwriters hereunder, upon request (i) concurrently with furnishing such reports to its shareholders, statements of operations of the Company for each of the first three (3) quarters in the form furnished to the Company's shareholders, (ii) concurrently with furnishing to its shareholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of shareholders' equity, and of cash flows of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent certified public accountants, (iii) as soon as they are available, copies of all reports (financial or other) mailed to shareholders, (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the NASD, (v) every material press release and every material news item or article in respect of the Company or its affairs which was generally released to shareholders or prepared by the Company, and (vi) any additional information of a public nature concerning the Company or its business which you may reasonably request. During such five (5) year period, if the Company shall have active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary that is not so consolidated. (g) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. No part of such net proceeds will be used for any purpose that violates the provisions of any of Regulations G, T or X of the Board of Governors of the Federal Reserve Systems or any other regulation of such Board of Governors. (h) The Company will maintain a transfer agent and a registrar (which may be the same entity) for its Common Stock. (i) If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to -12- be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder, or if the Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to Section 11(b)(i), and, in the judgment of the Representative, a public offering price of $________ or more per share is available, then the Company shall (i) reimburse the Representative in full for its out-of-pocket expenses, including without limitation, its legal fees and disbursements incurred prior to the termination; (ii) pay all Blue Sky filing fees and expenses, including Blue Sky legal fees and disbursements; (iii) indemnify and hold harmless the Representative for any expenses incurred by the Company in connection with the transactions contemplated by this Agreement, including but not limited to printing expenses and its accounting and legal fees; (iv) not sell any of its capital stock to the public through another underwriter for a period of at least twelve (12) months, or if it does so, then the Company shall pay to you $200,000 in addition to the amounts paid to you pursuant to subparagraphs (i), (ii) and (iii) above, which the Company and you agree is fair compensation to the Representative for services performed with respect to the transactions contemplated hereby; and (v) in the event the Company enters into an agreement to be acquired or merges, sells all or substantially all of the assets or otherwise effects a corporate reorganization with any other entity (a "Corporate Transaction") and, as a result, the public offering contemplated hereby is abandoned, (x) pay you a cash fee of $250,000, which the Company and you agree is fair compensation to you for services performed with respect to the public offering contemplated hereby (such cash fee to be in addition to the amounts paid to you pursuant to subparagraphs (i), (ii) and (iii) above) or (y) engage you as the Company's exclusive financial advisor with respect to the Corporate Transaction and upon request of the Company, you shall act as the Company's investment banker in connection with any such acquisition and shall render such services as are customary in connection therewith, in consideration for standard and customary fees. (j) If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, if reasonably requested by you, forthwith prepare, and, if permitted by law, disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (k) During the Lock-up Period, the Company will not, without the prior written consent of the Representative, effect the Disposition of, directly or indirectly, any Securities other than (i) the sale of the Firm Shares and the Option Shares hereunder and, (ii) the Company's issuance of options or Common Stock under the Company's presently authorized stock option plans or restricted stock plans (collectively, the "Option Plans"). 6. EXPENSES. (a) The Company agrees with each Underwriter that: (i) The Company will pay and bear all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto with the SEC and the NASD; the printing of this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and any supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any instruments related to any of the foregoing; the issuance and delivery of the Shares hereunder to the several Underwriters, including transfer taxes, if any, the cost of all certificates representing the Shares and transfer agents' and registrars' fees; all Blue Sky fees and expenses, including related fees and disbursements of the Representative's counsel; fifty percent (50%) of all other fees and disbursements of the Representative's counsel; the fees and -13- disbursements of counsel and accountants for the Company; all fees and other charges of the Company's independent certified public accountants; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus and the Prospectus, and any amendments or supplements to any of the foregoing; NASD filing fees and the cost of qualifying the Shares under the laws of such jurisdictions as you may designate (including filing fees and fees and disbursements of counsel for the Underwriters related to such qualification); the Company's road show costs and expenses, the cost of preparing bound volumes of the documents relating to the public offering of Common Stock contemplated hereby; and all other expenses directly incurred by the Company in connection with the performance of its obligations hereunder. (ii) In addition to its other obligations under Section 6(a)(i) hereof, if the Shares are sold pursuant to this Agreement, the Company will pay to the Representative a nonaccountable expense allowance equal to 1% of the aggregate sales price of the Shares to the public. This nonaccountable expense allowance with respect to the Firm Shares shall be paid to you on the Closing Date and the nonaccountable expense allowance with respect to the Option Shares shall be paid to you on the closing of the sale to you of such Option Shares. The $50,000 previously paid to the Representative by the Company shall be credited against this nonaccountable expense allowance. (iii) In addition to its other obligations under Section 8 hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) listed from time to time in The Wall Street Journal which represents the base rate on corporate loans posted by a substantial majority of the nation's five (5) largest banks (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (b) In addition to their other obligations under Section 8(b) hereof, the Underwriters severally and not jointly agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(b) hereof, they will reimburse the Company on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company shall promptly return such payment to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request -14- (c) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 6(a)(iii) and 6(b) hereof, including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the reimbursing parties, shall be settled by arbitration conducted pursuant to the Code of Arbitration Procedure of the NASD in Orange County, California (or as close geographically to Orange County, California as is reasonably practical). Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 6(a)(iii) and 6(b) hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses which is created by the provisions of Sections 8(a) and 8(b) hereof or the obligation to contribute to expenses which is created by the provisions of Section 8(d) hereof. 7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy, as of the date hereof and the Closing Date and any later date on which Option Shares are to be purchased, as the case may be, of the representations and warranties of the Company and the performance by the Company of its obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 2:00 P.M., California time, on the date of this Agreement, or such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel. (b) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issuance, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such documents and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) You shall be satisfied that since the respective dates as of which information is given in the Registration Statement and Prospectus, (i) there shall not have been any change in the capital stock of the Company other than pursuant to the exercise of outstanding options and warrants disclosed in the Prospectus or any material change in the indebtedness of the Company, (ii) except as set forth or contemplated by the Registration Statement or the Prospectus, no material verbal or written agreement or other transaction shall have been entered into by the Company, which is not in the ordinary course of business, (iii) no loss or damage (whether or not insured) to the property of the Company shall have been sustained which materially and adversely affects the condition (financial or otherwise), business, results of operations or prospects of the Company, (iv) no legal or governmental action, suit or proceeding affecting the Company which is material to the Company or which affects or may affect the transactions contemplated by this Agreement shall have been instituted or threatened and (v) there shall not have been any material change in the condition (financial or otherwise), business, management, results of operations or prospects of the Company which makes it impractical or inadvisable in the judgment of the Representative to proceed with public offering or purchase the Common Shares as contemplated hereby. -15- (d) You shall have received on the Closing Date and on any later date on which Option Shares are purchased, as the case may be, an opinion of Rutan & Tucker, LLP, counsel for the Company, dated the Closing Date or such later date on which Option Shares are purchased, addressed to the Underwriters (and stating that it may be relied upon by Underwriters' Counsel in rendering its opinion pursuant to Section 7(d) of this Agreement) and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) The Company and each of its subsidiaries has been duly incorporated and is validly existing and in good standing under the laws of the jurisdiction of its incorporation; (ii) The Company and each of its subsidiaries has full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement; (iii) The Company and each of its subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company taken as a whole. To such counsel's knowledge, Company has no subsidiaries other than as listed in Exhibit 21 to the Registration Statement; (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization"; all outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, have not been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right; without limiting the foregoing, to such counsel's knowledge, there are no preemptive or other rights to subscribe for or purchase any of the Shares; (v) The certificates evidencing the Shares to be delivered hereunder are in due and proper form under California law and when duly countersigned by the Company's transfer agent and registrar and delivered to you against payment of the agreed compensation in accordance with this Agreement, the Firm Shares and the Option Shares, represented thereby will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right of shareholders and will conform in all respects to the description thereof in the Registration Statement; (vi) the Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder; (vii) The Company has the corporate power and authority to enter into the Representative's Warrant Agreement and to issue, sell and deliver to the Representative the Representative's Warrants to be issued and sold by it thereunder; -16- (viii) Each of this Agreement, the Representative's Warrant Agreement and the Representative's Warrants has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except insofar as indemnification provisions may be limited by applicable law and to which counsel need not express any opinion and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; (ix) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (x) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements and schedules included in the Registration Statement as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations; (xi) The statements in the Registration Statement and Prospectus under the captions "Business--Government Regulations," "Management," "Certain Transactions," "Description of Capital Stock" and "Shares Eligible For Future Sale," and in the Registration Statement in Items 24 and 26 insofar as they constitute matters of law or legal conclusions or are descriptions of contracts, agreements or other documents are accurate and complete in all material respects and fairly present the information contained herein; (xii) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Act and the applicable Rules and Regulations and the Company is not in violation of its charter or bylaws, or other organizational documents; (xiii) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement that are not described or referred to therein or filed as required; (xiv) The execution and delivery of this Agreement and the Representative's Warrant Agreement and the performance by the Company of its obligations hereunder and thereunder will not (a) result in any violation of the Company's charter, bylaws or other organizational documents, or (b) result in a material breach or violation of any of the terms and provisions of, or constitute a material default under, any material bond, debenture, note or other evidence of indebtedness, or under any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which its properties are -17- bound, or any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or over any of its properties or operations; (xv) To counsel's best knowledge, no consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or over any of its properties or operations is necessary in connection with the consummation by the Company of the transactions contemplated in this Agreement and the Representative's Warrant Agreement, except such as have been obtained under the Act or such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters; (xvi) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company of a character required to be disclosed in the Registration Statement or the Prospectus by the Act or the Rules and Regulations or by the Exchange Act or the applicable rules and regulations of the Commission thereunder, other than those described therein; (xvii) The Representative's Warrants have been duly and validly authorized by the Company and upon delivery to you in accordance with the Representative's Warrant Agreement will be duly issued and legal, valid and binding obligations of the Company; (xviii) The Representative's Warrant Stock to be issued by the Company pursuant to the terms of the Representative's Warrant has been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms of the Representative's Warrant Agreement, will be duly and validly issued and fully paid and nonassessable, and to such counsel's knowledge, will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right of shareholders; (xix) To such counsel's knowledge, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company that have not been waived; and (xx) The offer and sale of all securities of the Company made within the last three years as set forth in Item 15 of the Registration Statement were exempt from the registration requirements of the Securities Act, pursuant to the provisions set forth in such Item, and from the registration or qualification requirements of all relevant state securities laws. (xxi) The Company has satisfied the conditions for use of Form S-1 as set forth in the General Instructions thereto. (xxii) No transfer taxes are required to be paid in connection with the sale and delivery of the Shares to the Underwriters. -18- In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representative, Underwriters' Counsel and the independent certified public accountants of the Company, at which the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel that leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are purchased, the Registration Statement and any amendment or supplement thereto, when such documents became effective or were filed with the Commission (other than the financial statements and supporting schedules included in the Registration Statement as to which such counsel need express no comment) contained any 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 misleading, or at the Closing Date or any later date on which the Option Shares are purchased, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company, and of government officials, in which case its opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representative of the Underwriters, and to Underwriters' Counsel. (e) You shall have received on the Closing Date and on any later date on which Option Shares are purchased, as the case may be, an opinion of Stradling Yocca Carlson & Rauth, in form and substance satisfactory to you, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (g) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a letter from KPMG Peat Marwick, LLP, addressed to the Company and the Underwriters, dated the Closing Date or such later date on which Option Shares are purchased, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than three (3) business days prior to the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations or business of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by -19- the Prospectus. The Original Letter from KPMG Peat Marwick, LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth its opinion with respect to its examination of the balance sheets of the Company as of June 30, 1998, December 31, 1997 and December 31, 1996 and related statements of operations, shareholders' equity, and cash flows for the years ended December 31, 1997 and 1996, and (iii) address other matters agreed upon by KPMG Peat Marwick, LLP and you. In addition, you shall have received from KPMG Peat Marwick, LLP a letter addressed to the Company and made available to you for the use of the Underwriters stating that its review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of its examination of the Company's financial statements as of June 30, 1998, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (h) You shall have received on the Closing Date and on any later date on which Option Shares are purchased, as the case may be, a certificate of the Company, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, signed by the President and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, and the Company has complied, in all material aspects, with all the agreements and satisfied all the conditions on its part to be performed or satisfied, in all material respects, at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or, to their knowledge, are pending or threatened under the Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all material information required to be included therein by the Act and the Rules and Regulations or the Exchange Act and the applicable rules and regulations of the Commission thereunder, as the case may be, and in all material respects conformed to the requirements of the Act and the Rules and Regulations or the Exchange Act and the applicable rules and regulations of the Commission thereunder, as the case may be, the Registration Statement, and any amendment or supplement thereto, did not and does 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 not misleading, the Prospectus, and any amendment or supplement thereto, did not and does not 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, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus that has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the condition (financial or otherwise), earnings, -20- operations or business of the Company, (b) any transaction that is material to the Company, (c) any obligation, direct or contingent incurred by the Company, that is material to the Company, (d) any change in the capital stock or outstanding indebtedness of the Company, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (f) any loss or damage (whether or not insured) to the property of the Company which has a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company. (i) The Company shall have obtained and delivered to you an agreement from each officer, director and director-nominee of the Company, and each beneficial owner of five percent or more of the Common Stock immediately after the offering contemplated hereby, in writing prior to the date hereof that such person will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to limited partners or shareholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of Cruttenden Roth Incorporated. The foregoing restriction is expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than the such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person will have also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. (j) The Company shall have furnished to you such further certificates and documents as you shall reasonably request, including certificates of officers of the Company as to the accuracy of the representations and warranties of the Company, as to the performance by the Company of its obligations hereunder and as to the other conditions concurrent and precedent to the obligations of the Underwriters hereunder. (k) The Representative's Warrant Agreement shall have been entered into by the Company and you, and the Representative's Warrants shall have been issued and sold to you pursuant thereto. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to Underwriters' Counsel. The Company will furnish you with such number of conformed copies of such opinions, certificates, letters and documents as you shall reasonably request. 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under the Act, the -21- Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, or any failure of the Company to perform its obligations hereunder or under law, and (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein 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, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or any such amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company as described in Section 3 hereof, and, PROVIDED FURTHER, that the indemnity agreement provided in this Section 8(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 5(d) hereof. The indemnity agreement in this Section 8(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company against any losses, claims, damages or liabilities, joint or several, to which the Company may become subject under the Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein 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, to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company as described in Section 3 hereof, and agrees to reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action. The indemnity agreement in this Section 8(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer of the Company who signed the Registration Statement and each director of the Company and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which each Underwriter may otherwise have. -22- (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party which pose a conflict of interest for such counsel, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party representing all the indemnified parties under Section 8(a) or 8(b) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; PROVIDED that such consent shall not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such indemnification. (d) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 8 provides for indemnification in such case, all the parties hereto shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Underwriters severally and not jointly are responsible pro rata for the portion represented by the percentage that the underwriting discount bears to the initial public offering price, and the Company is responsible for the remaining portion, PROVIDED, HOWEVER, that (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The contribution agreement in this Section 8(d) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if -23- any, who controls the Underwriters or the Company within the meaning of the Act or the Exchange Act and each officer of the Company who signed the Registration Statement and each director of the Company. (e) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 8, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 8 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act. The parties are advised that federal or state public policy, as interpreted by the courts in certain jurisdictions, may be contrary to certain of the provisions of this Section 8, and the parties hereto hereby expressly waive and relinquish any right or ability to assert such public policy as a defense to a claim under this Section 8 and further agree not to attempt to assert any such defense. 9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties, covenants and agreements of the Company and the Underwriters herein or in certificates delivered pursuant hereto, and the indemnity and contribution agreements contained in Sections 6 and 8 and hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person within the meaning of the Act or the Exchange Act, or by or on behalf of the Company or any of its officers, directors or controlling persons within the meaning of the Act or the Exchange Act, and shall survive the delivery of the Shares to the several Underwriters hereunder or termination of this Agreement. 10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall fail to take up and pay for the number of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder upon tender of such Firm Shares in accordance with the terms hereof, and if the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters so agreed but failed to purchase does not exceed 10% of the Firm Shares, the remaining Underwriters shall be obligated, severally in proportion to their respective commitments hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter or Underwriters. If any Underwriter or Underwriters so defaults and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase, the Closing Date shall be postponed for twenty-four (24) hours to allow the several Underwriters the privilege of substituting within twenty-four (24) hours (including non-business hours) another underwriter or underwriters (which may include any nondefaulting Underwriter) satisfactory to the Company. If no such underwriter or underwriters shall have been substituted as aforesaid by such postponed Closing Date, the Closing Date may, at the option of the Company, be postponed for a further twenty-four (24) hours, if necessary, to allow the Company the privilege of finding another underwriter or underwriters, satisfactory to you, to purchase the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted underwriter or underwriters to take up the Firm Shares of the defaulting Underwriter or Underwriters as provided in this Section 11, (i) the Company shall have the right to postpone the time of delivery for a period of not more than seven (7) full business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or -24- arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may thereby be made necessary, and (ii) the respective number of Firm Shares to be purchased by the remaining Underwriters and substituted underwriter or underwriters shall be taken as the basis of their underwriting obligation. If the remaining Underwriters shall not take up and pay for all such Firm Shares so agreed to be purchased by the defaulting Underwriter or Underwriters or substitute another underwriter or underwriters as aforesaid and the Company shall not find or shall not elect to seek another underwriter or underwriters for such Firm Shares as aforesaid, then this Agreement shall terminate. In the event of any termination of this Agreement pursuant to the preceding paragraph of this Section 10, the Company shall not be liable to any Underwriter (except as provided in Sections 6 and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the number of Firm Shares agreed by such Underwriter to be purchased hereunder, which Underwriter shall remain liable to the Company and the other Underwriters for damages, if any, resulting from such default) be liable to the Company (except to the extent provided in Sections 6 and 8 hereof). The term "Underwriter" in this Agreement shall include any person substituted for an Underwriter under this Section 10. 11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. (a) This Agreement shall become effective at the earlier of (i) 6:30 A.M., California time, on the second full business day following the effective date of the Registration Statement, or (ii) the time of the initial public offering of any of the Shares by the Underwriters after the Registration Statement becomes effective. The time of the initial public offering shall mean the time of the release by you, for publication, of the first newspaper advertisement relating to the Shares, or the time at which the Shares are first generally offered by the Underwriters to the public by letter, telephone, telegram or telecopy, whichever shall first occur. By giving notice as set forth in Section 12 before the time this Agreement becomes effective, you, as Representative of the several Underwriters, or the Company, may prevent this Agreement from becoming effective without liability of any party to any other party, except as provided in Sections 6 and 8 hereof. (b) You, as Representative of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time at or prior to the Closing Date or on or prior to any later date on which Option Shares are purchased, as the case may be, (i) if the Company shall have failed, refused or been unable to perform any agreement on its part to be performed, or (ii) because any other condition of the Underwriters' obligations hereunder required to be fulfilled is not fulfilled, including, without limitation, any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse, or (iii) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such exchange or in the over the counter market by the NASD, or if a banking moratorium shall have been declared by federal, New York or California authorities, or (iv) if the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured, or (v) if there -25- shall have been a material adverse change in the general political or economic conditions or financial markets as in your reasonable judgment makes it inadvisable or impracticable to proceed with the offering, sale and delivery of the Shares, or (vi) if there shall have been an outbreak or escalation of hostilities or of any other insurrection or armed conflict or the declaration by the United States of a national emergency which, in the reasonable opinion of the Representative, makes it impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. Any termination pursuant to any of subparagraphs (ii) through (vi) above shall be without liability of any party to any other party except as provided in Sections 7 and 9 hereof. In the event of termination pursuant to subparagraph (i) above, the Company shall also remain obligated to pay costs and expenses pursuant to Sections 7 and 9 hereof. If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, you shall promptly notify the Company by telephone, telecopy or telegram, in each case confirmed by letter. If the Company shall elect to prevent this Agreement from becoming effective, the Company shall promptly notify you by telephone, telecopy or telegram, in each case, confirmed by letter. 12. NOTICES. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and if sent to you shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to you c/o Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine, California 92715, telecopier number (949) 852-9603, Attention: Shelly Singhal; if sent to the Company, such notice shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to 17911 Von Karman, Suite 200, Irvine, California 92614, telecopier number (949) 622-4700, Attention: Michael C. Lowther. 13. PARTIES. This Agreement shall inure to the benefit of and be binding upon the several Underwriters and the Company and their respective executors, administrators, successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or corporation, other than the parties hereto and their respective executors, administrators, successors and assigns, and their controlling persons within the meaning of the Act or the Exchange Act, officers and directors referred to in Section 8 hereof, any legal or equitable right, remedy or claim 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 the parties hereto and their respective executors, administrators, successors and assigns and said controlling persons and said officers and directors, and for the benefit of no other person or corporation. No purchaser of any of the Shares from any Underwriter shall be construed a successor or assign by reason merely of such purchase. The Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof. In all dealings with the Company under this Agreement, you shall act on behalf of each of the several Underwriters, and the Company shall be entitled to act and rely upon any statement, request, notice or agreement made or given by you on behalf of each of the several Underwriters. 14. APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 15. COUNTERPARTS. This Agreement may be signed in several counterparts, each of which will constitute an original. -26- If the foregoing correctly sets forth the understanding among the Company and the several Underwriters, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company and the several Underwriters. Very truly yours, AMERICAN NATIONAL FINANCIAL, INC. By: --------------------------------------- Name: ---------------------------------- Title: --------------------------------- -27- Accepted as of the date first above written: CRUTTENDEN ROTH INCORPORATED On their behalf and on behalf of each of the several Underwriters named in Schedule A hereto. By: CRUTTENDEN ROTH INCORPORATED By: ------------------------------------- Name: ------------------------------- Title: ------------------------------ -28- SCHEDULE A
Number of Firm Shares To Be Purchased Underwriters ----------- Cruttenden Roth Incorporated ....................................... Total ......................................................... 1,250,000 ----------- -----------
-29- EX-1.2 3 EXHIBIT 1.2 WARRANT AGREEMENT This Warrant Agreement (this "Agreement") dated as of September ___, 1998 is by and between American National Financial, Inc., a California corporation (the "Company") and Cruttenden Roth Incorporated ("Cruttenden" or the "Representative"). WHEREAS, Cruttenden has agreed pursuant to an Underwriting Agreement dated September ___, 1998 (the "Underwriting Agreement") to act as the representative of the several underwriters in connection with the proposed public offering (the "Public Offering") by the Company of 1,437,500 shares of Common Stock, including up to 187,500 additional shares of Common Stock to cover over-allotments, if any; and WHEREAS, pursuant to Section 1 of the Underwriting Agreement, the Company has agreed to issue warrants (the "Warrants") to the Representative to purchase, at a price of $ per warrant, up to an aggregate of 125,000 shares (hereinafter, and as the number thereof may be adjusted hereto, the "Warrant Shares") of the Company's Common Stock, no par value (the "Common Stock"), each Warrant initially entitling the holder thereof to purchase one share of Common Stock. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein and in the Underwriting Agreement set forth and for other good and valuable consideration, the parties hereto agree as follows: 1. ISSUANCE OF WARRANTS: FORM OF WARRANT. The Company will issue and deliver to Cruttenden, Warrants to purchase 125,000 Warrant Shares on the Closing Date referred to in the Underwriting Agreement, in consideration for, and as part of the Representative's compensation in connection with, its acting as the representative of the several underwriters for the Public Offering pursuant to the Underwriting Agreement. The text of the Warrants and of the form of election to purchase Warrants Shares shall be substantially as set forth in Exhibit A attached hereto. The Warrants shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chairman of the Board, President or Vice President of the Company, under its corporate seal, affixed or in facsimile, attested by the manual or facsimile signature of the Secretary or an Assistant Secretary of the Company. Warrants bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any one of them shall have ceased to hold such offices prior to the delivery of such Warrants or did not hold such offices on the date of this Agreement. Warrants shall be dated as of the date of execution thereof by the Company either upon initial issuance or upon division, exchange, substitution or transfer. 2. REGISTRATION. The Warrants shall be numbered and registered on the books of the Company (the "Warrant Register") as they are issued. The Company shall be entitled to treat the registered holder of any Warrant on the Warrant Register (the "Holder") as the owner in fact therefor for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other person, and shall not be liable for any registration or transfer of Warrants which are registered or are to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with the actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration or transfer, or with the knowledge of such facts that its participation therein amounts to bad faith. The Warrants shall be registered initially in the name of "Cruttenden Roth Incorporated" or in such other denominations as Cruttenden may request in writing to the Company. 3. EXCHANGE OF WARRANT CERTIFICATES. Subject to any restriction upon transfer set forth in this Agreement, each Warrant certificate may be exchanged for another certificate or certificates entitling the Holder thereof to purchase a like aggregate number of Warrant Shares as the certificate or certificates surrendered then entitled such Holder to purchase. Any Holder desiring to exchange a Warrant certificate or certificates shall make such request in writing delivered to the Company, and shall surrender, properly endorsed, the certificate or certificates to be so exchanged. Thereupon, the Company shall execute and deliver to the person entitled thereto a new Warrant certificate or certificates, as the case may be, as so requested. 4. TRANSFER OF WARRANTS. Until September ___, 1999, the Warrants will not be sold, transferred, assigned or hypothecated except to (i) other brokers or dealers; (ii) one or more bona fide officers and/or partners of Cruttenden; (iii) a successor to the transferring Holder in merger or consolidation; (iv) a purchaser of all or substantially all of the transferring Holder's assets; or (v) any person receiving the Warrants from one or more of the persons listed in this Section 4 at such person's or persons' death pursuant to will, trust or the laws of intestate succession, each of whom agrees in writing to be bound by the terms hereof. The Warrants shall be transferable only on the Warrant Register upon delivery thereof duly endorsed by the Holder or by the Holder's duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment or authority to transfer. In all cases of transfer by an attorney, the original power of attorney, duly approved, or an official copy thereof, duly certified, shall be deposited with the Company. In case of transfer by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced and may be required to be deposited with the Company in its discretion. Upon any registration of transfer, the Company shall deliver a new Warrant or Warrants to the person entitled thereto. 5. TERM OF WARRANTS; EXERCISE OF WARRANTS. 5.1 Each Warrant entitles the registered owner thereof to purchase one share of Common Stock at any time from 10:00 a.m., Pacific time, on September ___, 1999 (the "Initiation Date") until 6:00 p.m., Pacific time, on September ___, 2003 (the "Expiration Date") at a purchase price of $ subject to adjustment (the "Warrant Price"). Notwithstanding the foregoing, if at 6:00 p.m., Pacific time on the Expiration Date, any Holder or Holders of the Warrants have not exercised their Warrants and the Closing Price (as defined below) for the Common Stock on the Expiration Date is greater than the Warrant Price, then each such unexercised Warrant shall be automatically converted into a number of shares of Common Stock of the Company equal to: (A) the number of shares of Common Stock then issuable upon exercise of a Warrant multiplied by (B) a fraction (1) the numerator of which is the difference between the Closing Price for the Common Stock on the Expiration Date and the Warrant Price and (2) the denominator of which is the Closing Price for the Common Stock on the Expiration Date. 5.2 The Warrant Price and the number of Warrant Shares issuable upon exercise of each Warrant are subject to adjustment upon the occurrence of certain events, pursuant to the -2- provisions of Section 11 of this Agreement. Subject to the provisions of this Agreement, each Holder of Warrants shall have the right, which may be exercised as expressed in the Warrant Certificate, to purchase from the Company (and the Company shall issue and sell to such Holder of Warrants) the number of fully paid and nonassessable Warrant Shares specified in such Warrant Certificate, upon surrender to the Company, or its duly authorized agent, of such Warrant Certificate, with the form of election to purchase on the reverse thereof duly filled in and signed, and upon payment to the Company of the Warrant Price, as adjusted in accordance with the provisions of Section 11 of this Agreement, for the number of Warrant Shares in respect of which such Warrants are then exercised. Payment of such Warrant Price shall be made in cash, by wire transfer or by certified or official bank check, or any combination thereof. No adjustment shall be made for any dividends on any Warrant Shares of stock issuable upon exercise of a Warrant. 5.3 Upon such surrender of Warrants, and payment of the Warrant Price as aforesaid, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the Holder of such Warrants and in such name or names as such registered Holder may designate, a certificate or certificates for the number of full Warrant Shares so purchased upon the exercise of such Warrants, together with cash, as provided in Section 12 of this Agreement, in respect of any fraction of a share otherwise issuable upon such surrender and, if the number of Warrants represented by a Warrant certificate shall not be exercised in full, a new Warrant certificate, executed by the Company for the balance of the number of whole Warrant Shares. 5.4 If permitted by applicable law, such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such shares as of the date of the surrender of such Warrants and payment of the Warrant Price as aforesaid. The rights of purchase represented by the Warrants shall be exercisable, at the election of the registered Holders thereof, either as an entirety or from time to time for only part of the shares specified therein. 6. COMPLIANCE WITH GOVERNMENT REGULATIONS. The Company covenants that if any shares of Common Stock required to be reserved for purposes of exercise or conversion of Warrants require, under any Federal or state law or applicable governing rule or regulation of any national securities exchange, registration with or approval of any governmental authority, or listing on any such national securities exchange before such shares may be issued upon exercise, the Company will in good faith and as expeditiously as possible endeavor to cause such shares to be duly registered, approved or listed on the relevant national securities exchange, as the case may be; PROVIDED, HOWEVER, that (except to the extent legally permissible with respect to Warrant of which Cruttenden is the Holder) in no event shall such shares of Common Stock be issued, and the Company is hereby authorized to suspend the exercise of all Warrants, for the period during which such registration, approval or listing is required but not in effect. 7. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of the Warrants or the securities comprising the Warrant Shares upon the exercise of Warrants; PROVIDED, HOWEVER, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue or delivery of any warrants or certificate for Warrant Shares in a name other than that of the registered Holder of such warrants. -3- 8. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall be mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing an equivalent right or interest; but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of such Warrant and, if requested, indemnity or bond also reasonably satisfactory to the Company. An applicant for such substitute Warrants shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. 9. RESERVATION OF WARRANT SHARES. There has been reserved out of the authorized and unissued shares of Common Stock a number of shares sufficient to provide for the exercise of the Warrants, and the transfer agent for the Common Stock ("Transfer Agent") and every subsequent Transfer Agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid are hereby irrevocably authorized and directed at all times until the Expiration Date to reserve such number of authorized and unissued shares as shall be required for such purpose. The Company will keep a copy of this Agreement on file with the Transfer Agent and with every subsequent Transfer Agent for any shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Warrants. The Company will supply such Transfer Agent with duly executed stock certificates for such purposes and will itself provide or otherwise make available any cash which may be issuable as provided in Section 12 of this Agreement. The Company will furnish to such Transfer Agent a copy of all notices of adjustments, and certificates related thereto, transmitted to each Holder pursuant to Section 11.2 of this Agreement. All Warrants surrendered in the exercise of the rights thereby evidenced shall be cancelled. 10. OBTAINING STOCK EXCHANGE LISTINGS. The Company will from time to time take all action which may be necessary so that the Warrant Shares, immediately upon their issuance upon the exercise of Warrants, will be listed on the securities exchanges and stock markets within the United States of America, if any, on which other shares of Common Stock are then listed. 11. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF WARRANT SHARES. The number and kind of securities purchasable upon the exercise of each Warrant and the Warrant Price shall be subject to adjustment from time to time upon the happening of certain events as hereinafter defined. For purposes of this Section 11, "Common Stock" means shares now or hereafter authorized of any class of common stock of the Company and any other stock of the Company, however designated, that has the right (subject to any prior rights of any class or series of preferred stock) to participate in any distribution of the assets or earnings of the Company without limit as to per share amount. 11.1 MECHANICAL ADJUSTMENTS. The number of Warrant Shares purchasable upon the exercise of each Warrant and the Warrant Price shall be subject to adjustment as follows: (a) In case the Company shall (i) pay a dividend in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock or (iv) issue by reclassification of its shares of Common Stock other securities of the Company (including any such reclassification in connection with a consolidation or merger in which the Company is the surviving corporation), the number of Warrant Shares purchasable upon exercise of each warrant immediately prior thereto shall be adjusted so that the Holder of each Warrant shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which he -4- would have owned or would have been entitled to receive after the happening of any of the events described above, had such Warrants been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case the Company shall distribute to all holders of its shares of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the surviving corporation) evidences of its indebtedness or assets (excluding cash dividends or distributions payable out of consolidated earnings or earned surplus and dividends or distribution referred to in paragraph (a) above or in the paragraph immediately following this paragraph) or rights, options or warrants, or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock, then in each case the number of Warrant Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon the exercise of each Warrant by a fraction, the numerator of which shall be the then current market price per share of Common Stock (as defined in paragraph (c) below) on the date of such distribution, and the denominator of which shall be the then current market price per share of Common Stock, less the then fair value (as reasonably determined by the Board of Directors of the Company) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options or warrants, or of such convertible or exchangeable securities applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. In the event of a distribution by the Company to all holders of its shares of Common Stock of a subsidiary or securities convertible into or exercisable for such stock, then in lieu of an adjustment in the number of Warrant Shares purchasable upon the exercise of each Warrant, the Holder of each Warrant, upon the exercise thereof at any time after such distribution, shall be entitled to receive from the Company, such subsidiary or both, as the Company shall determine, the stock or other securities to which such Holder would have been entitled if such Holder had exercised such Warrant immediately prior thereto, all subject to further adjustment as provided in this Section 11.1; PROVIDED, HOWEVER, that no adjustment in respect of dividends or interest on such stock or other securities shall be made during the term of a Warrant or upon the exercise of a Warrant. (c) For the purpose of any computation under paragraph (b) of this Section, the current market price per share of Common Stock at any date shall be the average of the daily Closing Prices for 20 consecutive trading days commencing 30 trading days before the date of such computation. The selling price for each day (the "Closing Price") shall be the last such reported sales price regular way or, in case no such reported sale takes place on such day, the average of the closing bid and asked prices regular way for such day, in each on the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading or, if not listed or admitted to trading, the average of the closing bid and asked prices of the Common Stock in the over-the counter market as reported by the Nasdaq National Market System or Nasdaq SmallCap System or if not approved for quotation on the Nasdaq National Market System or Nasdaq SmallCap System, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose. -5- (d) No adjustment in the number of Warrant Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the number of Warrant Shares purchasable upon the exercise of each Warrant; PROVIDED, HOWEVER, that any adjustments which by reason of this paragraph (d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. (e) Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant is adjusted, as herein provided, the Warrant Price payable upon exercise of each Warrant shall be adjusted by multiplying such Warrant Price immediately prior to such adjustment by a fraction, the numerator of which shall be the number of Warrant Shares purchasable upon the exercise of each Warrant immediately prior to such adjustment, and the denominator of which shall be the number of Warrant Shares purchasable immediately thereafter. (f) No adjustment in the number of Warrant Shares purchasable upon the exercise of each Warrant need be made under paragraph (b) if the Company issues or distributes to each Holder of Warrants the rights, options, warrants or convertible or exchangeable securities, or evidences of indebtedness or assets referred to in those paragraphs which each Holder of Warrants would have been entitled to receive had the Warrants been exercised prior to the happening of such event or the record date with respect thereto. No adjustment need be made for a change in the par value of the Warrant Shares. (g) In the event that at any time, as a result of an adjustment made pursuant to paragraph (a) above, the Holders shall become entitled to purchase any securities of the Company other than shares of Common Stock, thereafter the number of such other shares so purchasable upon exercise of each Warrant and the Warrant Price of such shares shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Shares contained in this Section 11, and the other provisions of this Agreement, with respect to the Warrant and Warrant Shares, shall apply as nearly equivalent as practicable on like terms to such other securities. (h) Upon the expiration of any rights, options, warrants or conversion or exchange privileges for which an adjustment was made hereunder, if any thereof shall not have been exercised, the Warrant Price and the number of shares of Common Stock purchasable upon the exercise of each Warrant shall, upon such expiration, be readjusted and shall thereafter be such as it would have been had it been originally adjusted (or had the original adjustment not been required, as the case may be) as if (i) the only shares of Common Stock so issued were the shares of Common Stock, if any, actually issued or sold upon the exercise of such rights, options, warrants or conversion or exchange rights and (ii) such shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise plus the aggregate consideration, if any, actually received by the Company for the issuance, sale or grant of all such rights, options, warrants or conversion or exchange rights whether or not exercised; PROVIDED, HOWEVER, that no such readjustment shall have the effect of increasing the Warrant Price or decreasing the number of shares of Common Stock purchasable upon the exercise of each Warrant by an amount in excess of the amount of the adjustment initially made in respect to the issuance, sale or grant of such rights, options, warrants or conversion or exchange rights. -6- 11.2 NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant or the Warrant Price of such Warrant Shares is adjusted, as herein provided, the Company shall promptly mail by first class, postage prepaid, to each Holder notice of such adjustment or adjustments and a certificate of a firm of independent public accountants selected by the Board of Directors of the Company (who may be the regular accountants employed by the Company) setting forth the number of Warrant Shares purchasable upon the exercise of each Warrant and the Warrant Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 11.3 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in Section 11.1, no adjustments in respect of any dividends shall be made during the term of a Warrant or upon the exercise of a Warrant. 11.4 PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION ETC. In case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale, transfer or lease to another corporation of all or substantially all the property of the Company, the Company or such successor or purchasing corporation, as the case may be, shall execute with each Holder an agreement that each Holder shall have the right thereafter upon payment of the Warrant Price in effect immediately prior to such action to purchase upon exercise of each Warrant the kind and amount of shares and other securities, cash and property which he would have owned or would have been entitled to receive after the happening of such consolidation, merger, sale, transfer or lease had such Warrant been exercised immediately prior to such action; PROVIDED, HOWEVER, that no adjustment in respect of dividends, interest or other income on or from such shares or other securities, cash and property shall be made during the term of a Warrant or upon the exercise of a Warrant. Such agreement shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 11. The provisions of this Section 11.4 shall similarly apply to successive consolidations, mergers, sales transfer or leases. 11.5 STATEMENTS ON WARRANTS. Irrespective of any adjustments in the Warrant Price or the number or kind of shares purchasable upon the exercise of the Warrants, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the Warrants initially issuable pursuant to this Agreement. 11.6 OPTIONAL CONVERSION. (a) In addition to and without limiting the rights of the Holders of the Warrants under the terms of this Agreement and the Warrants, the holder of the Warrants shall have the right (the "Conversion Right") to convert the Warrants or any portion thereof into shares of Common Stock as provided in this Section 11.6 at any time or from time to time after the first anniversary of the date hereof and prior to its expiration, subject to the restrictions set forth in paragraph (c) below. Upon exercise of the Conversion Right with respect to a particular number of shares subject to the Warrants (the "Converted Warrant Shares"), the Company shall deliver to the Holder of the Warrants, without payment by the Holder of any exercise price or any cash or other consideration, the number of shares of Common Stock equal to the quotient obtained by dividing the Net Value (as hereinafter defined) of the Converted Warrant Shares by the fair market value (as defined in paragraph (d) below) of a single share of Common Stock, determined in each case as of the close of business on the Conversion Date (as -7- hereinafter defined). The "Net Value" of the Converted Warrant Shares shall be determined by subtraction of the aggregate warrant purchase price of the Converted Warrant Shares (which aggregate warrant purchase price includes the consideration actually received by the Company upon such exercise plus the aggregate consideration, if any, actually received by the Company for the issuance of the Warrants) from the aggregate fair market value of the Converted Warrant Shares. No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of shares to be issued in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Holder of the Warrants an amount in cash equal to the fair market value of the resulting fractional share. (b) The Conversion Right may be exercised by the Holder of the Warrants by the surrender of such Warrants at the principal office of the Company together with a written statement specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to the Warrants which are being surrendered (referred to in paragraph (a) above as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of the Warrants together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"), not later than the expiration date of the Warrants. Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right together with a check in payment of any fractional share and, in the case of a partial exercise, new warrants evidencing the shares remaining subject to the Warrants, shall be issued as of the Conversion Date and shall be delivered to the holder of the Warrants within 7 days following the Conversion Date. (c) In the event the Conversion Right would, at any time the Warrants remain outstanding, be deemed by the Company's independent certified public accountants to give rise to a charge to the Company's earnings for financial reporting purposes, then the Conversion Right shall automatically terminate upon receipt by the holder of this Warrant of an opinion of such independent certified public accountant as to such adverse accounting treatment. (d) For purposes of this paragraph 11.6, the "fair market value" of a share of Common Stock as of a particular date shall be its "current market price," calculated as described in paragraph 11.1(c) hereof. 12. FRACTIONAL INTERESTS. The Company shall not be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the sale time by the same holder, the number of full Warrant Shares which shall be issuable upon the exercise thereon shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 12 be issuable on the exercise of any Warrant (or specified portion thereof), the Company shall pay an amount in cash equal to the closing price for one share of the Common Stock, as defined in Section 11.1(c), on the trading day immediately preceding the date the Warrant is presented for exercise, multiplied by such faction. 13. REGISTRATION UNDER THE SECURITIES ACT OF 1933. Cruttenden represents and warrants to the Company that it will not dispose of the Warrants or the Warrant Shares except pursuant to (i) an effective registration statement under the Securities Act of 1933, as amended (the "Act"), including a post-effective amendment to the Registration Statement, (ii) Rule 144 under the Act (or any similar rule -8- under the Act relating to the disposition of securities), or (iii) an opinion of counsel, reasonably satisfactory to counsel of the Company, that an exemption from such registration is available. 14. CERTIFICATES TO BEAR LEGENDS. The Warrant, the Warrant Shares or other securities issued upon exercise of the Warrant shall be subject to a stop-transfer order and the certificate or certificates therefore shall bear the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW. SAID SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. 15. REGISTRATION RIGHTS. 15.1 DEMAND REGISTRATION RIGHTS. The Company covenants and agrees with Cruttenden and any subsequent Holders of the Warrants and/or Warrant Shares that, on one occasion, within 60 days after receipt of a written request from Cruttenden or from Holders of more than 25% in interest of the aggregate of Warrants and/or Warrant Shares issued pursuant to this Agreement that Cruttenden or such Holders of the Warrants and/or Warrant Shares desires and intends to transfer more than 25% in interest of the aggregate number of the Warrants and/or Warrant Shares under such circumstances that a public offering, within the meaning of the Act, will be involved, the Company shall, on that one occasion, file a registration statement (and use its best efforts to cause such registration statement to become effective under the Act at the Company's expense) with respect to the offering and sale or other disposition of the Warrant Shares (the "Offered Warrant Shares"); PROVIDED, HOWEVER, that the Company shall have no obligation to comply with the foregoing provisions of this Section 15.1 if in the opinion of counsel to the Company reasonably acceptable to the Holder or Holders, from whom such written requests have been received, registration under the Act is not required for the transfer of the Offered Warrant Shares in the manner proposed by such person or persons or that a post-effective amendment to an existing registration statement would be legally sufficient for such transfer (in which latter event the Company shall promptly file such post-effective amendment (and use its best efforts to cause such amendment to become effective under the Act)). Notwithstanding the foregoing, the Company shall not be obligated to file a registration statement with respect to the Offered Warrant Shares on more than one occasion. The Company may defer the preparation and filing of a registration statement for up to 90 days after the request for registration is made if the Board of Directors determines in good faith that such registration or post-effective amendment would materially adversely affect or otherwise materially interfere with a proposed or pending transaction by the Company, including without limitation a material financing or a corporate reorganization, or during any period of time in which the Company is in possession of material inside information concerning the Company or its securities, which information the Company determines in good faith is not ripe for disclosure. The Company shall not honor any request to register Warrant Shares pursuant to this Section 15.1 received later than five (5) years from the effective date of the Company's Registration Statement on Form S-1 (File No. 333-________) (the "Effective Date"). The Company shall not be required (i) to maintain the effectiveness of the registration statement beyond the earlier to occur of 90 days after the -9- effective date of the registration statement or the date on which all of the Offered Warrant Shares have been sold (the "Termination Date"); PROVIDED, HOWEVER, that if at the Termination Date the Offered Warrant Shares are covered by a registration statement which also covers other securities and which is required to remain in effect beyond the Termination Date, the Company shall maintain in effect such registration statement as it relates to Offered Warrant Shares for so long as such registration statement (or any substitute registration statement) remains or is required to remain in effect for any such other securities, or (ii) to cause any registration statement with respect to the Warrant Shares to become effective prior to the Initiation Date. All expenses of registration pursuant to this Section 15.1 shall be borne by the Company (excluding underwriting discounts and commissions on Warrant Shares not sold by the Company). The Company shall be obligated pursuant to this Section 15.1 to include in the registration statement Warrant Shares that have not yet been purchased by a Holder of Warrants so long as such Holder of Warrants submits an undertaking to the Company that such Holder intends to exercise Warrants representing the number of Warrant Shares to be included in such registration statement prior to the consummation of the public offering with respect to such Warrant Shares. In addition, such Holder of Warrants is permitted to pay the Company the Warrant Price for such Warrant Shares upon the consummation of the public offering with respect to such Warrant Shares. 15.2 PIGGY-BACK REGISTRATION RIGHTS. The Company covenants and agrees with the Holders and any subsequent Holders of the Warrants and/or Warrant Shares that in the event the Company proposes to file a registration statement under the Act with respect to any class of security (other than in connection with an exchange offer, a non-cash offer or a registration statement on Form S-8 or other unsuitable registration statement form) which becomes or which the Company believes will become effective at any time after the Initiation Date then the Company shall in each case give written notice of such proposed filing to the Holders of Warrants and Warrant Shares at least 30 days before the proposed filing date and such notice shall offer to such Holders the opportunity to include in such registration statement such number of Warrant Shares as they may request, unless, in the opinion of counsel to the Company reasonably acceptable to any such Holder of Warrants or Warrant Shares who wishes to have Warrant Shares included in such registration statement, registration under the Act is not required for the transfer of such Warrants and/or Warrant Shares in the manner proposed by such Holders. The Company shall not honor any such request to register any such Warrant Shares if the request is received later than six (6) years from the Effective Date, and the Company shall not be required to honor any request (a) to register any such Warrant Shares if the Company is not notified in writing of any such request pursuant to this Section 15.2 within at least 20 days after the Company has given notice to the Holders of the filing, or (b) to register Warrant Shares that represent in the aggregate fewer than 25% of the aggregate number of Warrant Shares. The Company shall permit, or shall cause the managing underwriter of a proposed offering to permit, the Holders of Warrant Shares requested to be included in the registration (the "Piggy-back Shares") to include such Piggy-back Shares in the proposed offering on the same terms and conditions as applicable to securities of the Company included therein or as applicable to securities of any person other than the Company and the Holders of Piggy-back Shares if the securities of any such person are included therein. Notwithstanding the foregoing, if any such managing underwriter shall advise the Company in writing that it believes that the distribution of all or a portion of the Piggy-back Shares requested to be included in the registration statement concurrently with the securities being registered by the Company would materially adversely affect the distribution of such securities by the Company for its own account, then the Holders of such -10- Piggy-back Shares shall delay their offering and sale of Piggyback Shares (or the portion thereof so designated by such managing underwriter) for such period, not to exceed 120 days, as the managing underwriter shall request provided that no such delay shall be required as to Piggy-back Shares if any securities of the Company are included in such registration statement for the account of any person other than the Company and the Holders of Piggy-back Shares. In the event of such delay, the Company shall file such supplements, post-effective amendments or separate registration statement, and take any such other steps as may be necessary to permit such Holders to make their proposed offering and sale for a period of 90 days immediately following the end of such period of delay ("Piggy-back Termination Date"); PROVIDED, HOWEVER, that if at the Piggy-back Termination Date the Piggyback Shares are covered by a registration statement which is, or required to remain, in effect beyond the Piggy-back Termination Date, the Company shall maintain in effect the registration statement as it relates to the Piggy-back Shares for so long as such registration statement remains or is required to remain in effect for any of such other securities. All expenses of registration pursuant to this Section 15.2 shall be borne by the Company, except that underwriting commissions and expenses attributable to the Piggy-back Shares and fees and disbursements of counsel (if any) to the Holders requesting that such Piggy-back Shares be offered will be borne by such Holders. The Company shall be obligated pursuant to this Section 15.2 to include in the Piggy-back Offering, Warrant Shares that have not yet been purchased by a holder of Warrants so long as such Holder of Warrants submits an undertaking to the Company that such Holder intends to exercise Warrants representing the number of Warrant Shares to be included in such Piggy-back Offering prior to the consummation of such Piggy-back Offering. In addition, such Holder of Warrants is permitted to pay the Company the Warrant Price for such Warrant Shares upon the consummation of the Piggy-back Offering. If the Company decides not to proceed with a Piggy-back Offering, the Company has no obligation to proceed with the offering of the Piggy-back Shares, unless the Holders of the Warrants and/or Warrant Shares otherwise comply with the provisions of Section 15.1 hereof (without regard to the 60 days' written request required thereby). Notwithstanding any of the foregoing contained in this Section 15.2, the Company's obligation to offer registration rights to the Piggy-back Shares pursuant to this Section 15.2 shall terminate two (2) years after the Expiration Date. 15.3 In connection with the registration of Warrant Shares in accordance with Section 15.1 and 15.2 above, the Company agrees to: (a) Use its best efforts to register or qualify the Warrant Shares for offer or sale under the state securities or Blue Sky laws of such states which the Holders of such Warrant Shares shall designate, until the dates specified in Section 15.1 and 15.2 above in connection with registration under the Act; PROVIDED, HOWEVER, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject or to register or get a license as a broker or dealer in securities in any jurisdiction where it is not so registered or licensed or to register or qualify the Warrant Shares for offer or sale under the state securities or Blue Sky laws of any state other than the states in which some or all of the shares offered or sold in the Public Offering were registered or qualified for offer and sale. -11- (b) (i) In the event of any post-effective amendment or other registration with respect to any Warrant Shares pursuant to Section 15.1 or 15.2 above, the Company will indemnify and hold harmless any Holder whose Warrant Shares are being so registered, and each person, if any, who controls such Holder within the meaning of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Holder or such controlling person may be subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any such registration statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each such Holder and each such controlling person for any legal or other expenses reasonably incurred by such Holder or such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the Company will not be liable in such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any such registration statement, any preliminary prospectus or final prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by such Holder expressly for use in the preparation thereof. The Company will not be liable to a claimant to the extent of any misstatement corrected or remedied in any amended prospectus if the Company timely delivers a copy of such amended prospectus to such indemnified person and such indemnified person does not timely furnish such amended prospectus to such claimant. The Company shall not be required to indemnify any Holder or controlling person for any payment made to any claimant in settlement of any suit or claim unless such payment is approved by the Company. (ii) Each Holder of Warrants and/or Warrant Shares who participates in a registration pursuant to Section 15.1 or 15.2 will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any such registration statement, and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company, or any such director, officer or controlling person may become subject under the Act, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement or any material fact contained in any such registration statement, any preliminary prospectus or final prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any such registration statement, any preliminary prospectus or final prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by such Holder expressly for use in the preparation thereof; and will reimburse any legal or other expenses reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the indemnity agreement contained in this subparagraph (ii) -12- shall not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by such Holder. (iii) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this clause (b)(iii) of Section 15.3 but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this clause (b)(iii) of Section 15.3 provides for indemnification in such case, all the parties hereto shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that each Holder whose Warrant Shares are being registered is responsible pro rata for the portion represented by the public offering price received by such Holder from the sale of such Holder's Warrant Shares, and the Company is responsible for the remaining portion; PROVIDED, HOWEVER, that (i) no Holder shall be required to contribute any amount in excess of the public offering price received by such Holder from the sale of such Holder's Warrant Shares and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. This subsection (b)(iii) shall not be operative as to any Holder of Warrant Shares to the extent that the Company has received indemnity under this clause (b)(iii) of Section 15.3. 16. NO RIGHTS AS STOCKHOLDER; NOTICES TO HOLDERS. Nothing contained in this Agreement or in any of the Warrants shall be construed as conferring upon the Holders or their transferee(s) the right to vote or to receive dividends or to consent to or receive notice as stockholders in respect of any meeting of stockholders for the election of directors of the Company or any other matter or any rights whatsoever as stockholders of the Company. If, however, at any time prior to the expiration of the Warrants and prior to their exercise, any of the following events occur: (a) the Company shall declare any dividend payable in any securities upon its shares of Common Stock or make any distribution (other than a cash dividend) to the holders of its shares of Common Stock: or (b) the Company shall offer to the holders of its shares of Common Stock any additional shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock or any right to subscribe to or purchase any thereof; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger, sale, transfer or lease of all or substantially all of its property, assets and business as an entirety) shall be proposed, then in any one or more of said events the Company shall (i) give notice in writing of such event to the Holders, as provided in Section 17 hereof and (ii) if there are more than 100 Holders, cause notice of such event to be published once in The Wall Street Journal (national edition), such giving of notice and publication to be completed at least 20 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution or subscription rights, or for the determination of stockholders entitled to vote on such -13- proposed dissolution, liquidation or winding up. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to publish, mail or receive such notice or any defect therein or in the publication or mailing thereof shall not affect the validity of any action taken in connection with such dividend, distribution or subscription rights, or such proposed dissolution, liquidation or winding up. 17. NOTICES. Any notice pursuant to this Agreement to be given or made by the registered Holder of any Warrant to the Company shall be sufficiently given or made if sent by first-class mail or facsimile to: American National Financial, Inc. 17911 Von Karman Avenue, Suite 200 Irvine, California 92614-6253 Attn: President Fax: (949) 260-1692 Notices or demands authorized by this Agreement to be given or made by the Company to the registered Holder of any Warrant shall be sufficiently given or made (except as otherwise provided in this Agreement) if sent by first-class mail to such Holder at the address of such Holder as shown on the Warrant Register. 18. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California without giving effect to principles of conflicts of laws. 19. SUPPLEMENTS AND AMENDMENTS. The Company and Cruttenden may from time to time supplement or amend this Agreement in order to cure any ambiguity or to correct or supplement any provision contained herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and Cruttenden may deem necessary or desirable and which shall not be inconsistent with the provisions of the Warrants and which shall not adversely affect the interests of the Holders. This Agreement may also be supplemented or amended from time to time by a writing executed by or on behalf of the Company and all of the Holders. 20. SUCCESSOR. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Holders shall bind and inure to the benefit of their respective successors and assigns hereunder. Assignments by the Holders of their rights hereunder shall be made in accordance with Section 4 hereof. 21. MERGER OR CONSOLIDATION OF THE COMPANY. So long as Warrants remain outstanding, the Company will not merge or consolidate with or into, or sell, transfer or lease all or substantially all of its property to, any other corporation unless the successor or purchasing corporation, as the case may be (if not the Company), shall expressly assume, by supplemental agreement executed and delivered to the Holders, the due and punctual performance and observance of each and every covenant and condition of this Agreement to be performed and observed by the Company. 22. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Holders, any legal or equitable right, remedy -14- or claim under this Agreement, but this Agreement shall be for the sole and exclusive benefit of the Company any the Holders of the Warrants and Warrant Shares. 23. CAPTIONS. The captions of the sections and subsections of this Agreement have been reserved for convenience only and shall have no substantive effect. 24. COUNTERPARTS. This Agreement may be executed in any number of counterparts each of which when so executed shall be deemed to be an original; but such counterparts together shall constitute but one and the same instrument. -15- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day, month and year first above written. CRUTTENDEN ROTH INCORPORATED Attest: By: - ---------------------------- ----------------------- Name: Title: AMERICAN NATIONAL FINANCIAL, INC. Attest: By: - ---------------------------- ----------------------- Name: Title: -16- EXHIBIT A [Form of Warrant Certificate] THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW. SAID SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT WARRANT CERTIFICATE OF AMERICAN NATIONAL FINANCIAL, INC. EXERCISABLE ON OR BEFORE SEPTEMBER , 2003 No. 1 125,000 Warrants This Warrant Certificate certifies that the registered holder hereof or its registered assigns, is the registered holder of Warrants expiring September ___, 2003 (the "Warrants") to purchase Common Stock, no par value (the "Common Stock"), of American National Financial, Inc., a California corporation (the "Company"). Each Warrant entitles the holder upon exercise to receive from the Company from 10:00 a.m., Pacific time, on September ___, 1999 through and until 6:00 p.m., Pacific time, on September ___, 2003, one fully paid and nonassessable share of Common Stock (a "Warrant Share") at the initial exercise price (the "Warrant Price") of $ payable in lawful money of the United States of America upon surrender of this Warrant Certificate and payment of the Warrant Price at the conditions set forth herein and in the Warrant Agreement referred to on the reverse hereof. The Warrant Price and number of Warrant Shares issuable upon exercise of the Warrants are subject to adjustment upon the occurrence of certain events set forth in the Warrant Agreement. No Warrant may be exercised after 6:00 p.m., Pacific Time, on September ___, 2003 (the "Expiration Date"). Notwithstanding the foregoing, if at 6:00 p.m., Pacific time on the Expiration Date, any Holder or Holders of the Warrants have not exercised their Warrants and the Closing Price (as defined in the Warrant Agreement) for the Common Stock on the Expiration Date is greater than the Warrant Price, then each such unexercised Warrant shall be automatically converted into a number of shares of Common Stock of the Company equal to: (A) the number of shares of Common Stock then issuable upon exercise of a Warrant multiplied by (B) a fraction (1) the numerator of which is the difference between the Closing Price for the Common Stock on the Expiration Date and the Warrant Price and (2) the denominator of which is the Closing Price for the Warrant Stock on the Expiration Date. Reference is hereby made to the further provisions of this Warrant Certificate set forth on the reverse hereof and such further provisions shall for all purposes have the same effect as though fully set forth at this price. This Warrant Certificate shall not be valid unless countersigned by the Company. -17- IN WITNESS WHEREOF, American National Financial, Inc. has caused this Warrant Certificate to be signed by its President and by its Chief Financial Officer and has caused its corporate seal to be affixed hereunto or imprinted hereon. Dated: September ___, 1998 AMERICAN NATIONAL FINANCIAL, INC. -------------------------- Wayne D. Diaz President -------------------------- Carl A. Strunk Executive Vice President and Chief Financial Officer -18- [Form of Warrant Certificate] [Reverse] The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants expiring September ___, 2003 entitling the holder on exercise to receive shares of Common Stock, no par value, of the Company (the "Common Stock"), and are issued or to be issued pursuant to a Warrant Agreement, dated as of September ___, 1998 (the "Warrant Agreement"), duly executed and delivered by the Company, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. A copy of the Warrant Agreement may be obtained by the holder hereof upon written request to the Company. The Warrants may be exercised at any time on or before September ___, 2003. The holder of Warrants evidenced by this Warrant Certificate may exercise them by surrendering this Warrant Certificate, with the form of election to purchase set forth hereon properly completed and executed, together with payment of the Warrant Price at the office of the Company designated for such purpose. In the event that upon any exercise of Warrants evidenced hereby the number of Warrants exercised shall be less than the total number of Warrants evidenced hereby, there shall be issued to the holder hereof or his assignee a new Warrant Certificate evidencing the number of Warrants not exercised. No adjustment shall be made for any dividends on any Common Stock issuable upon exercise of this Warrant. The Warrant Agreement provides that upon the occurrence of certain events the number of shares of Common Stock issuable upon the exercise of each Warrant shall be adjusted. If the number of shares of Common Stock issuable upon such exercise is adjusted, the Warrant Agreement provides that the Warrant Price set forth on the face hereof may, subject to certain conditions, be adjusted. No fractions of a share of Common Stock will be issued upon the exercise of any Warrants but the Company will pay the cash value thereof determined as provided in the Warrant Agreement. The Warrant Agreement also provides that, while the Warrants are exercisable, the holders of the Warrants shall have an optional conversion right to convert, without payment of any exercise price or any cash or other consideration by such holders, the Warrants or any portion thereof into a number of shares of Common Stock as specified in the Warrant Agreement. The holders of the Warrants are entitled to certain registration rights with respect to the Common Stock purchasable upon exercise thereof. Said registration rights are set forth in full in the Warrant Agreement. Warrant Certificates, when surrendered at the office of the Company by the registered holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged, in the manner and subject to the limitations provided in the Warrant Agreement, but without payment of any service charge, for another Warrant certificate of Warrant Certificates of like tenor evidencing in the aggregate a like number of Warrants. -19- Upon due presentation for registration of transfer of this Warrant Certificate at the office of the Company, a new Warrant certificate or Warrant certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to other transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. The Company may deem and treat the registered holder(s) thereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, of any distribution to the holder(s) hereof and for all other purposes, and the Company shall not be affected by any notice to the contrary. Neither the Warrants nor this Warrant Certificate entitles any holder hereof to any rights of a stockholder of the Company. -20- (Form of Election to Purchase) (To be Executed upon Exercise of Warrant) The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to receive ____________ shares of Common Stock and herewith tenders payment for such shares in accordance with the terms of the Warrant Agreement. The undersigned requests that a certificate for such shares be registered in the name of _____________________________, whose address is ______________________________________ and that such shares be delivered to _______________________ whose address is ________________________________________. If said number of shares is less than all of the shares of Common Stock purchasable hereunder, the undersigned requests that a new Warrant Certificate representing the remaining balance of such shares be registered in the name of ________________________, whose address is _______________________, and that such Warrant Certificate be delivered to _______________________, whose address is _________________________________. Signature: Date: Signature Guaranteed: -21- (Form of Assignment) (To be Executed upon Assignment of Warrants) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto (Name and Address of Assignee Must Be Printed or Typewritten) ----------------------------------- ----------------------------------- ----------------------------------- the within Warrants, hereby irrevocably constituting and appointing ________________ Attorney to transfer said Warrants on the books of the Company, with full power of substitution in the premises. Dated: ------------------- ------------------------------------ Signature of Registered Holder Note: The signature on this assignment must correspond with the name as it appears upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed: ------------------------- (Signature must be guaranteed by a bank or trust company having an office or correspondent in the United States or by a member firm of a registered securities exchange or the National Association of Securities Dealers, Inc.) -22- EX-2.1 4 EXHIBIT 2.1 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AND LOAN AGREEMENT (the "Agreement") is entered into as of this 1st day of January, 1997, by and among ATC HOLDINGS, INC., a California corporation ("Purchaser"), or its assigns, FIDELITY NATIONAL FINANCIAL, INC., a Delaware corporation ("Parent"), and AMERICAN TITLE COMPANY, a California underwritten title company ("Subsidiary"). RECITALS: Parent desires to sell to Purchaser and Purchaser desires to buy from Parent shares of the Common Stock of Subsidiary, in the amount and for the purchase price set forth herein (the "Stock Acquisition"). NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL AGREEMENTS AND COVENANTS CONTAINED HEREIN, THE PARTIES AGREE AS FOLLOWS: 1. PURCHASE AND SALE OF SECURITIES. 1.1 SECURITIES. Subject to the terms and conditions of this Agreement, Parent hereby agrees to sell to Purchaser, and Purchaser hereby agrees to purchase from Parent, one thousand eight hundred (1,800) shares of the Common Stock of Subsidiary (the "Shares"), which Shares shall constitute sixty percent (60%) of the issued and outstanding Common Stock of Subsidiary, on a fully diluted basis, immediately after the Closing. 1.2 CONSIDERATION. The consideration for the sale and issuance of the Shares to Purchaser shall consist of Six Million Dollars ($6,000,000) (the "Consideration"). 1.3 OPTION TO PURCHASE. Parent grants Purchaser an option to purchase the remaining forty percent (40%) of the Common Stock of Subsidiary (the "Ownership Interest") under the following terms and conditions: (a) in the event that there is a change of control (a controlling interest of Parent is sold to an independent third party unaffiliated with Parent or its subsidiaries) or there is a merger between Parent and an independent third party unaffiliated with Parent or its subsidiaries, Purchaser shall have the right to purchase the Ownership Interest at 125% of the then net book value of the Ownership Interest, (b) in the event 1 that Parent contemplates the sale of its Ownership Interest during the term of the Underwriting Agreements or any renewals thereof (see Section 5.1(m)), then Purchaser shall have the right to purchase the Ownership Interest for 125% of the net book value of the Ownership Interest, or (c) in the event that after the expiration of the Underwriting Agreements, should Parent determine to sell the Ownership Interest, Parent must first offer such Ownership Interest to Purchaser at a price selected by Parent (the "Sale Price"). Purchaser will have the right, for 30 days commencing on the date of its receipt of Parent's offer to sell to Purchaser said Ownership Interest, at the Sale Price. If Purchaser fails to complete such purchase within the 30 day period, Parent may sell its Ownership Interest to a third party at or above the Sale Price for 180 days commencing on the date Purchaser's 30-day option period expires. 2. CLOSING; TERMINATION. 2.1 CLOSING. The purchase and sale of the Shares shall take place on or before the tenth business day after all of the conditions provided for in Section 5 below have been satisfied, at the offices of Fidelity National Financial, Inc., 17911 Von Karman, Suite 300, Irvine, California, or at such other time and place as the Purchaser and Parent mutually agree (which time and place are designated as the "Closing"). At the Closing, Parent shall deliver to Purchaser (i) a stock certificate evidencing the Shares, against delivery to the Parent by Purchaser of the amount equal to the purchase price for the Shares, and (ii) such other documents and instruments as are provided for in this Agreement or are reasonably requested by Purchaser. 2.2 BUSINESS CONSULTING AGREEMENT. The parties agree to continue to be bound by the terms of the Business Consulting Agreement attached hereto as Exhibit "A" until the Closing. 2.3 TERMINATION. If the Closing has not occurred by June 30, 1997, either party may terminate this Agreement upon written notice to the other party, provided that such terminating party is not then in breach of any of its covenants, representations or warranties contained in this Agreement. Notwithstanding the foregoing, Purchaser may, at its sole election, extend such date for up to three additional 30-day increments by giving Parent and Subsidiary notice of any such extension on or before this Agreement is otherwise terminated. Any such termination shall not relieve any party of any liability for any breach which occurred prior to such termination. With respect to any party not then in breach of this Agreement at the time of such termination, such party shall have no further obligations or liabilities under this Agreement. 2 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND SUBSIDIARY. Parent and Subsidiary, jointly and severally, make the following representations and warranties to Purchaser as of the date hereof and as of the date of Closing which are true and correct except as otherwise set forth in the attached disclosure schedules: 3.1 ORGANIZATION AND STANDING; ARTICLES AND BYLAWS. Parent is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware, and has full power and authority to own and operate its properties and assets and to carry on its business as presently conducted. Subsidiary is a corporation duly organized, validly existing, and in good standing under the laws of the State of California, and has full power and authority to own and operate its properties and assets and to carry on its business as presently conducted. Subsidiary is duly qualified and authorized to do business, and is in good standing as a foreign corporation, in each jurisdiction where the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except where the failure to so qualify would not have a material adverse effect upon its business and operations. Each of Parent and Subsidiary has furnished Purchaser or its counsel with copies of its Articles of Incorporation and Bylaws, as amended to the date hereof. Said copies are true, correct, and complete and contain all amendments through the date of the Closing. 3.2 CAPITALIZATION. The authorized capital stock of Subsidiary consists solely of three thousand (3,000) shares of common stock, with no par value which shares are 100% owned by Parent. All issued and outstanding shares of the capital stock of each have been duly authorized and validly issued, and are fully paid and nonassessable. There are no outstanding rights of first refusal, preemptive rights or other rights, options, warrants, conversion rights, or other agreements either directly or indirectly for the purchase or acquisition of any shares of the capital stock of either. All of the outstanding shares of the Subsidiary have been duly and validly issued in compliance with all applicable federal and state securities laws. 3.3 SUBSIDIARIES. Subsidiary does not presently own or control, directly or indirectly, any equity interest in any corporation, association or business entity. Subsidiary is not, directly or indirectly, a participant in any joint venture or partnership. 3.4 AUTHORIZATION. All corporate action on the part of Parent and Subsidiary, their officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement and the documents contemplated hereby and the performance of all of their obligations hereunder and thereunder and for the authorization, issuance, sale and delivery of the Shares 3 have been taken or will be taken prior to the Closing. This Agreement and the documents contemplated hereby, when executed and delivered, shall constitute valid and legally binding obligations of Parent and Subsidiary enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and subject to the availability of equitable remedies. 3.5 VALIDITY OF SHARES. The sale of each of the Shares will not be, subject to any preemptive rights or rights of first refusal and, when issued, sold and delivered in compliance with the provisions of this Agreement and the Shares will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Shares may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 3.6 FINANCIAL STATEMENTS. To the best of Parent's knowledge and belief, the balance sheet and statement of stockholder's equity of Subsidiary as of December 31, 1996 (collectively, the "Financial Statements") are complete and correct, and present fairly, in all material respects, the financial condition as of the date referred to and have been prepared in accordance with generally accepted accounting principles. 3.7 CONTRACTS AND AGREEMENTS. To the best of Parent's knowledge, based on the representation of management of Subsidiary at December 31, 1996, all contracts, agreements, and instruments to which Subsidiary is a party are valid and binding and in full force and effect in all material respects, and to the best of knowledge of Parent and Subsidiary, no other party thereto is in material breach thereof. 3.8 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. To the best of Parent's knowledge, based on the representation of management of Subsidiary at December 31, 1996, Subsidiary has good and marketable title to its properties and assets, and good title to all its leasehold estates, subject to no mortgage, pledge, lien, lease, encumbrance, or charge, other than (a) liens resulting from taxes which have not yet become delinquent, or (b) minor liens, encumbrances, or defects of title which do not, individually or in the aggregate, materially detract from the value of the property subject thereto or materially impair their operations. With respect to property leases, Subsidiary is in compliance with all such leases. 3.9 COMPLIANCE WITH OTHER INSTRUMENTS. To the best of Parent's knowledge, based on the representation of management of Subsidiary at December 31, 1996, Subsidiary is not in violation of any term of its articles of incorporation or bylaws, any mortgage, indenture, contract, agreement, 4 instrument, judgment, decree, order or any statute, rule or regulation applicable to it. The execution, delivery, and performance of and compliance with this Agreement, and the issuance and sale of the Shares, will not result in any violation of any term of the articles of incorporation or bylaws or any mortgage, indenture, contract, agreement, instrument, judgment, decree or order, or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance, or charge upon any of the properties or assets; and there is no term of the articles of incorporation or bylaws of either Parent or Subsidiary or any mortgage, indenture, contract, agreement, instrument, judgment, decree or order which materially adversely affects, or, so far as may now reasonably be foreseen, in the future may materially adversely affect, Subsidiary's business, prospects, conditions, affairs, operations or any of its properties or assets. 3.10 LITIGATION, ETC. To the best of Parent's knowledge, there is no action, suit, proceeding, or investigation currently pending against Subsidiary. 3.11 TAXES. To the best of Parent's knowledge, Subsidiary has paid, or has provided adequate reserves (in the good faith judgment of the management) for the payment of all federal and state income taxes applicable to the year ended December 31, 1996, its first year of operations, and for the current fiscal year to the date hereof. 3.12 INSURANCE. Subsidiary has adequate insurance, with financially sound and reputable insurers, with respect to its properties that are of a character customarily insured by entities engaged in the same or a similar business similarly situated, against loss or damage of the kinds customarily insured against by such entities, which insurance is of such types (including public liability insurance) as are customarily carried under similar circumstances by such other entities. 3.13 OPERATING RIGHTS. Subsidiary has all operating authority, licenses, franchises, permits, certificates, consents, rights and privileges (collectively "Licenses") as are necessary or appropriate to the operation of its business as now conducted and as proposed to be conducted. Such Licenses are in full force and effect, no violations have been or are expected to have been recorded in respect of any such Licenses, and no proceeding is pending or threatened that could result in the revocation or limitation of any of such Licenses. Subsidiary has conducted its business so as to comply in all material respects with all such Licenses. 3.14 FULL DISCLOSURE. Neither this Agreement, the representations and warranties by each contained herein, the exhibits hereto, nor any other written statement or certificate delivered or to be furnished to Purchaser in 5 connection herewith, when read together, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. There is no fact known which has not been disclosed to Purchaser that would materially adversely affect its business or financial condition or its ability to perform its obligations under this Agreement. 3.15 OFFICERS AND DIRECTORS. Set forth in the disclosure schedule is a list of all officers and directors of Parent and Subsidiary, which list is full, complete and correct. 3.16 VOTING AGREEMENTS. There exists no voting agreements or voting trusts involving shares of stock of each or any shareholder of Subsidiary. 3.17 BOOKS AND RECORDS. The minute book of the Subsidiary contains accurate records of all meetings of and corporate actions or written consents by the shareholders and boards of directors of the Subsidiary. Subsidiary does not have any of its respective records, systems, controls, data or information recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which (including all means of access thereto and therefrom) are not under the exclusive ownership and direct control of the Subsidiary. 3.18 BANK ACCOUNTS. Schedule 3.19 hereto sets forth a complete list of each bank and its address in which the Subsidiary has accounts (giving the account numbers) or safe deposit boxes or lock boxes, the names of the persons currently authorized to draw thereon or to have access thereto, and the current balances in such accounts. 3.19 POWERS OF ATTORNEY; GUARANTEES. There are no outstanding powers of attorney executed on behalf of the Subsidiary. The Subsidiary is not a guarantor or otherwise liable for any material indebtedness of any other person or entity. 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser hereby represents and warrants as follows: 4.1 ORGANIZATION AND STANDING; ARTICLES AND BYLAWS. Purchaser is a corporation duly organized, validly existing, and in good standing under the laws of the State of California, and has full power and authority to own and operate its properties and assets and to carry on its business as presently conducted. Purchaser is duly qualified and authorized to do business, and is in good standing 6 as a foreign corporation, in each jurisdiction where the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except where the failure to so qualify would not have a material adverse effect upon its business and operations. Purchaser has provided Parent or its counsel with copies of its Articles of Incorporation and Bylaws, as amended to the date hereof. Said copies are true, correct, and complete and contain all amendments through the date of the Closing. 4.2 LEGAL POWER. Purchaser has the requisite legal power to enter into this Agreement, to purchase the Shares and to carry out and perform its obligations under the terms of this Agreement. 4.3 AUTHORIZATION. All corporate action on the part of Purchaser necessary for the authorization, execution and delivery of this Agreement and the documents contemplated hereby and the performance of all of their obligations hereunder and thereunder have been taken or will be taken prior to the Closing. This Agreement and the documents contemplated hereby, when executed and delivered, shall constitute valid and legally binding obligations of Purchaser enforceable in accordance with its respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and subject to the availability of equitable remedies. 4.4 COMPLIANCE WITH OTHER INSTRUMENTS. Purchaser is not in violation of any term of its articles of incorporation or bylaws, any mortgage, indenture, contract, agreement, instrument, judgment, decree, order or any statute, rule or regulation applicable to it. The execution, delivery, and performance of and compliance with this Agreement, and the purchase of the Shares, will not result in any violation of any term of the articles of incorporation or bylaws or any mortgage, indenture, contract, agreement, instrument, judgment, decree or order, or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance, or charge upon any of the properties or assets. 4.5 LITIGATION, ETC. There is no action, suit, proceeding, or investigation currently pending against Purchaser which would prevent the transactions from closing. 4.6 FULL DISCLOSURE. Neither this Agreement, the representations and warranties by each contained herein, the exhibits hereto, nor any other written statement or certificate delivered or to be furnished in connection herewith, when read together, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. There is no fact known which has not 7 been disclosed to Parent that would materially adversely affect its business or financial condition or its ability to perform its obligations under this Agreement. 4.7 INVESTMENT REPRESENTATIONS. (a) Purchaser is acquiring the Shares for its own account, not as nominee or agent, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the 1933 Act. (b) Purchaser understands that (i) the Shares have not been registered under the 1933 Act by reason of a specific exemption therefrom, that they must be held by it indefinitely, and that it must, therefore, bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the 1933 Act or is exempt from such registration; and (ii) each certificate representing the Shares will be endorsed with legends to such effect. (c) Purchaser acknowledges that it is able to fend for itself, can bear the economic risk of its investment and has such knowledge and experience in financial or business matters and that it is capable of evaluating the merits and risks of the investment in the Shares. (d) Purchaser understands that the Shares it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from Parent in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the 1933 Act, only in certain limited circumstances, and it represents that it is familiar with SEC Rule 144 and Rule 144A, as presently in effect, and understands the resale limitations imposed thereby and by the 1933 Act. (e) Purchaser was not formed for the specific purpose of acquiring the Shares offered hereunder. (f) Purchaser's principal business address is as set forth on the signature page hereto. 5. CONDITIONS TO CLOSING. 5.1 CONDITIONS TO OBLIGATIONS OF THE PURCHASER. The Closing, the Purchaser's obligation to purchase the Shares from Parent and Parent's obligation to sell such Shares as provided in this Agreement are conditioned on and subject 8 to satisfaction of each of the following conditions (which conditions are for the benefit of and may be unilaterally waived by the Buyer): (a) NO MISREPRESENTATION OR BREACH OF COVENANTS AND REPRESENTATIONS AND WARRANTIES. There shall have been no breach by Parent or the Subsidiary in the performance of any of their respective covenants, representations and warranties, and agreements contained or referred to in this Agreement, and each of the Parent and the Subsidiary shall have performed all obligations required to be performed by them under this Agreement prior to or at the Closing; each of the representations and warranties of each of the Parent and the Subsidiary contained or referred to in this Agreement shall be true and correct in all respects at the Closing as though made at the Closing, except for changes therein specifically permitted by this Agreement or resulting from any transaction expressly consented to in writing by the Buyer or any transaction contemplated by this Agreement; and there shall have been delivered to the Purchaser a certificate or certificates to such effect, dated the date of the Closing, signed by the Parent and the Subsidiary. (b) AUTHORIZATIONS AND APPROVALS. All authorizations, approvals, or permits of any governmental authority or regulatory body of the United States or of any state specifically including, but not limited to, the California Department of Insurance, that are required in connection with the transactions contemplated by this Agreement shall have been duly obtained and shall be effective on and as of the Closing. No stop order or other order enjoining the sale of the Shares shall have been issued and no proceedings for such purpose shall be pending or threatened by the California Commissioner of Insurance, the Securities and Exchange Commission, the California Commissioner of Corporations, or any similar officer of any other Federal or state agency having jurisdiction over this transaction. (c) NO RESTRAINT OR LITIGATION. No order, decree or ruling of any court shall have been entered, and no action, suit or proceeding before any court or governmental or regulatory authority or body shall have been instituted (or threatened if the Purchaser reasonably believes that such threat will result in institution of an action, suit or proceeding) by any person or by any governmental or regulatory authority or agency, to restrain, prohibit, challenge or invalidate any of the transactions contemplated by this Agreement or which might adversely affect the right of the Purchaser to own the Shares, or which might adversely affect the right of the Subsidiary to carry out its respective businesses after the date of the Closing. (d) NECESSARY CONSENTS. The parties shall have received consents, in form and substance satisfactory to counsel for the Purchaser, to the 9 transactions contemplated hereby by all appropriate third parties to all contracts, leases, agreements and permits material to the operations of the Subsidiary and the Assets to which the Subsidiary is a party or by which it is affected and which requires such consent prior to the Closing. (e) TRANSFER OF 100% OF THE OUTSTANDING STOCK OF NATIONS TITLE OF ARIZONA, INC. TO SUBSIDIARY. Parent shall have caused the transfer of all of the outstanding stock of Nations Title of Arizona to Subsidiary prior to Closing. (f) TRANSFER OF 100% OF THE OUTSTANDING COMMON STOCK OF FIDELITY ASSET RECOVERY SERVICES, INC. Parent shall have caused the transfer of all of the outstanding Common Stock of Fidelity Asset Recovery Services, Inc. to subsidiary prior to Closing. (g) LIENS. The Purchaser shall have received reports, satisfactory to the Purchaser, from the Secretary of State of California indicating that there are no liens of record as of a date not more than two days before the Closing with respect to the Assets. (h) EXECUTION OF DOCUMENTS. Purchaser shall have executed all documents required by this Agreement to be executed by it. (i) USE OF TITLE PLANT. Subsidiary shall have negotiated for access to the title plants necessary to its business, the terms of which are acceptable to all parties. (j) CLOSING DELIVERIES. In addition to the other deliveries referenced in this Article 5, on the date of the Closing, Parent and Subsidiary shall deliver to the Purchaser: (i) STOCK CERTIFICATES. Stock certificates representing in the aggregate sixty percent (60%) of the outstanding shares of the Subsidiary, together with duly executed and witnessed stock powers (in blank) attached thereto. (ii) BOOKS. The books, records, customer lists, files, reports, surveys, studies, projections, budgets and strategic plans in connection with the ownership, operation, development, maintenance and management of the Assets and the businesses of the Subsidiary. (iii) CERTIFICATE. A certificate from and executed by the Parent dated the date of the Closing certifying that the conditions specified in Sections 5.1(b), 5.1(e), and 5.1(f), hereof have been fulfilled. 10 (iv) SECRETARY'S CERTIFICATE. A certificate dated the date of the Closing and signed by the secretary of the Subsidiary setting forth a copy of the resolutions adopted by the board of directors of the Subsidiary authorizing the transactions contemplated in this Agreement. (v) ADDITIONAL DOCUMENTS. Such other instruments and documents which the Purchaser shall reasonably request in furtherance of the purposes of this Agreement and executed by the Parent and/or the Subsidiary. (k) FINANCING. Purchaser shall be able to obtain in its sole discretion acceptable financing for the completion of this acquisition of the Shares. In the event Purchaser does not obtain acceptable financing, Purchaser shall be under no obligation to close. (l) PERFORMANCE BY PARENT AND SUBSIDIARY. Parent and Subsidiary shall have performed, satisfied and complied with all covenants, agreements and conditions required by this Agreement to be performed and complied with by them or any of them, on or before the Closing. (m) UNDERWRITING AGREEMENT. Parent shall cause Subsidiary to enter into underwriting agreements with Fidelity National Title Insurance Company and Fidelity National Title Insurance Company of California or their successors in interest including but not limited to Fidelity National Title Insurance Company of New York for initial five (5) year terms with an option to renew on the 5th anniversary of the effective date of the agreements, as attached hereto as Exhibit "C". All of the foregoing instruments shall be in form and substance reasonably satisfactory to the Purchaser and its counsel. 5.2 CONDITIONS TO OBLIGATIONS OF PARENT AT THE CLOSING. Parent's obligations hereunder are subject to the fulfillment, at or prior to the Closing, of all of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by Purchaser in Section 4 hereof shall be true and correct at the date of the Closing, with the same force and effect as if they had been made on and as of said date; and Purchaser shall have performed all obligations herein required to be performed by it at or prior to the Closing. (b) AUTHORIZATIONS AND APPROVALS. All authorizations, approvals, or permits of any governmental authority or regulatory body of the United States or of any state specifically including, but not limited to, the 11 California Department of Insurance, that are required in connection with the transactions contemplated by this Agreement shall have been duly obtained and shall be effective on and as of the Closing. No stop order or other order enjoining the sale of the Shares shall have been issued and no proceedings for such purpose shall be pending or threatened by the California Commissioner of Insurance, the Securities and Exchange Commission, the California Commissioner of Corporations, or any similar officer of any other Federal or state agency having jurisdiction over this transaction. (c) NECESSARY CONSENTS. The parties shall have received consents, in form and substance satisfactory to counsel for the Parent, to the transactions contemplated hereby by all appropriate third parties to all contracts, leases, agreements and permits material to the operations of the Subsidiary and the Assets to which the Subsidiary is a party or by which it is affected and which requires such consent prior to the Closing. (d) EXECUTION OF DOCUMENTS. Purchaser shall have executed all documents required by this Agreement to be executed by it. (c) CERTIFICATE. The President and CEO of Subsidiary shall have delivered to Purchaser a certificate in which they represent that all the representations and warranties stated in Sections 3.7, 3.8, 3.9, 3.10, 3.11 and 3.15 are true and correct. 6. INDEMNIFICATION. 6.1 PARENT'S AND SUBSIDIARY'S INDEMNITY. Parent will make no claim on Subsidiary for liquidated damages for Fidelity National Title Insurance Company claims arising from policies written prior to January 1, 1997. Subsidiary will not be responsible for any escrow or policy files associated with American Title Insurance Company. 6.2 PURCHASER'S INDEMNITY. Purchaser and Subsidiary (as constituted after the Closing) shall indemnify, defend and hold Parent and Subsidiary (as constituted prior to the Closing) harmless from and against any and all liabilities, losses, damages, claims, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees), arising out of or relating to any breach of any representation, warranty or any other material covenant, term or condition and for any actions brought against Parent or Subsidiary after Closing which are due to the actions of Purchaser. 6.3 PROCEDURES. In the event any third party asserts any claim with respect to any matter as to which the indemnities in this Agreement relate, the 12 party against whom the claim is asserted (the "Indemnified Party") shall give prompt notice to the other party (the "Indemnifying Party"), and the Indemnifying Party shall have the right at its election to take over the defense or settlement of the third party claim at its own expense by giving prompt notice to the Indemnified Party. If the Indemnifying Party does not give such notice and does not proceed diligently so to defend the third party claim within 30 days after receipt of the notice of the third party claim, the Indemnifying Party shall be bound by any defense or settlement that the Indemnified Party may make as to those claims and shall reimburse the Indemnified Party for its losses and expenses related to the defense or settlement of the third party claim. The parties shall cooperate in defending against any asserted third party claims. For purposes of this Section 6, the indemnification of the Indemnified Party shall also include the indemnification of the Indemnified Party's employees, agents, affiliates, and third parties performing services for the Indemnified Party, and the reference to this Agreement includes any certificate, schedule, list, summary or other information provided or delivered to a party by the Indemnifying Party or its agents and affiliates in connection with this Agreement. 7. COVENANTS. 7.1 COVENANTS OF PARENT AND SUBSIDIARY. Parent and Subsidiary covenant as more specifically set forth below to the following actions from the date of execution of this Agreement until the Closing: 7.1.1 CORPORATE EXISTENCE AND FOREIGN QUALIFICATION. Parent and Subsidiary will do and cause to be done all things necessary to (i) preserve Subsidiary's corporate existence and for Subsidiary to remain in good standing in the state of its incorporation, (ii) for Subsidiary to become or remain qualified to do business and to remain in good standing in each jurisdiction where the nature of its business makes such qualification necessary. 7.1.2 DIVIDENDS. Parent will not cause and Subsidiary shall not (i) declare, pay or make any dividends or other distribution, whether in cash or in property, with respect to any class of its common stock or right to acquire its common stock now or hereafter outstanding, (ii) issue any warrants, options or other right to acquire any share of Subsidiary's common stock now or hereafter authorized, (iii) purchase, acquire, redeem, retire, or cancel any of Subsidiary's common stock now or hereafter outstanding, or set aside any property or assets for such purpose. 7.1.3 MERGER. Parent will not cause and Subsidiary shall not merge or consolidate with or agree to merge or consolidate with, nor purchase or 13 agree to purchase all or substantially all of the assets of, nor otherwise acquire any corporation, partnership or other business organization or any portion thereof. 7.1.4 ADDITIONAL STOCK. Parent will not cause and Subsidiary shall not authorize for issuance, issue, sell or deliver any additional shares of its capital stock of any class or issue or grant any option, warrant or other right to purchase any shares of its capital stock of any class. 7.1.5 RECAPITALIZATION. Parent will not cause and Subsidiary shall not split, combine or reclassify any shares of its capital stock of any class or redeem or otherwise acquire, directly or indirectly any shares of its capital stock of any class. 7.1.6 ADDITIONAL DEBT. Parent will not cause and Subsidiary shall not incur or become subject to, nor agree to incur or become subject to, any debt, obligation or liability, contingent or otherwise, except current liabilities and contractual obligations incurred in or arising in the usual and ordinary course of business. In addition, Parent will not cause and Subsidiary shall not guaranty or otherwise become liable with respect to the obligations of any other person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection). 7.1.7 PAYMENT OF TAXES AND OTHER CHARGES. Parent shall pay or cause to be paid or discharged, all before the same become delinquent and prior to December 31, 1996, (i) all taxes, assessments and governmental charges levied or assessed against Subsidiary on its gross receipts, income, profits, assets and properties and (ii) all lawful claims against Subsidiary for labor, materials, supplies, goods and services; provided, however, that Purchaser shall be required to pay, perform or discharge any sales tax directly related to the transfer of the Shares to Purchaser as contemplated herein which does not result, directly or indirectly, from the breach of any representation, warranty or covenant of Parent or Subsidiary set forth herein. 7.1.8 FINANCIAL STATEMENTS RECORDS. Parent will not cause and Subsidiary will not make any material change in the methods of accounting or accounting practices applied in connection with the Financial Statements or any of the accounting records of Subsidiary. 8. MISCELLANEOUS. 8.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements 14 among California residents, made and to be performed entirely within the State of California. 8.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any party and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of Parent and Subsidiary pursuant hereto or in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by them hereunder as of the date of such certificate or instrument. 8.3 HOME OFFICE RIGHTS. Parent agrees to grant home office rights to subsidiary in connection with customer multiple state transactions. Parent will insure that an underwriter of parent will underwrite such transaction on a case by case basis with prior approval of underwriting counsel at Parent's corporate offices. Subsidiary will prepare all documentation on said home office transactions and Subsidiary will receive the fees generated by the transaction. 8.4 STARTER EXCHANGE PROGRAM. Parent agrees to cause its underwriting subsidiaries to provide starters to Subsidiary upon request for $5 per starter requested. 8.5 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. 8.6 ENTIRE AGREEMENT. This Agreement, the Exhibits hereto, and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Purchaser did a thorough investigation and was familiar with the company and obtained all information considered necessary to close, including but not limited to a complete financial review of the Company. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this agreement, except as expressly provided herein. 8.7 SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, it shall, to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the 15 intent of the parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 8.8 AMENDMENT AND WAIVER. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived only with the written consent of the parties hereto. 8.9 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery or on the third day following mailing by registered or certified mail, return receipt requested, postage prepaid, addressed: (a) if to Purchaser, at its address as set forth under such Purchaser's signature at the end of this Agreement, or at such other address as such Purchaser shall have furnished to the Subsidiary in writing or (b) if to Parent and Subsidiary, at their addresses as set forth at the end of this Agreement, or at such other addresses as they shall have furnished to Purchaser in writing. 8.10 FINDERS' FEES. Each party hereto represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement and hereby agrees to indemnify and to hold harmless the other party from any liability for any commission or compensation in the nature of a finder's fee to any broker or other person or firm (and the costs and expenses, including reasonable attorneys' fees, of defending against such liability or asserted liability) for which such other party or any of its employees or representatives is responsible. 8.11 FEES AND EXPENSES. Each party shall be responsible for such party's outside legal and accounting fees and other expenses incurred by such party in connection with this transaction. 8.12 HEADINGS. The headings of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 8.13 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 8.14 ASSIGNMENT. No party to this Agreement may assign all or any part of its interest in this Agreement except Purchaser may assign its rights under this Agreement to a commonly held entity for tax purposes, in which event this Agreement shall still be binding on all parties and any successors or assigns. 16 8.16 ATTORNEY'S FEE CLAUSE. If either party to this Agreement shall bring any action, suit, counterclaim, appeal, arbitration, or mediation for any relief against the other, declaratory or otherwise, to enforce the terms hereof or to declare rights hereunder (collectively, an "Action"), the losing party shall pay to the prevailing party a reasonable sum for attorneys' fees and costs (at the prevailing party's attorneys' then-prevailing rates as increased from time to time by the giving of advance written notice by such counsel to such party) incurred in bringing and prosecuting such Action and/or enforcing any judgment, order, ruling, or award (collectively, a "Decision") granted therein, all of which shall be deemed to have accrued on the commencement of such Action and shall be paid whether or not such Action is prosecuted to a Decision. Any Decision entered in such Action shall contain a specific provision providing for the recovery of attorneys' fees and costs incurred in enforcing such Decision. The court or arbitrator may fix the amount of reasonable attorneys' fees and costs on the request of either party. For the purposes of this paragraph, attorneys' fees shall include, without limitation, fees incurred in the following: (1) postjudgment motions and collection actions; (2) contempt proceedings; (3) garnishment, levy, and debtor and third party examination; (4) discovery; and (5) bankruptcy litigation. "Prevailing party" within the meaning of this paragraph includes, without limitation, a party who agrees to dismiss an Action on the other party's payment of the sums allegedly due or performance of the covenants allegedly breached, or who obtains substantially the relief sought by it. 8.17 CONSTRUCTION. The parties have participated jointly in the negotiation and drafting of this Agreement and have had competent counsel of their own choosing. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context otherwise requires. The word "including" shall mean including without limitation. 17 IN WITNESS WHEREOF, the foregoing Agreement is hereby executed as of the date first above written. ADDRESS: ATC HOLDINGS, INC., a California Corporation By: /s/ Michael Lowther -------------------------------- Its: C.E.O -------------------------------- ADDRESS: FIDELITY NATIONAL FINANCIAL, INC., a Delaware Corporation 17911 Von Karman Avenue Irvine, CA 92614 By: /s/ Carl A. Strunk -------------------------------- Its: Exec. V.P. -------------------------------- ADDRESS: AMERICAN TITLE COMPANY, a California Corporation 17911 Von Karman Avenue Irvine, CA 92614 By: /s/ Wayne Diaz -------------------------------- Its: President -------------------------------- 18 BUSINESS CONSULTANT AGREEMENT THIS BUSINESS CONSULTANT AGREEMENT (the "Agreement) is made as of the 1st day of January, 1997, by and among ATC Holdings, Inc., a California corporation, and/or its assigns which shall be limited to a commonly held entity for tax purposes (hereinafter referred to as "Consultant"), Fidelity National Financial, Inc., a Delaware corporation ("FNFI") and American Title Company, a California corporation ("ATC"). R E C I T A L S : A. FNFI owns and operates, either directly or indirectly title insurance and escrow businesses, including ATC, an underwritten title company. B. Consultant is experienced in operating and managing title insurance and escrow service offices in the title insurance industry. C. FNFI desires to engage the services of Consultant to perform certain consulting functions in connection with the operation and management of ATC arid to also consult with the Board of Directors and officers of FNFI and ATC concerning problems which may arise in the operation of ATC and to authorize Consultant to take certain actions with respect to ATC in accordance with the terms and conditions of this Agreement. D. Consultant desires to provide such services to FNFI on the terms and conditions set forth herein. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, covenant and agree as follows: 1. TERM. The term of this Agreement shall be for a period commencing on the date hereof and continuing through the date Consultant or its nominee obtains required approvals from the Department of Insurance ("DOI") and financing for the purchase of sixty percent (60%) of the outstanding stock of ATC from FNFI. 2. CONSULTATION. The Consultant shall make itself available to consult with the Board of Directors and the officers of FNFI and the Board of Directors and the officers of ATC, at reasonable times, and to implement or assist in implementing actions as provided in this Agreement concerning matters pertaining to litigation and claims handling, the administration and operation of ATC, the personnel and fiscal affairs of ATC and, in general, any problem of importance with regard to the business affairs or operations of ATC. Without limiting the generality of the foregoing, the parties hereto agree that the Consultant will consult with ATC and, where appropriate, take action Exhibit "A" -1- as provided in this Agreement, in implementing the actions deemed desirable by Consultant and FNFI as provided in Section 3 hereof, and considering the actions described in Section 7 hereof. 3. SCOPE OF CONSULTATION. The business operations of ATC which affect, directly or indirectly, the operation of ATC and which arise in the ordinary course of business, shall be conducted by the officers and administration of ATC. The Consultant shall (i) advise the administrative staff of ATC and, in connection therewith, Consultant is hereby authorized and ATC agrees to take such actions necessary or appropriate in order to implement the plans and recommendations agreed to by Consultant, ATC and FNFI, (ii) analyze the operations of ATC, including personnel and facility needs, the appropriate positioning of employees, and other material items of revenue or expenditures, and to make recommendations with respect thereto, (iii) analyze the policies and procedures utilized by ATC for the operations, and to make recommendations with respect thereto, and (iv) analyze any other aspect of the business affairs of ATC for which Consultant may believe that either expenditures can be reduced, revenues increased or efficiencies attained, and to make recommendations with respect thereto. Any recommendation by Consultant shall be reviewed and considered by a committee (the "Committee") of four persons, two of which Consultant shall appoint or replace and two of which FNFI shall appoint or replace. The Committee, by majority vote, shall then either approve or disapprove of such recommendation. If the Committee approves of such recommendation, the following shall occur: (a) If the recommendation requires, under applicable State law, the approval of the Board of Directors of ATC, such recommendation shall be promptly submitted for approval, which approval will not be unreasonably denied. If the Corporation does not disapprove of such recommendation in writing and communicates such disapproval to the Committee members within five (5) business days of when the Committee submitted such recommendation to the Board of Directors, such recommendation shall be deemed approved. (b) If the recommendation does not so require such Board of Director approval, such recommendation shall be deemed approved upon the adoption by the Committee. With respect to all recommendations or actions approved, the Consultant, working with the administrative staff and officers of ATC, shall proceed to implement such recommendation or action and is hereby specifically authorized to so do; provided, however, that, to the extent that any such recommendation or action may require an expenditure which must be formally approved by the Board of Directors of FNFI, ATC shall (and FNFI shall cause the officers and administrative staff of ATC to) take such actions as may be reasonably necessary or appropriate in order to implement the actions recommended by Consultant and approved as provided above. Notwithstanding the above, ATC shall not be obligated to take any action with respect to the termination of agents or employees unless such action is in compliance with any agreement with such agents or employees, applicable policies of FNFI or ATC, as the case may be, then in effect, applicable law and the Worker Adjustment and Retraining Notification Act of 1988, as amended (the "WARN Act"). -2- 4. MINIMUM AMOUNT OF SERVICE. In the sole discretion of Consultant, the Consultant shall devote such time, if any, as reasonably necessary to perform its duties under this Agreement and in particular shall cause its employees and agents to devote such portion of their time, if any, to the rendering of services hereunder as Consultant determines appropriate, recognizing that the officers and directors already serve in capacities as management of ATC and will continue to perform these duties. The additional services shall include but not be limited to long range planning. The Consultant may represent, perform services for, and be employed by any additional clients, persons, or companies so long as it does not conflict with the performance of services under this Agreement. 5. COMPENSATION. The Consultant shall receive from ATC a monthly fee for the performance of the services to be rendered by Consultant of $1,000 per month. Any partial months shall be prorated. 6. AUTHORITY TO CONTRACT. From time to time, the Consultant may deem it advisable to recommend to FNFI that either it or ATC enter into agreements for the purpose of enhancing or improving the operations of ATC. With regard to any such agreements as may be approved as provided in Section 3 above, the Consultant shall be the exclusive agent of ATC for the purpose of negotiating the terms and conditions of agreements. The Consultant shall not, however, bind FNFI or its subsidiaries (other than ATC or its subsidiaries) to such agreements without first obtaining the approval of the terms and conditions of such agreements from the Board of Directors of FNFI or its subsidiaries, as applicable, as provided in Section 3 above. 7. ADDITIONAL ACTIONS: CLAIMS NOTIFICATION. (a) The Consultant agrees that, except as otherwise provided in Section 3 above, actions may not be taken without the advance approval of the Committee regarding changes, amendments, modifications or adjustments to financial accounting or reporting systems, policies, and procedures. (b) Any request by Consultant for approval under this Section 7, shall be submitted to FNFI in writing and shall be deemed approved unless rejected in writing (which writing shall specify the reasons for such rejection) within seven (7) business days from when such request for approval is submitted to FNFI in writing. 8. TERMINATION. (a) Upon the occurrence of any one of the following events, FNFI and ATC shall be entitled to terminate this Agreement immediately upon written notice to the Consultant: -3- (i) The filing of any petition by the Consultant in any court, whether or not pursuant to any statute of the United States or of any state, initiating bankruptcy, arrangement, or insolvency proceedings; (ii) The filing of any petition against the Consultant in any court, whether or not pursuant to any statute of the United States or of any state, initiating bankruptcy, arrangement, or insolvency proceedings which petition is not dismissed within sixty (60) days of the filing thereof; (iii) The appointment of a receiver or trustee for all or any portion of the Consultant's business or assets; (iv) Any assignment by the Consultant for the benefit of creditors; (v) The attachment, execution, or other judicial seizure of a material portion of the Consultant's asset, which attachment, execution, or judicial seizure is not removed or released within one hundred twenty (120) days; (vi) The material failure by the Consultant to perform any of the Consultant's covenants or obligations set forth in this Agreement, and such material failure continues for twenty (20) days after written notice thereof by FNFI; (vii) Termination of any stock purchase agreement("SPA") which is executed between FNFI and Consultant, pursuant to the terms thereof; or (viii) Notification from any regulatory agency, whose approval of this Agreement is required, that such approval is denied. (b) Upon the occurrence of any of the following events, Consultant shall be entitled to terminate this Agreement immediately upon written notice to FNFI: (i) If any of the events set forth in clauses (i) through (v) above occurs with respect to FNFI or ATC; (ii) The material failure by FNFI or ATC to perform any of FNFI's or ATC's covenants or obligations set forth in this Agreement for ATC and such material failure continues for twenty (20) days after written notice thereof by the Consultant; (iii) Termination of the SPA pursuant to the terms thereof; -4- (iv) Notification from any regulatory agency, whose approval of the SPA is required, that such approval is denied; or (v) failure of Consultant to obtain required financing to the purchase of 60% of the outstanding stock of ATC. (c) In the event of the termination of this Agreement for any reason by either party including but not limited to (a) and (b) above, no employee of ATC will lose their employment due to the termination. 9. REMEDIES. In addition to any remedies provided herein, FNFI, ATC and Consultant shall have all other remedies permitted in law or in equity under the laws of the State of California and the laws of the United States for any breach by the other party of the terms and conditions hereof. 10. LIMITED LIABILITY: INDEMNIFICATION. (a) Notwithstanding any provision hereof to the contrary, the Consultant shall have no liability to FNFI or ATC for any act or failure to act by or on behalf of the Consultant in connection with provision of services by the Consultant under this Agreement, unless such act or failure to act constitutes (i) gross negligence, (ii) recklessness, or (iii) intentional misconduct or bad faith. (b) FNFI and ATC hereby jointly and severally agree to indemnify, hold harmless and provide a defense to the Consultant against all claims, costs, demands, damages, losses, expenses or liabilities to or as a result of claims asserted by persons or entities not a party to this Agreement, or an affiliate of Consultant, resulting from or arising out of the provision by the Consultant of services hereunder; provided that FNFI shall not indemnify the Consultant against any such claim, cost, damage, expense or liability arising out of or resulting from any act of failure to act by or on behalf of the Consultant enumerated in clauses (i) through (iv) of subsection (a) above. (c) Consultant hereby agrees to indemnify, hold harmless and provide a defense to ATC against all claims, costs, demands, damages, losses, expenses or liabilities to or as a result of claims asserted by persons or entitles not a party to this Agreement, or an affiliate of ATC, resulting from or arising out of any act or failure to act which constitutes (i) gross negligence, (ii) recklessness, or (iii) intentional misconduct or bad faith. 11. ASSIGNMENT. No party to this Agreement may assign all or any part of its interest in this Agreement without the prior express written consent of the other party, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, it is understood and agreed that ATC Holdings can assign its rights to a commonly held entity for tax purposes, in which event this Agreement shall still be binding on all parties and any such successor or assign. -5- 12. INVALIDITY. Wherever possible, each provision of this Agreement shall be interpreted in such a manner as to be valid under applicable law, but if any provision of this Agreement shall be invalid or prohibited hereunder, such provision shall be ineffective to the extent of such prohibition or invalidation, but shall not invalidate the remainder of such provision or the remaining provisions of this Agreement. 13. NOTICES. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two (2) business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to Consultant: ATC Holdings, Inc. 17911 Von Karman Avenue Suite 500 Irvine, CA 92614 with a copy to: George Wall Palmieri, Tyler, Wiener, Wilhelm & Waldron 2603 Main Street Suite 1300 Irvine, CA 92714 If FNFI: Fidelity National Financial, Inc. 17911 Von Karman Avenue Suite 300 Irvine, CA 92614 Fax: (714) 622-4131 Attention: Andrew F. Puzder, Executive Vice President and General Counsel Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties notice in the manner herein set forth. 14. ARBITRATION. Except as otherwise provided in this Agreement, any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in Orange County, California. -6- (a) JUDICIAL ARBITRATION AND MEDIATION SERVICES. The arbitration shall be administered by Judicial Arbitration and Mediation Service ("JAMS") in its Orange County office. (b) ARBITRATOR. The arbitrator shall be a retired superior court judge of the State of California affiliated with JAMS. (c) PROVISIONAL REMEDIES. Each of the parties reserves the right to file with a court of competent jurisdiction an application for temporary or preliminary injunctive relief, writ of attachment, writ of possession, temporary protective order and/or appointment of a receiver on the grounds that the arbitration award to which the applicant may be entitled may be rendered ineffectual in the absence of such relief. (d) ENFORCEMENT OF JUDGMENT. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (e) DISCOVERY. The parties may obtain discovery in aid of the arbitration to the fullest extent permitted under law, including California Code of Civil Procedure Section 1283.05. All discovery disputes shall be resolved by the arbitrator. (f) CONSOLIDATION. Any arbitration hereunder may be consolidated by JAMS with the arbitration of any other dispute arising out of or relating to the same subject matter when the arbitrator determines that there is a common issue of law or fact creating the possibility of conflicting rulings by more than one arbitrator. Any disputes over which arbitrator shall hear any consolidated matter shall be resolved by JAMS. (g) POWER AND AUTHORITY OF ARBITRATOR. The arbitrator shall not have any power to alter, amend, modify or change any of the terms of this Agreement nor to grant any remedy which is either prohibited by the terms of this Agreement, or not available in a court of law. (h) GOVERNING LAW. All questions in respect of procedure to be followed in conducting the arbitration as well as the enforceability of this Agreement to arbitrate which may be resolved by state law shall be resolved according to the law of the State of California. Any action brought to enforce the provisions of this Section shall be brought in the Orange County Superior Court. All other questions in respect to this Agreement, including but not limited to the interpretation, enforcement of this Agreement (other than the right to arbitrate), and the rights, duties and liabilities of the parties to this Agreement shall be governed by California law. (i) COSTS. The costs of the arbitration, including any JAMS administration fee, the arbitrator's fee, and costs of the use of facilities during the hearings, shall be borne equally by the parties. Costs and attorneys' fees may be awarded to the prevailing party at the discretion of the arbitrator. -7- 15. ATTORNEYS' FEES. In the event of any dispute arising under this Agreement, other than as addressed in Section 14, the prevailing party shall be entitled to attorneys' fees. 16. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties hereto with respect to the matters set forth herein and supersedes all prior arrangements and understandings between the parties, and no other agreement, statement, or promise made by either party hereto which is not contained herein shall be binding or valid. 17. AMENDMENT. This Agreement may only be amended by written document signed by each of the parties hereto. 18. COUNTERPARTS. This Agreement shall be executed simultaneously or in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. 19. GOVERNING LAW. This Agreement shall be construed and interpreted under, and governed and enforced according to, the domestic internal law (but not the law of conflicts of law) of the State of California. 20. HEADINGS. The headings or captions of sections in this Agreement are for convenience and reference only and in no way define, limit, or describe the scope or intent of this Agreement or the provisions of such sections. 21. JOINT DOCUMENT. The parties hereto were all represented by legal counsel in connection with this Agreement and all participated in the drafting thereof. Accordingly, this Agreement is deemed to have been jointly drafted by the parties hereto. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. FIDELITY NATIONAL FINANCIAL INC. a Delaware corporation By: /s/ [Illegible] -------------------------------- [insert name] Its: [insert title] -8- ATC HOLDINGS, INC. a California corporation By: /s/ Michael Lowther -------------------------------- Michael Lowther Its: President /s/ Wayne Diaz -------------------------------- Wayne Diaz Vice President, Secretary AMERICAN TITLE COMPANY a California corporation By: /s/ M'Liss Jones Kane -------------------------------- [insert name] Its: [insert title] -9- AMENDMENT TO STOCK PURCHASE AGREEMENT This AMENDMENT TO STOCK PURCHASE AGREEMENT ("Amendment") is made this 26th day of August, 1998 by and among AMERICAN NATIONAL FINANCIAL, INC. (formerly ATC Holdings, Inc.) ("Purchaser"), FIDELITY NATIONAL FINANCIAL, INC. ("Parent") and AMERICAN TITLE COMPANY ("Subsidiary"), as follows: 1. The parties agree that effective on the closing of the initial public offering of securities by Purchaser, the Stock Purchase Agreement dated as of January 1, 1997 among Purchaser, Parent and Subsidiary (the "Stock Purchase Agreement") is amended by terminating all of the provisions of Section 1.3 thereof. 2. Except as set forth above, the remaining provisions of the Stock Purchase Agreement shall be unaffected by this Amendment. IN WITNESS WHEREOF, the undersigned have executed this Amendment, effective as of the date first set forth above. AMERICAN NATIONAL FINANCIAL, INC. By: /s/ Michael Lowther -------------------------------- FIDELITY NATIONAL FINANCIAL, INC. By: /s/ Carl Strunk -------------------------------- AMERICAN TITLE COMPANY By: /s/ Wayne Diaz -------------------------------- EX-2.2 5 EXHIBIT 2.2 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into as of this 31st day of December, 1996, by and among AMERICAN TITLE COMPANY, a California corporation ("Purchaser"), FIDELITY NATIONAL ASSET RECOVERY SERVICES, INC., a Kansas corporation ("Company"), and NATIONS TITLE, INC., a Kansas corporation ("Shareholder") with reference to the following facts and circumstances: RECITALS A. The Shareholder is the record and beneficial owner of all the issued and outstanding shares of common stock of the Company (the "Company Stock"). B. The Shareholder desires to sell, and Purchaser wishes to purchase, all of the issued and outstanding Company Stock upon the terms and subject to the conditions set forth below. AGREEMENT NOW, THEREFORE, in consideration of the premises and the respective representations, warranties, covenants, agreements and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: I. PURCHASE AND SALE OF COMPANY STOCK 1.1. PURCHASE AND SALE. Subject to the terms and conditions set forth in this Agreement, on the Closing Date (as defined below), Shareholder will sell, transfer and convey One Hundred Thousand (100,000) shares of the Company Stock, which amount constitutes all of the issued and outstanding shares of the Company Stock, to Purchaser, and Purchaser will acquire the Company Stock from Shareholder. 1.2. PURCHASE PRICE. In consideration of the sale and transfer of the Company Stock by Shareholder, Purchaser shall, in full payment therefor, pay to Shareholder the amount of Ten Thousand Dollars ($10,000) (the "Purchase Price"). 1.3. PAYMENT OF PURCHASE PRICE. Provided that all of the conditions to the Closing set forth in Article V below have been satisfied or waived by the party benefiting therefrom, Purchaser shall pay to Shareholder at the Closing the Purchase Price by delivery of a cashier's or certified bank check at Closing. 1 II. CLOSING 2.1. CLOSING. The closing of the purchase and sale of the Company Stock and the consummation of the other transactions contemplated by this Agreement (the "Closing") shall take place at 10:00 a.m., local time, on December 31, 1996, at the offices of the Shareholder, 17911 Von Karman Avenue, Suite 500, Irvine, California 92614, or at such other date, time and place as the parties hereto may mutually agree upon in writing (the "Closing Date"). 2.2. SHAREHOLDERS' DELIVERIES AT CLOSING. Provided that all of the conditions to the Closing set forth in Article V below have been satisfied or waived by the party benefiting therefrom, Shareholder shall execute and deliver or cause to be delivered to Purchaser at the Closing the following documents: (a) Certificates representing the Company Stock being sold, duly endorsed for transfer, or accompanied by duly executed stock powers, transferring to Purchaser good and marketable title to the Company Stock, free and clear of all liens and encumbrances. (b) The Company's original minute book, such minute book to contain (i) original Articles of Incorporation and all amendments thereto, or copies thereof if the originals are unavailable, (ii) the Company's Bylaws presently in effect, (iii) the Company's stock transfer records together with all available cancelled stock certificates, and (iv) all minutes of meetings or consents in lieu of such meetings of the Company's Board of Directors and shareholders. (c) Such other documents and agreements as may be either reasonable or necessary to carry out the purpose and intention of this Agreement. 2.3. PURCHASER'S DELIVERIES AT CLOSING. Provided that all of the conditions to the Closing set forth in Article V below have been satisfied or waived by the party benefiting therefrom, Purchaser shall execute and deliver or cause to be delivered to Shareholder at the Closing the following documents: (a) A certified or bank cashier's check payable to Shareholder (or, at Purchaser's option, wire transfer funds to an account designated in writing by the Shareholder) in the amount of the Purchase Price. (b) Such other documents and agreements as may be either reasonable or necessary to carry out the purpose and intention of this Agreement. III. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER AND THE COMPANY The Company and the Shareholder, jointly and severally, hereby represent and warrant to Purchaser as follows: 2 3.1 ORGANIZATION AND STANDING; ARTICLES AND BYLAWS. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Arizona, has full power and authority to own its properties and to carry on its business as presently conducted. The Company is duly qualified to transact intrastate business and is in good standing in all jurisdictions in which the nature of its business or its properties makes such qualification necessary. The Company has furnished Purchaser with copies of its Articles of Incorporation and Bylaws, as amended to the date hereof. Said copies are true, correct and complete and contain all amendments through the date of the Closing. 3.2 AUTHORIZATION. All corporate action on the part of Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement and the documents contemplated hereby and the performance of all of the Company's and Shareholder's obligations hereunder and thereunder and for the authorization, issuance, sale and delivery of the Company Stock have been taken or will be taken prior to the Closing. This Agreement and the documents contemplated hereby, when executed and delivered, shall constitute valid and legally binding obligations of the Company enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and subject to the availability of equitable remedies. 3.3 VALIDITY OF COMPANY STOCK. The sale of each of the shares of the Company Stock is not, and will not be, subject to any preemptive rights or rights of first refusal and, when issued, sold and delivered in compliance with the provisions of this Agreement, the Company Stock will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Company Stock may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 3.4 CAPITALIZATION. The authorized capital stock of the Company consists solely of One hundred Thousand (100,000) shares of Class A common stock no par value, of which 100,000 shares are issued and outstanding. Upon the consummation of the transactions contemplated by this Agreement, the Shareholder shall have transferred and conveyed one hundred percent (100%) of the issued and outstanding shares of Company Stock to Purchaser. All of the issued and outstanding shares of the Company Stock are duly authorized and validly issued, fully paid and nonassessable. There are no outstanding rights of first refusal, preemptive rights or other rights, options, warrants, conversion rights, or other agreements either directly or indirectly for the purchase or acquisition of any shares of the Company Stock. All of the outstanding shares of the Company Stock have been duly and validly issued in compliance with all applicable federal and state securities laws. 3.5 FINANCIAL STATEMENTS. The balance sheet as of December 31, 1996, together with statements of income and cash flow for the year ending December 31, 1996, heretofore delivered to Purchaser, are complete and correct in all material respects, and 3 present fairly the financial condition of the Company and the results of its operation as of the dates and for the periods referred to and have been prepared in accordance with generally accepted accounting principles consistently applied. 3.6 MATERIAL CONTRACTS AND AGREEMENTS. Except as set forth on SCHEDULE 3.6, the Company has no contract, agreement, lease or other commitment, written or oral, absolute or contingent. All material contracts, agreements and instruments to which the Company is a party are valid and binding and in full force and effect in all material respects, and the Company is not in, and to the best of its knowledge, no other party thereto is in material breach thereof. 3.7 TITLE TO PROPERTIES AND ASSETS. Except as set forth on SCHEDULE 3.7, the Company has good and marketable title to its properties and assets, and good title to all its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance, or charge, other than (a) liens resulting from taxes which have not yet become delinquent, or (b) minor liens, encumbrances, or defects of title which do not, individually or in the aggregate, materially detract from the value of the property subject thereto or materially impair their operations. 3.8 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation of any term of its Articles of Incorporation or Bylaws, any mortgage, indenture, contract, agreement, instrument, judgment, decree, order or any statute, rule or regulation applicable to it. The execution, delivery, and performance of and compliance with this Agreement, and the issuance and sale of the Company Stock pursuant hereto, will not result in any violation of any term of the Articles of Incorporation or Bylaws of either or any mortgage, indenture, contract, agreement, instrument, judgment, decree or order, or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance, or charge upon any of the properties or assets of the Company; and there is no term of the Articles of Incorporation or Bylaws of the Company or any mortgage, indenture, contract, agreement, instrument, judgment, decree or order which materially adversely affects, or, so far as the Company may now reasonably foresee, in the future may materially adversely affect, its business, prospects, conditions, affairs, operations or any of its properties or assets. 3.9 LITIGATION. There are no actions, proceedings, or investigations before any court or administrative agency pending or currently threatened against or with respect to the Company (or any basis therefor known to the Company or the Shareholder), which question the validity of this Agreement or any action taken or to be taken in connection herewith, or which, the Company individually or in the aggregate, might result in a material adverse change in the business, prospects, conditions, affairs, or operations of the Company or in any of its properties or assets, or in any material impairment of the right or ability of each to carry on its business as now conducted or as proposed to be conducted, or in any material liability on the part of the Company. The Company is not a party or subject to, and none of its assets are bound by, the provisions of any order, 4 writ, injunction, judgment, or decree of any court or governmental agency or instrumentality. 3.10 TAXES. The Company has no material liability for any federal, state or local taxes, except for taxes which have accrued and are not yet payable. The Company has filed all tax returns required to be filed by it and has paid all income taxes payable by it which have become due pursuant to such tax returns and all other taxes and assessments payable by it which have become due, other than those not yet delinquent and except for those contested in good faith and for which adequate reserves have been established. The Company has paid, or has provided adequate reserves (in the good faith judgment of the management of the Company) for the payment of, all federal and state income or premium taxes applicable for all prior fiscal years and for the current fiscal year to the date hereof. 3.11 EMPLOYEES. No employee of the Company is obligated under any contract (including licenses, covenants, or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any Court or administrative agency that would conflict with such employee's obligation to use his or her best effort to promote the interests of the Company or that would conflict with its business as conducted or as proposed to be conducted. No employee of the Company is in violation of any term of any employment contract, or any other contract or agreement relating to the relationship of any such employee with it or any previous employer. The Company has no collective bargaining agreements with any of its employees and, to the best knowledge of the Company and the Shareholder, there is no labor union organizing activity pending or threatened with respect to the Company. 3.12 GOVERNMENTAL CONSENTS. All consents, approvals, orders, or authorizations of, or registrations, qualifications, designations, declarations or filings with, any governmental authority, required on the part of Company and/or Shareholder in connection with the valid execution and delivery of this Agreement and the offer, sale or issuance of the Company Stock, or the consummation of any other transaction contemplated hereby have been obtained, or will be effective at the Closing, except for notices required or permitted to be filed with certain state and federal securities commissions after the Closing, which notices will be filed on a timely basis. 3.13 OPERATING RIGHTS. The Company has all operating authority, licenses, franchises, permits, certificates, consents, rights and privileges (collectively, "Licenses") as are necessary or appropriate to the operation of its business as now conducted and as proposed to be conducted. Such Licenses are in full force and effect, no violations have been or are expected to have been recorded in respect of any such Licenses, and no proceeding is pending or threatened that could result in the revocation or limitation of any such Licenses. The Company has conducted its business so as to comply in all material respects with all such Licenses. 3.14 FULL DISCLOSURE. Neither this Agreement, the representations and warranties by the Company contained herein, the exhibits or schedules hereto, nor any other written 5 statement or certificate delivered or to be furnished to Purchaser in connection herewith, when read together, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. There is no fact known to the Company which has not been disclosed to Purchaser that would materially adversely affect the Company's business or financial condition or its ability to perform its obligations under this Agreement. IV. REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to the Company and Shareholder as follows: 4.1 ORGANIZATION AND GOOD STANDING. Purchaser has been duly organized and is existing as a corporation in good standing under the laws of the State of California with full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. 4.2 DUE EXECUTION. This Agreement has been duly authorized, executed and delivered by it and, upon due execution and delivery by Purchaser, this Agreement and the agreements contemplated hereby will be valid and binding agreements of Purchaser, enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and subject to the availability of equitable remedies. 4.3 NO CONFLICTS. The execution, delivery and performance of this Agreement by Purchaser and the consummation by Purchaser of the transactions contemplated hereby will not conflict with or result in the violation of the provisions of the Articles of Incorporation or Bylaws of Purchaser. 4.4 INVESTMENT INTENT. Purchaser is acquiring the Company Stock for investment purposes only, for its own account and not as a nominee or agent for any other person, and not with a view to or for resale in connection with any distribution thereof within the meaning of the Securities Act of 1933. V. CONDITIONS TO CLOSING 5.1. CONDITIONS TO OBLIGATIONS OF PURCHASER AT CLOSING. Purchaser's obligations hereunder are subject to the fulfillment, at or prior to the Closing, of all of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE: PERFORMANCE OF OBLIGATIONS. The representations and warranties made by the Company and the Shareholder in Section 3 hereof shall be true and correct on the Closing Date with the same force and 6 effect as if they had been made on and as of said date; and the Company and the Shareholder shall have performed all of the obligations and complied with each and all of the covenants required to be performed or complied with by them on or prior to the Closing. (b) MATERIAL ADVERSE CHANGE. There shall not have occurred any material adverse change to the business, assets, financial condition or prospects of the Company. (c) AUTHORIZATIONS AND APPROVALS. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with transactions contemplated by this Agreement shall have been duly obtained and shall be effective on and as of the Closing. No stop order or other order enjoining the sale of the Company Stock shall have been issued and no proceedings for such purpose shall be pending. (d) DELIVERY OF DOCUMENTS. The Company shall have delivered to Purchaser all share certificates evidencing the Company Stock and such other documents and instruments as Purchaser may reasonably request. (e) CERTIFICATES. The President and Chief Financial Officer of the Company shall deliver to Purchaser a certificate in which they certify that all of their representations and warranties are true and correct, that all obligations to be performed by them pursuant to this Agreement prior to Closing have been performed, and that all of the conditions to Purchaser's obligations provided for in this Section 5.1 have been satisfied. 5.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY AT THE CLOSING. The Company's obligations hereunder are subject to the fulfillment, at or prior to the Closing, of all of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by Purchaser in Section 4 hereof shall be true and correct at the Closing Date, with the same force and effect as if they had been made on and as of said date; and Purchaser shall have performed all obligations herein required to be performed by it at or prior to the Closing. (b) AUTHORIZATIONS AND APPROVALS. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the transactions contemplated by this Agreement shall have been duly obtained and shall be effective on and as of the Closing. No stop order or other order enjoining the sale of the Company Stock shall have been issued and no proceedings for such purpose shall be pending or threatened by the Securities and Exchange Commission, the California Commissioner of Corporations, or 7 any similar officer of any other federal or state agency having jurisdiction over this transaction. VI. CONDUCT OF BUSINESS PENDING CLOSING During the period commencing on the date hereof and continuing through the Closing Date, the Company and Shareholder jointly and severally covenant and agree that: 6.1 QUALIFICATION. The Company shall maintain all qualifications to transact business and remain in good standing in its jurisdiction of incorporation and in the foreign jurisdictions in which it is qualified to transact business. 6.2 ORDINARY COURSE. The Company shall conduct its business in the ordinary course and shall not make or institute any unusual or novel methods of management, accounting, or operation that vary materially from those methods used by the Company as of the date of this Agreement. The Company will use its best efforts to preserve its business organizations intact, to keep available to Company its present officers and employees, and to preserve its present relationships with suppliers, customers, and others having business relationships with the Company. 6.3 CORPORATE MATTERS. The Company shall not (a) amend its Articles of Incorporation or Bylaws; (b) issue any shares of its capital stock; (c) issue or create any warrants, obligations, subscriptions, options, convertible securities, or other commitments under which any additional shares of its capital stock of any class might be directly or indirectly authorized, issued, or transferred from treasury; or (d) agree to any of the acts listed above. 6.4 INDEBTEDNESS. The Company shall not incur any indebtedness, sell any debt securities or lend money to or guarantee the indebtedness of any person or entity. The Company shall not restructure or refinance its existing indebtedness. 6.5 DISPOSITION OF ASSETS. The Company shall not sell, transfer, license, lease or otherwise dispose of, or suffer or cause the encumbrance by any lien upon any of its properties or assets, tangible or intangible, or upon any interest therein, except for sales in the ordinary course of its business. 6.6 EMPLOYEES AND COMPENSATION. The Company shall not do, or agree to do, any of the following acts: (a) make any change in compensation payable or to become payable by it to any officer, employee, or representative; (b) make any change in benefits payable to any officer, employee, or representative under any bonus or other contract or commitment; or (c) modify any collective bargaining agreement to which it is a party or by which it may be bound. 6.7 CONSENTS. The Company shall use its best efforts to obtain any consent, authorization or approval of any person or entity required to be obtained or made by any party 8 hereto in connection with the transactions contemplated hereby or the taking of any action in connection with the consummation thereof. 6.8 MAINTENANCE OF INSURANCE. The Company shall maintain its policies of insurance in full force and effect and shall not do, permit or willingly allow to be done any act by which any of the policies may be suspended, impaired or cancelled. VII. INDEMNIFICATION 7.1 INDEMNIFICATION BY THE COMPANY AND THE SHAREHOLDER. The Company and the Shareholder shall indemnify and hold harmless Purchaser against any and all losses, liabilities, claims and expenses, including reasonable attorneys' fees ("Losses"), sustained by Purchaser resulting from, arising out of, or connected with any material inaccuracy in, breach of, or nonfulfillment of any representation, warranty, covenant or agreement made by or other obligation of the Company contained in this Agreement. Notwithstanding the foregoing, the Company and the Shareholder shall not be liable for any of Purchaser's lost profits or any incidental or consequential damages. 7.2 INDEMNIFICATION BY PURCHASER. Purchaser shall indemnify and hold harmless the Company and the Shareholder against any and all Losses sustained by the Company and/or the Shareholder resulting from, arising out of, or connected with any material inaccuracy in, breach of, or nonfulfillment of any representation, warranty, covenant or agreement made by or other obligation of Purchaser contained in this Agreement. Notwithstanding the foregoing, Purchaser shall not be liable for any of the Company's or the Shareholder's lost profits or any incidental or consequential damages. 7.3 PROCEDURES. In the event any third party asserts any claim with respect to any matter as to which the indemnities in this Agreement relate, the party against whom the claim is asserted (the "Indemnified Party") shall give prompt notice to the other party (the "Indemnifying Party"), and the Indemnifying Party shall have the right at its election to take over the defense or settlement of the third party claim at its own expense by giving prompt notice to the Indemnified Party. If the Indemnifying Party does not give such notice and does not proceed diligently so to defend the third party claim within thirty (30) days after receipt of the notice of the third party claim, the Indemnifying Party shall be bound by any defense or settlement that the Indemnified Party may make as to those claims and shall reimburse the Indemnified Party for its Losses and expenses related to the defense or settlement of the third party claim. The parties shall cooperate in defending against any asserted third party claims. For purposes of this Section 7, the indemnification of the Indemnified Party shall also include the indemnification of the Indemnified Party's employees, agents, affiliates, and third parties performing services for the Indemnified Party, and the reference to this Agreement includes any certificate, schedule, list, summary or other information provided or delivered to a party by the Indemnifying Party or its agents and affiliates in connection with this Agreement. 9 VIII. MISCELLANEOUS 8.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents, made and to be performed entirely within the State of California. 8.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by Purchaser and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto or in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by it hereunder as of the date of such certificate or instrument. 8.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. 8.4 ENTIRE AGREEMENT. This Agreement, the exhibits and schedules hereto, and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subject matter hereof and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 8.5 SEVERABILITY. In the event any provision of this Agreement shall be invalid, illegal, or unenforceable, it shall, to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 8.6 AMENDMENT AND WAIVER. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived only with the written consent of the parties hereto. 8.7 NOTICE. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery or on the third day following mailing by registered or certified mail, return receipt requested, postage prepaid, addressed: (a) if to Purchaser, at its address as set forth at the end of this Agreement, or at such other address as such Purchaser shall have furnished to the Company in writing or (b) if to the Company, at its address as set forth at the end of this Agreement, or at such other address as it shall have furnished to Purchaser in writing. 10 8.8 CONSTRUCTION. The parties to this Agreement have participated jointly in the negotiation and drafting of this Agreement and have had competent counsel of their own choosing. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 8.9 HEADINGS. The headings of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 8.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the foregoing Agreement is hereby executed as of the date first above written. PURCHASER ADDRESS: AMERICAN TITLE COMPANY 17911 Von Karman Ave., Ste. 500 Irvine, California 92614 By: /s/ Michael C. Lowther --------------------------------- Michael C. Lowther Its: Chief Executive Officer COMPANY ADDRESS: FIDELITY NATIONAL ASSET RECOVERY SERVICES, INC. 17911 Von Karman Ave., Ste. 300 Irvine, California 92614 By: /s/ M'Liss Jones Kane --------------------------------- M'Liss Jones Kane Its: Senior Vice President and Secretary SHAREHOLDER ADDRESS: NATIONS TITLE, INC. 17911 Von Karman Ave., Ste. 300 Irvine, California 92614 By: /s/ Carl A. Strunk --------------------------------- Carl A. Strunk Its: Executive Vice President and Chief Financial Officer 11 SCHEDULE 3.6 LIST OF MATERIAL CONTRACTS AND AGREEMENTS 12 SCHEDULE 3.7 EXCEPTIONS TO TITLE OF PROPERTIES AND ASSETS 13 EX-2.3 6 EXHIBIT 2.3 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into as of this 31st day of December, 1996, by and among AMERICAN TITLE COMPANY, a California corporation ("Purchaser"), NATIONS TITLE INSURANCE OF ARIZONA, INC., an Arizona corporation ("Company"), and FIDELITY NATIONAL FINANCIAL, INC., a Delaware corporation ("Shareholder") with reference to the following facts and circumstances: RECITALS A. The Shareholder is the record and beneficial owner of all the issued and outstanding shares of common stock of the Company (the "Company Stock"). B. The Shareholder desires to sell, and Purchaser wishes to purchase, all of the issued and outstanding Company Stock upon the terms and subject to the conditions set forth below. AGREEMENT NOW, THEREFORE, in consideration of the premises and the respective representations, warranties, covenants, agreements and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: I. PURCHASE AND SALE OF COMPANY STOCK 1.1 PURCHASE AND SALE. Subject to the terms and conditions set forth in this Agreement, on the Closing Date (as defined below), Shareholder will sell, transfer and convey One Thousand (1,000) shares of the Company Stock, which amount constitutes all of the issued and outstanding shares of the Company Stock, to Purchaser, and Purchaser will acquire the Company Stock from Shareholder. 1.2. PURCHASE PRICE. In consideration of the sale and transfer of the Company Stock by Shareholder, Purchaser shall, in full payment therefor, pay to Shareholder the amount of Ten Thousand Dollars ($10,000) (the "Purchase Price"). 1.3. PAYMENT OF PURCHASE PRICE. Provided that all of the conditions to the Closing set forth in Article V below have been satisfied or waived by the party benefiting therefrom, Purchaser shall pay to Shareholder at the Closing the Purchase Price by delivery of a cashier's or certified bank check at Closing. 1 II. CLOSING 2.1. CLOSING. The closing of the purchase and sale of the Company Stock and the consummation of the other transactions contemplated by this Agreement (the "Closing") shall take place at 10:00 a.m., local time, on December 31, 1996, at the offices of the Shareholder, 17911 Von Karman Avenue, Suite 500, Irvine, California 92614, or at such other date, time and place as the parties hereto may mutually agree upon in writing (the "Closing Date"). 2.2. SHAREHOLDERS' DELIVERIES AT CLOSING. Provided that all of the conditions to the Closing set forth in Article V below have been satisfied or waived by the party benefiting therefrom, Shareholder shall execute and deliver or cause to be delivered to Purchaser at the Closing the following documents: (a) Certificates representing the Company Stock being sold, duly endorsed for transfer, or accompanied by duly executed stock powers, transferring to Purchaser good and marketable title to the Company Stock, free and clear of all liens and encumbrances. (b) The Company's original minute book, such minute book to contain (i) original Articles of Incorporation and all amendments thereto, or copies thereof if the originals are unavailable, (ii) the Company's Bylaws presently in effect, (iii) the Company's stock transfer records together with all available cancelled stock certificates, and (iv) all minutes of meetings or consents in lieu of such meetings of the Company's Board of Directors and shareholders. (c) Such other documents and agreements as may be either reasonable or necessary to carry out the purpose and intention of this Agreement. 2.3. PURCHASER'S DELIVERIES AT CLOSING. Provided that all of the conditions to the Closing set forth in Article V below have been satisfied or waived by the party benefiting therefrom, Purchaser shall execute and deliver or cause to be delivered to Shareholder at the Closing the following documents: (a) A certified or bank cashier's check payable to Shareholder (or, at Purchaser's option, wire transfer funds to an account designated in writing by the Shareholder) in the amount of the Purchase Price. (b) Such other documents and agreements as may be either reasonable or necessary to carry out the purpose and intention of this Agreement. III. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER AND THE COMPANY The Company and the Shareholder, jointly and severally, hereby represent and warrant to Purchaser as follows: 2 3.1 ORGANIZATION AND STANDING; ARTICLES AND BYLAWS. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Arizona, has full power and authority to own its properties and to carry on its business as presently conducted. The Company is duly qualified to transact intrastate business and is in good standing in all jurisdictions in which the nature of its business or its properties makes such qualification necessary. The Company has furnished Purchaser with copies of its Articles of Incorporation and Bylaws, as amended to the date hereof. Said copies are true, correct and complete and contain all amendments through the date of the Closing. 3.2 AUTHORIZATION. All corporate action on the part of Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement and the documents contemplated hereby and the performance of all of the Company's and Shareholder's obligations hereunder and thereunder and for the authorization, issuance, sale and delivery of the Company Stock have been taken or will be taken prior to the Closing. This Agreement and the documents contemplated hereby, when executed and delivered, shall constitute valid and legally binding obligations of the Company enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and subject to the availability of equitable remedies. 3.3 VALIDITY OF COMPANY STOCK. The sale of each of the shares of the Company Stock is not, and will not be, subject to any preemptive rights or rights of first refusal and, when issued, sold and delivered in compliance with the provisions of this Agreement, the Company Stock will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Company Stock may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 3.4 CAPITALIZATION. The authorized capital stock of the Company consists solely of One Million (1,000,000) shares of Class A common stock and One Million (1,000,000) shares of Class B common stock, par value of $1.00 per share, of which 1,000 shares are issued and outstanding. Upon the consummation of the transactions contemplated by this Agreement, the Shareholder shall have transferred and conveyed one hundred percent (100%) of the issued and outstanding shares of Company Stock to Purchaser. All of the issued and outstanding shares of the Company Stock are duly authorized and validly issued, fully paid and nonassessable. There are no outstanding rights of first refusal, preemptive rights or other rights, options, warrants, conversion rights, or other agreements either directly or indirectly for the purchase or acquisition of any shares of the Company Stock. All of the outstanding shares of the Company Stock have been duly and validly issued in compliance with all applicable federal and state securities laws. 3.5 FINANCIAL STATEMENTS. The balance sheet as of December 31, 1996, together with statements of income and cash flow for the year ending December 31, 1996, heretofore delivered to Purchaser, are complete and correct in all material respects, and 3 fairly present the financial condition of the Company and the results of its operation as of the dates and for the periods referred to and have been prepared in accordance with generally accepted accounting principles consistently applied. 3.6 MATERIAL CONTRACTS AND AGREEMENTS. Except as set forth on SCHEDULE 3.6, the Company has no contract, agreement, lease or other commitment, written or oral, absolute or contingent. All material contracts, agreements and instruments to which the Company is a party are valid and binding and in full force and effect in all material respects, and the Company is not in, and to the best of its knowledge, no other party thereto is in material breach thereof. 3.7 TITLE TO PROPERTIES AND ASSETS. Except as set forth on SCHEDULE 3.7, the Company has good and marketable title to its properties and assets, and good title to all its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance, or charge, other than (a) liens resulting from taxes which have not yet become delinquent, or (b) minor liens, encumbrances, or defects of title which do not, individually or in the aggregate, materially detract from the value of the property subject thereto or materially impair their operations. 3.8 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation of any term of its Articles of Incorporation or Bylaws, any mortgage, indenture, contract, agreement, instrument, judgment, decree, order or any statute, rule or regulation applicable to it. The execution, delivery, and performance of and compliance with this Agreement, and the issuance and sale of the Company Stock pursuant hereto, will not result in any violation of any term of the Articles of Incorporation or Bylaws of either or any mortgage, indenture, contract, agreement, instrument, judgment, decree or order, or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance, or charge upon any of the properties or assets of the Company; and there is no term of the Articles of Incorporation or Bylaws of the Company or any mortgage, indenture, contract, agreement, instrument, judgment, decree or order which materially adversely affects, or, so far as the Company may now reasonably foresee, in the future may materially adversely affect, its business, prospects, conditions, affairs, operations or any of its properties or assets. 3.9 LITIGATION. There are no actions, proceedings, or investigations before any court or administrative agency pending or currently threatened against or with respect to the Company (or any basis therefor known to the Company or the Shareholder), which question the validity of this Agreement or any action taken or to be taken in connection herewith, or which, the Company individually or in the aggregate, might result in a material adverse change in the business, prospects, conditions, affairs, or operations of the Company or in any of its properties or assets, or in any material impairment of the right or ability of each to carry on its business as now conducted or as proposed to be conducted, or in any material liability on the part of the Company. The Company is not a party or subject to, and none of its assets are bound by, the provisions of any order, 4 writ, injunction, judgment, or decree of any court or governmental agency or instrumentality. 3.10 TAXES. The Company has no material liability for any federal, state or local taxes, except for taxes which have accrued and are not yet payable. The Company has filed all tax returns required to be filed by it and has paid all income taxes payable by it which have become due pursuant to such tax returns and all other taxes and assessments payable by it which have become due, other than those not yet delinquent and except for those contested in good faith and for which adequate reserves have been established. The Company has paid, or has provided adequate reserves (in the good faith judgment of the management of the Company) for the payment of, all federal and state income or premium taxes applicable for all prior fiscal years and for the current fiscal year to the date hereof. 3.11 EMPLOYEES. No employee of the Company is obligated under any contract (including licenses, covenants, or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any Court or administrative agency that would conflict with such employee's obligation to use his or her best effort to promote the interests of the Company or that would conflict with its business as conducted or as proposed to be conducted. No employee of the Company is in violation of any term of any employment contract, or any other contract or agreement relating to the relationship of any such employee with it or any previous employer. The Company has no collective bargaining agreements with any of its employees and, to the best knowledge of the Company and the Shareholder, there is no labor union organizing activity pending or threatened with respect to the Company. 3.12 GOVERNMENTAL CONSENTS. All consents, approvals, orders, or authorizations of, or registrations, qualifications, designations, declarations or filings with, any governmental authority, required on the part of Company and/or Shareholder in connection with the valid execution and delivery of this Agreement and the offer, sale or issuance of the Company Stock, or the consummation of any other transaction contemplated hereby have been obtained, or will be effective at the Closing, except for notices required or permitted to be filed with certain state and federal securities commissions after the Closing, which notices will be filed on a timely basis. 3.13 OPERATING RIGHTS. The Company has all operating authority, licenses, franchises, permits, certificates, consents, rights and privileges (collectively, "Licenses") as are necessary or appropriate to the operation of its business as now conducted and as proposed to be conducted. Such Licenses are in full force and effect, no violations have been or are expected to have been recorded in respect of any such Licenses, and no proceeding is pending or threatened that could result in the revocation or limitation of any such Licenses. The Company has conducted its business so as to comply in all material respects with all such Licenses. 3.14 FULL DISCLOSURE. Neither this Agreement, the representations and warranties by the Company contained herein, the exhibits or schedules hereto, nor any other written 5 statement or certificate delivered or to be furnished to Purchaser in connection herewith, when read together, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. There is no fact known to the Company which has not been disclosed to Purchaser that would materially adversely affect the Company's business or financial condition or its ability to perform its obligations under this Agreement. IV. REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to the Company and Shareholder as follows: 4.1 ORGANIZATION AND GOOD STANDING. Purchaser has been duly organized and is existing as a corporation in good standing under the laws of the State of California with full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. 4.2 DUE EXECUTION. This Agreement has been duly authorized, executed and delivered by it and, upon due execution and delivery by Purchaser, this Agreement and the agreements contemplated hereby will be valid and binding agreements of Purchaser, enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and subject to the availability of equitable remedies. 4.3 NO CONFLICTS. The execution, delivery and performance of this Agreement by Purchaser and the consummation by Purchaser of the transactions contemplated hereby will not conflict with or result in the violation of the provisions of the Articles of Incorporation or Bylaws of Purchaser. 4.4 INVESTMENT INTENT. Purchaser is acquiring the Company Stock for investment purposes only, for its own account and not as a nominee or agent for any other person, and not with a view to or for resale in connection with any distribution thereof within the meaning of the Securities Act of 1933. V. CONDITIONS TO CLOSING 5.1. CONDITIONS TO OBLIGATIONS OF PURCHASER AT CLOSING. Purchaser's obligations hereunder are subject to the fulfillment, at or prior to the Closing, of all of the following conditions: (a) Representations and Warranties True: Performance of Obligations. The representations and warranties made by the Company and the Shareholder in Section 3 hereof shall be true and correct on the Closing Date with the same force and 6 effect as if they had been made on and as of said date; and the Company and the Shareholder shall have performed all of the obligations and complied with each and all of the covenants required to be performed or complied with by them on or prior to the Closing. (b) MATERIAL ADVERSE CHANGE. There shall not have occurred any material adverse change to the business, assets, financial condition or prospects of the Company. (c) AUTHORIZATIONS AND APPROVALS. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with transactions contemplated by this Agreement shall have been duly obtained and shall be effective on and as of the Closing. No stop order or other order enjoining the sale of the Company Stock shall have been issued and no proceedings for such purpose shall be pending. (d) DELIVERY OF DOCUMENTS. The Company shall have delivered to Purchaser all share certificates evidencing the Company Stock and such other documents and instruments as Purchaser may reasonably request. (e) CERTIFICATES. The President and Chief Financial Officer of the Company shall deliver to Purchaser a certificate in which they certify that all of their representations and warranties are true and correct, that all obligations to be performed by them pursuant to this Agreement prior to Closing have been performed, and that all of the conditions to Purchaser's obligations provided for in this Section 5.1 have been satisfied. 5.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY AT THE CLOSING. The Company's obligations hereunder are subject to the fulfillment, at or prior to the Closing, of all of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by Purchaser in Section 4 hereof shall be true and correct at the Closing Date, with the same force and effect as if they had been made on and as of said date; and Purchaser shall have performed all obligations herein required to be performed by it at or prior to the Closing. (b) AUTHORIZATIONS AND APPROVALS. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the transactions contemplated by this Agreement shall have been duly obtained and shall be effective on and as of the Closing. No stop order or other order enjoining the sale of the Company Stock shall have been issued and no proceedings for such purpose shall be pending or threatened by the Securities and Exchange Commission, the California Commissioner of Corporations, or 7 any similar officer of any other federal or state agency having jurisdiction over this transaction. VI. CONDUCT OF BUSINESS PENDING CLOSING During the period commencing on the date hereof and continuing through the Closing Date, the Company and Shareholder jointly and severally covenant and agree that: 6.1 QUALIFICATION. The Company shall maintain all qualifications to transact business and remain in good standing in its jurisdiction of incorporation and in the foreign jurisdictions in which it is qualified to transact business. 6.2 ORDINARY COURSE. The Company shall conduct its business in the ordinary course and shall not make or institute any unusual or novel methods of management, accounting, or operation that vary materially from those methods used by the Company as of the date of this Agreement. The Company will use its best efforts to preserve its business organizations intact, to keep available to Company its present officers and employees, and to preserve its present relationships with suppliers, customers, and others having business relationships with the Company. 6.3 CORPORATE MATTERS. The Company shall not (a) amend its Articles of Incorporation or Bylaws; (b) issue any shares of its capital stock; (c) issue or create any warrants, obligations, subscriptions, options, convertible securities, or other commitments under which any additional shares of its capital stock of any class might be directly or indirectly authorized, issued, or transferred from treasury; or (d) agree to any of the acts listed above. 6.4 INDEBTEDNESS. The Company shall not incur any indebtedness, sell any debt securities or lend money to or guarantee the indebtedness of any person or entity. The Company shall not restructure or refinance its existing indebtedness. 6.5 DISPOSITION OF ASSETS. The Company shall not sell, transfer, license, lease or otherwise dispose of, or suffer or cause the encumbrance by any lien upon any of its properties or assets, tangible or intangible, or upon any interest therein, except for sales in the ordinary course of its business. 6.6 EMPLOYEES AND COMPENSATION. The Company shall not do, or agree to do, any of the following acts: (a) make any change in compensation payable or to become payable by it to any officer, employee, or representative; (b) make any change in benefits payable to any officer, employee, or representative under any bonus or other contract or commitment; or (c) modify any collective bargaining agreement to which it is a party or by which it may be bound. 6.7 CONSENTS. The Company shall use its best efforts to obtain any consent, authorization or approval of any person or entity required to be obtained or made by any party 8 hereto in connection with the transactions contemplated hereby or the taking of any action in connection with the consummation thereof. 6.8 MAINTENANCE OF INSURANCE. The Company shall maintain its policies of insurance in full force and effect and shall not do, permit or willingly allow to be done any act by which any of the policies may be suspended, impaired or cancelled. VII. INDEMNIFICATION 7.1 INDEMNIFICATION BY THE COMPANY AND THE SHAREHOLDER. The Company and the Shareholder shall indemnify and hold harmless Purchaser against any and all losses, liabilities, claims and expenses, including reasonable attorneys' fees ("Losses"), sustained by Purchaser resulting from, arising out of, or connected with any material inaccuracy in, breach of, or nonfulfillment of any representation, warranty, covenant or agreement made by or other obligation of the Company contained in this Agreement. Notwithstanding the foregoing, the Company and the Shareholder shall not be liable for any of Purchaser's lost profits or any incidental or consequential damages. 7.2 INDEMNIFICATION BY PURCHASER. Purchaser shall indemnify and hold harmless the Company and the Shareholder against any and all Losses sustained by the Company and/or the Shareholder resulting from, arising out of, or connected with any material inaccuracy in, breach of, or nonfulfillment of any representation, warranty, covenant or agreement made by or other obligation of Purchaser contained in this Agreement. Notwithstanding the foregoing, Purchaser shall not be liable for any of the Company's or the Shareholder's lost profits or any incidental or consequential damages. 7.3 PROCEDURES. In the event any third party asserts any claim with respect to any matter as to which the indemnities in this Agreement relate, the party against whom the claim is asserted (the "Indemnified Party") shall give prompt notice to the other party (the "Indemnifying Party"), and the Indemnifying Party shall have the right at its election to take over the defense or settlement of the third party claim at its own expense by giving prompt notice to the Indemnified Party. If the Indemnifying Party does not give such notice and does not proceed diligently so to defend the third party claim within thirty (30) days after receipt of the notice of the third party claim, the Indemnifying Party shall be bound by any defense or settlement that the Indemnified Party may make as to those claims and shall reimburse the Indemnified Party for its Losses and expenses related to the defense or settlement of the third party claim. The parties shall cooperate in defending against any asserted third party claims. For purposes of this Section 7, the indemnification of the Indemnified Party shall also include the indemnification of the Indemnified Party's employees, agents, affiliates, and third parties performing services for the Indemnified Party, and the reference to this Agreement includes any certificate, schedule, list, summary or other information provided or delivered to a party by the Indemnifying Party or its agents and affiliates in connection with this Agreement. 9 VIII. MISCELLANEOUS 8.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents, made and to be performed entirely within the State of California. 8.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by Purchaser and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto or in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by it hereunder as of the date of such certificate or instrument. 8.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. 8.4 ENTIRE AGREEMENT. This Agreement, the exhibits and schedules hereto, and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subject matter hereof and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 8.5 SEVERABILITY. In the event any provision of this Agreement shall be invalid, illegal, or unenforceable, it shall, to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 8.6 AMENDMENT AND WAIVER. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived only with the written consent of the parties hereto. 8.7 NOTICE. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery or on the third day following mailing by registered or certified mail, return receipt requested, postage prepaid, addressed: (a) if to Purchaser, at its address as set forth at the end of this Agreement, or at such other address as such Purchaser shall have furnished to the Company in writing or (b) if to the Company, at its address as set forth at the end of this Agreement, or at such other address as it shall have furnished to Purchaser in writing. 10 8.8 CONSTRUCTION. The parties to this Agreement have participated jointly in the negotiation and drafting of this Agreement and have had competent counsel of their own choosing. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 8.9 HEADINGS. The headings of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 8.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the foregoing Agreement is hereby executed as of the date first above written. PURCHASER ADDRESS: American Title Company 17911 Von Karman Ave., Ste. 500 Irvine, California 92614 By. /s/ Michael C. Lowther ------------------------------ Michael C. Lowther Its: Chief Executive Officer COMPANY ADDRESS: Nations Title Insurance of Arizona, Inc. 17911 Von Karman Ave., Ste. 300 Irvine, California 92614 By: /s/ M'Liss Jones Kane ------------------------------ M'Liss Jones Kane Its: Senior Vice President and Secretary SHAREHOLDER ADDRESS: Fidelity National Financial, Inc. 17911 Von Karman Ave., Ste. 300 Irvine, California 92614 By: /s/ Carl A. Strunk ------------------------------ Carl A. Strunk Its: Executive Vice President and Chief Financial Officer 11 SCHEDULE 3.6 LIST OF MATERIAL CONTRACTS AND AGREEMENTS 12 SCHEDULE 3.7 EXCEPTIONS TO TITLE OF PROPERTIES AND ASSETS 13 EX-2.4 7 EXHIBIT 2.4 STOCK PURCHASE AGREEMENT BY AND AMONG FIDELITY NATIONAL TITLE INSURANCE COMPANY OF NEW YORK, NATIONAL TITLE INSURANCE OF NEW YORK, INC. AND AMERICAN TITLE COMPANY DATED AS OF MARCH 16, 1998
TABLE OF CONTENTS PAGE RECITALS ............................................................... 1 INDEX OF EXHIBITS....................................................... iv INDEX OF SCHEDULES...................................................... iv ARTICLE I Certain Definitions ............................................... 1 ARTICLE 2 The Basic Transaction.............................................. 6 2.1 Purchase and Sale of Company Stock ................................ 6 2.2 Consideration at Closing .......................................... 6 2.3 Certificate Delivery Requirement................................... 6 ARTICLE 3 Closing............................................................ 6 3.1. Closing ........................................................... 6 3.2 Seller's Deliveries at Closing .................................... 7 3.3 Buyer's Deliveries at Closing ..................................... 7 3.4 Conditions of Buyer ............................................... 7 3.5 Conditions of Seller and Company .................................. 9 ARTICLE 4 Representations and Warranties of Company and Shareholders ........ 10 4.1 Organization and Standing; Articles and Bylaws .................... 10 4.2 Authorization ..................................................... 10 4.3 Subsidiaries ...................................................... 10 4.4 Capitalization .................................................... 10 4.5 Financial Statements .............................................. 11 4.6 Material Contracts ................................................ 11 4.7 Assets Other Than Real Property.................................... 12 4.8 Real Property ..................................................... 12 4.9 No Conflicts ...................................................... 13 4.10 Litigation ........................................................ 13 4.11 Taxes ............................................................. 13 i 4.12 Employees. ........................................................ 14 4.13 Consents .......................................................... 14 4.14 Operating Rights .................................................. 14 4.15 Compliance with Applicable Laws ................................... 15 4.16 Insurance ......................................................... 15 4.17 Absence of Changes ................................................ 15 4.18 Employee Plans .................................................... 16 4.19 Intellectual Property Rights ...................................... 16 4.20 Environment, Health and Safety .................................... 17 4.21 Certain Transactions............................................... 17 4.22 Bank Accounts; Powers of Attorney.................................. 17 4.23 Brokers' Fees ..................................................... 18 4.24 Full Disclosure ................................................... 18 ARTICLE 5 Representations and Warranties of Buyer............................ 18 5.1 Organization and Standing; Articles and Bylaws .................... 18 5.2 Authorization ..................................................... 18 5.3 No Conflicts ...................................................... 19 5.4 Governmental Consents.............................................. 19 5.5 Brokers' Fees ..................................................... 19 5.6 Full Disclosure ................................................... 19 ARTICLE 6 Conduct of Business Pending Closing ............................... 19 6.1 Qualification...................................................... 19 6.2 Ordinary Course ................................................... 19 6.3 Corporate Changes ................................................. 20 6.4 Indebtedness ...................................................... 20 6.5 Accounting......................................................... 20 6.6 Compliance with Legal Requirements ................................ 20 6.7 Disposition of Assets ............................................. 20 6.8 Compensation ...................................................... 20 6.9 Modification or Breach of Agreements; New Agreements .............. 21 6.10 Capital Expenditures............................................... 21 6.11 Consents .......................................................... 21 6.12 Maintenance of Insurance........................................... 21 6.13 Discharge.......................................................... 21 6.14 Claims............................................................. 21 6.15 Taxes and Tax Assessments ......................................... 21 ii ARTICLE 7 Additional Covenants. ............................................. 22 7.1 Covenants of Seller and Company ................................... 22 7.2 Covenants of Buyer ................................................ 23 7.3 Tax Advice......................................................... 23 7.4 Access and Information ............................................ 23 7.5 Expenses .......................................................... 24 7.6 Certain Notifications.............................................. 24 7.7 Publicity.......................................................... 24 7.8 Further Assurances................................................. 24 7.9 Post-Closing Employment ........................................... 25 7.10 Employee Benefits ................................................. 25 7.11 Post-Closing Underwriting and Other Contractual Obligations ....... 25 7.12 Use of Name........................................................ 26 ARTICLE 8 Termination, Amendment and Waiver.................................. 27 8.1 Termination ....................................................... 27 8.2 Effect of Termination ............................................. 27 8.3 Amendment ......................................................... 27 8.4 Waiver............................................................. 27 ARTICLE 9 Indemnification ................................................... 28 9.1 Survival of Representations and Warranties ........................ 28 9.2 Indemnification by Seller ......................................... 28 9.3 Indemnification by Buyer........................................... 28 9.4 Third-Party Claims................................................. 29 9.5 Additional Indemnification Provisions.............................. 29 9.6 Indemnification Non-Exclusive ..................................... 29 9.7 Access and Information ............................................ 29 9.8 Mitigation......................................................... 30 9.9 Right of Set-Off................................................... 30 ARTICLE 10 General Provisions ................................................ 30 10.1 Governing Law ..................................................... 30 10.2 Successors and Assigns............................................. 30 10.3 Entire Agreement................................................... 30 iii 10.4 Severability....................................................... 31 10.5 Notice ............................................................ 31 10.6 Construction ...................................................... 31 10.7 Headings .......................................................... 32 10.8 Counterparts ...................................................... 32 10.9 Recitals, Schedules, and Exhibits.................................. 32
INDEX OF EXHIBITS EXHIBIT "A" - Promissory Note EXHIBIT "B" - List of Counties LIST OF SCHEDULES Disclosure Schedule iv STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into as of this 16th day of March, 1998, by and among FIDELITY NATIONAL TITLE INSURANCE COMPANY OF NEW YORK, a New York corporation ("Seller"); NATIONAL TITLE INSURANCE COMPANY OF NEW YORK, INC., a New York corporation ("Company"); and AMERICAN TITLE COMPANY, a California corporation ("Buyer"). Seller, Company, and Buyer are sometimes referred to collectively herein as the "Parties" or singularly as a "Party." RECITALS A. Seller is the record and beneficial owner of all of the outstanding capital stock of Company (the "Company Stock"). B. This Agreement contemplates the acquisition by Buyer from Seller of all of the Company Stock. C. The respective Boards of Directors of Buyer and Seller believe that this Agreement and the transactions contemplated herein are advisable and in the best interests of their respective shareholders. NOW, THEREFORE, in consideration of the premises and the respective representations, warranties, covenants, agreements and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: ARTICLE I CERTAIN DEFINITIONS Unless the context otherwise requires, the terms defined in this Article 1 shall have the meanings herein specified for all purposes of this Agreement, applicable to both the singular and the plural forms of such terms. Any capitalized term used in this Agreement and not ascribed a meaning in this Article 1 shall have the meaning ascribed to such term elsewhere in this Agreement. "AFFILIATE" means, with respect to a Person, any other Person that directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person. 1 "BASIS" means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction that forms or would reasonably form the basis for any specified consequence. "BENEFIT ARRANGEMENT" mean any form of current or deferred compensation, bonus, stock option, stock appreciation right, severance pay, salary continuation, pension, profit-sharing, retirement or incentive plan, practice or arrangement, any group or individual disability, medical, dental, health, hospitalization, life insurance or other insurance plans or related benefits, or any other welfare or similar plan or arrangement for the benefit of any director, officer or employee, whether active or retired, or for any class or classes of such directors, officers or employees. "CLAIM" means any actual or threatened claim, action, suit, arbitration, hearing, inquiry, proceeding (including administrative and informal proceedings), complaint, charge, investigation or audit by or before any Governmental Entity or arbitrator and any appeal from any of the foregoing. "CLOSING" has the meaning set forth in Section 3.1, below. "CLOSING DATE" has the meaning set forth in Section 3.1, below. "CODE" means the Internal Revenue Code of 1986, as amended. "COMPANY STOCK" has the meaning set forth in Recital A. "CONFIDENTIAL INFORMATION" means any information concerning the businesses and affairs of any of the Parties that is not already generally available to the public. "DISCLOSURE SCHEDULE" means the Schedules to this Agreement required to be prepared by Seller and Company and delivered to Buyer. "EMPLOYEE PLAN" means any "employee benefit plan," as defined in Section 3(3) of ERISA, which is subject to any provisions of ERISA and covers any employee, whether active or retired. "ENVIRONMENTAL, HEALTH, AND SAFETY LAWS" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, and the Occupational Safety and Health Act of 1970, each as amended, together with all Legal Requirements concerning pollution or protection of the environment, public health and safety, or employee health and safety, including Legal Requirements relating to emissions, discharges, releases, or threatened releases of pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials or wastes into ambient air, surface water, ground water, or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, 2 disposal, transport, or handling of pollutants, contaminants, or chemical, industrial, toxic materials or other Hazardous Materials. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "GAAP" means United States generally accepted accounting principles, as amended from time to time. "GOVERNMENTAL ENTITY" means any court, federal, state, local or foreign government or any administrative agency or commission or any other governmental authority or instrumentality whatsoever. "HAZARDOUS SUBSTANCES" means any hazardous, toxic or infectious substance, material, gas or waste which is regulated by any Governmental Entity. "INDEBTEDNESS" means, when used with reference to any Person, without duplication, (i) any Liability of such Person created or assumed by such Person, or any Subsidiary thereof, (A) for borrowed money, (B) evidenced by a bond, note, debenture, or similar instrument (including a purchase money obligation, deed of trust or mortgage) given in connection with the acquisition of, or exchange for, any property or assets (other than inventory or similar property acquired and consumed in the Ordinary Course of Business), including securities and other indebtedness, (C) in respect of letters of credit issued for such Person's account and "swaps" of interest and currency exchange rates (and other interest and currency exchange rate hedging agreements) to which such Person is a party or (D) for the payment of money as lessee under leases that should be, in accordance with GAAP, recorded as capital leases for financial reporting purposes; (ii) any Liability of others described in the preceding clause (i) guaranteed as to payment of principal or interest by such Person or in effect guaranteed by such Person through an agreement, contingent or otherwise, to purchase, repurchase, or pay the related Indebtedness or to acquire the security therefor; (iii) all Liabilities or obligations secured by a Lien upon property owned by such Person and upon which Liabilities or obligations such Person customarily pays interest or principal, whether or not such Person has assumed or become liable for the payment of such liabilities or obligations; and (iv) any amendment, renewal, extension, revision or refunding of any such Liability or obligation. "INTELLECTUAL PROPERTY" means (i) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissurances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof; (ii) all trademarks, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith; (iii) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith; (iv) all trade secrets and confidential business information (including ideas, research and development, know-how, 3 formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals); (v) all computer software (including data and related documentation); (vi) all other proprietary rights; and (vii) all copies and tangible embodiments thereof (in whatever form or medium). "KNOWLEDGE" means that Seller is actually aware of the fact or matter in question or reasonably should be aware of the fact or matter in question after a reasonable investigation concerning such fact or matter. "LEGAL REQUIREMENT" means any statute, law, ordinance, rule, regulation, permit, order, writ, judgment, injunction, decree or award issued, enacted or promulgated by any Governmental Entity or any arbitrator with binding authority on a Party or Parties, as the case may be. "LIABILITY" means any liability (whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including, but not limited to, any liability for Taxes. "LICENSES" has the meaning set forth in Section 4.14, below. "LIEN" means all liens (including judgment and mechanics' liens, regardless of whether liquidated), mortgages, assessments, security interests, easements, pledges, trusts (constructive or otherwise), deeds of trust, options or other charges, encumbrances or restrictions. "LOSSES" means any and all losses, damages, demands, assessments, adjustments, judgments, settlement payments, deficiencies, penalties, fines, interest (including interests from the date of such damages), and costs and expenses (including without limitation reasonable attorneys' fees and disbursements of every kind, nature and description). "MATERIAL ADVERSE EFFECT" means any event, effect, development, occurrence or circumstance, individually or when taken together with all other such events, effects, developments, occurrences or circumstances, causing, resulting in or having a material adverse effect on (i) the business, assets, results of operations, properties or condition (financial or otherwise) of Buyer, Seller or Company (as applicable); or (ii) the legal right or authorization of Buyer, Seller or Company (as applicable) to continue to operate its business as a going concern. "MATERIAL CONTRACTS" means (i) any union contract or any employment or consulting contract or arrangement providing for future compensation, written or oral, with any officer, director or employee which is not terminable on thirty (30) days notice or less without penalty or obligation to make payments related to such termination; (ii) any plan contract or arrangement, whether written or oral, providing for bonuses, pensions, deferred compensation, severance pay or benefits, retirement payments, profit sharing or the like; (iii) any existing distribution agreement, volume purchase agreement, or similar agreement (but excluding individual customer 4 purchase orders) in which the annual amount involved in fiscal 1997 exceeded or is expected to exceed $25,000 in aggregate amount; (iv) any individual customer purchase order for the sale of goods or services in excess of $25,000; (v) except for trade indebtedness incurred in the Ordinary Course of Business, any Indebtedness incurred in the acquisition of companies or other entities or Indebtedness for borrowed money by way of direct loan, sale of debt securities, purchase money obligation, conditional sale, guarantee, leasehold obligations or otherwise; (vi) any contract containing covenants purporting to limit in any way the freedom of Company to compete in any line of business or in any geographic area; (vii) any agreement of indemnification other than those entered into in connection with the sale of products or services of Company in the Ordinary Course of Business; (viii) any agreement, contract or commitment relating to capital expenditures and which involve future payments in excess of $25,000 in the aggregate by Company; (ix) any agreements, contracts or commitments relating to the disposition of assets, including any intangible assets or intellectual property rights (other than inventory), which involve payments in excess of $25,000 in the aggregate by Company; (x) any contracts with a Governmental Entity subject to price redetermination or renegotiation; or (xi) all insurance policies of Company; (xii) all equipment leases of Company which involve payments in excess of $10,000 in the aggregate; or (xiii) any other agreement, contract or commitment which is material to Company. "ORDINARY COURSE OF BUSINESS" means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency and, where appropriate, in accordance with formula). "PARTY" has the meaning set forth in the preamble to this Agreement. "PERMITTED LIENS" means (i) mechanic's, materialmen's, and similar liens; (ii) liens for Taxes not yet due and payable or for Taxes that the taxpayer is contesting in good faith through appropriate proceedings; and (iii) purchase money liens and liens securing rental payments under capital lease arrangements. "PERSON" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof), or any other legal entity. "SUBSIDIARY" means any corporation with respect to which a specified Person (or a Subsidiary thereof) owns a majority of the common stock or has the power to vote or direct the voting of sufficient securities to elect a majority of the directors. "TAX" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs, duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value 5 added, alternative or add-on minimum, estimated, or other tax or contribution of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "TAX RETURN" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. ARTICLE 2 THE BASIC TRANSACTION 2.1 PURCHASE AND SALE OF COMPANY STOCK. On the Closing Date, subject to the terms and conditions of this Agreement, Buyer shall acquire from Seller, and Seller shall sell to Buyer, the Company Stock, free and clear of all Liens, Claims, Indebtedness and Security Interests. 2.2 CONSIDERATION AT CLOSING. In consideration for the acquisition of the Company Stock in accordance with Section 2.1, above, Buyer shall, on the Closing Date, (i) pay to Seller the cash sum of One Million Two Hundred Fifty Thousand Dollars ($1,250,000) by delivery, at Buyer's option, of a cashier's or certified bank check, or by wire transfer to an account or accounts designated by Seller; and (ii) deliver to Seller that certain Promissory Note in the principal amount of Two Million Dollars ($2,000,000), a copy of which is attached hereto as Exhibit "A." 2.3 CERTIFICATE DELIVERY REQUIREMENT. On the Closing Date, Seller shall deliver to Buyer the certificate(s) (the "Certificates") representing the Company Stock, duly endorsed in blank by Seller, or accompanied by blank stock powers, and with all necessary transfer tax and other revenue stamps affixed and canceled. ARTICLE 3 CLOSING 3.1. CLOSING. The consummation of the purchase and sale of the Company Stock and the other transactions contemplated by this Agreement (the "Closing"), shall take place at the offices of Buyer, located at 2510 North Red Hill Avenue, Santa Ana, California 92705, on such date (the "Closing Date") and at such time as may be mutually designated by the Parties within five (5) business days following the satisfaction or waiver of the conditions set forth in Sections 3.4 and 3.5, below (including, without limitation, the "Requisite Regulatory Approvals," as defined below), or such other date, time, place and manner as the Parties may mutually agree. 6 3.2 SELLER'S DELIVERIES AT CLOSING. Provided that all of the conditions to the Closing set forth in Sections 3.4 and 3.5, below, have been satisfied or waived by the Party benefiting therefrom, Seller shall execute and deliver or cause to be delivered to Buyer at or prior to the Closing the following documents: (a) The Certificates, in accordance with Section 2.3 above; (b) Company's original minute book, such minute book to contain (i) original Articles of Incorporation and all amendments thereto, or copies thereof if the originals are unavailable; (ii) Company's Bylaws presently in effect; (iii) Company's stock transfer records together with all available canceled stock certificates; and (iv) all minutes of meetings or consents in lieu of such meetings of Company's Board of Directors and shareholders. Each of the above items shall be certified by the Secretary of Seller; and (c) Minutes of the Board of Directors of Seller, certified by the Secretary of Seller, authorizing and approving this agreement and the transactions contemplated herein; (d) Resignations of all of the officers and directors of Company effective as of the Closing Date; (e) Within thirty (30) days after the execution of this Agreement, the Disclosure Schedule required under Article 4, below; and (f) Such other documents and instruments as may be specified in this Agreement or otherwise reasonably requested by Buyer in order to consummate the transactions contemplated hereby. 3.3 BUYER'S DELIVERIES AT CLOSING. Provided that all of the conditions to the Closing set forth in Sections 3.4 and 3.5, below, have been satisfied or waived by the Party benefiting therefrom, Buyer shall execute and deliver or cause to be delivered to Seller at the Closing: (a) The cash and the Promissory Note in accordance with Section 2.2, above; and (b) Such other documents and instruments as may be specified in this Agreement or otherwise reasonably requested by Seller in order to consummate the transactions contemplated hereby. 3.4 CONDITIONS OF BUYER. Buyer's obligations hereunder to consummate the transactions contemplated hereby are subject to the satisfaction, at or prior to the Closing, of all of the following conditions: 7 (a) REPRESENTATIONS AND WARRANTIES TRUE: PERFORMANCE OF OBLIGATIONS. The representations and warranties made by Seller in this Agreement shall be true, correct and complete in all material respects on and as of the Closing Date with the same force and effect as if they had been made on and as of said date; and Seller and Company shall have in all material respects performed all of the obligations and complied with each and all of the covenants required to be performed or complied with by them on or prior to the Closing Date. (b) MATERIAL ADVERSE EFFECT. No act, event or condition shall have occurred after the date hereof which Buyer determines in its reasonable discretion has had or could have a Material Adverse Effect on Company. (c) AUTHORIZATIONS. APPROVALS AND CONSENTS. All authorizations, approvals or consents from third parties, including from any Governmental Entity, landlord or other Person, necessary for the consummation of the transactions contemplated hereby shall have been obtained. (d) DELIVERIES. Buyer shall have received from Seller the delivery obligations set forth in Sections 3.2, above. (e) DISCLOSURE SCHEDULE. Buyer shall be satisfied in its reasonable discretion with the Disclosure Schedule to be delivered by Seller in accordance with Section 3.2(e), above, and shall notify Seller of such approval or disapproval within ten (10) business days of receipt of the Disclosure Schedule. (f) NO CLAIMS. There shall not be instituted and pending or threatened any Claims before any Governmental Entity (i) challenging or otherwise seeking to restrain or prohibit the consummation of the transactions contemplated hereby, or (ii) seeking to prohibit the direct or indirect ownership or operation by Buyer of all or a material portion of the capital stock, business or assets of Company, or to compel Buyer or Company to dispose of or hold separate all or a material portion of the capital stock, business or assets of Company or Buyer. (g) CORPORATE ACTION. All corporate and other proceedings and actions taken in connection with the transactions contemplated hereby and all certificates, opinions, agreements, instruments, releases and documents referenced herein or incident to the transactions contemplated hereby shall be in form and substance satisfactory to Buyer in its reasonable discretion. (h) REQUISITE REGULATORY APPROVALS. All notices or filings required to be made, all authorizations, permits, certificates, registrations, consents, approvals or orders required to be obtained, and all waiting periods required to expire, prior to the consummation of the transactions contemplated by this Agreement under applicable federal law of the United States or applicable laws of any state having jurisdiction over the transactions contemplated by this Agreement or the businesses conducted by the Parties or any Affiliate or Subsidiary of any 8 Party, including those described in Section 7.1(g), below, (collectively, the "Requisite Regulatory Approvals") shall have been obtained or expired, as the case may be, without the imposition of any condition which is materially burdensome upon Buyer or any Party or Person to be affected by such condition. (i) DUE DILIGENCE INVESTIGATION. Within forty (40) days after the date of this Agreement, Buyer shall have concluded (through its representatives, accountants, counsel and other experts) its due diligence investigation of the business, condition (financial, legal and other), properties, assets, prospects, operations and affairs of Company (as contemplated by Section 7.4, below) and shall, in its reasonable discretion, be satisfied with the results thereof, which results shall promptly be communicated to Seller at the end of such forty (40) day period. 3.5 CONDITIONS OF SELLER AND COMPANY. Seller's and Company's obligations hereunder to consummate the transactions contemplated hereby are subject to the satisfaction, at or prior to the Closing, of the following conditions: (a) REPRESENTATIONS AND WARRANTIES TRUE: PERFORMANCE OF OBLIGATIONS. The representations and warranties made by Buyer in this Agreement shall be true, correct and complete in all material respects on and as of the Closing Date with the same force and effect as if they had been made on and as of said date; and Buyer shall have in all material respects performed all of the obligations and complied with each and all of the covenants required to be performed or complied with by it on or prior to the Closing Date. (b) MATERIAL ADVERSE EFFECT. No act, event or condition shall have occurred after the date hereof which Seller determines in its reasonable discretion has had or could have a Material Adverse Effect on Buyer. (c) AUTHORIZATIONS, APPROVALS AND CONSENTS. All authorizations, approvals or consents, if any, from third parties, including from any Governmental Entity or other Person, required to be obtained by Buyer shall have been obtained. (d) DELIVERIES. Seller shall have received from Buyer the delivery obligations set forth in Section 3.3, above. (e) NO CLAIMS. There shall not be instituted and pending or threatened any Claims before any Governmental Entity (i) challenging or otherwise seeking to restrain or prohibit the consummation of the transactions contemplated hereby, or (ii) seeking to prohibit the direct or indirect ownership or operation by Buyer of all or a material portion of the business or assets of Company, or to compel Buyer or Company to dispose of or hold separate all or a material portion of the business or assets of Company or Buyer. 9 (f) REQUISITE REGULATORY APPROVALS. The Requisite Regulatory Approvals, including those described in Section 7.1(g), below, shall have been obtained or expired, as the case may be, without the imposition of any condition which is materially burdensome upon Seller, Company or any Party or Person to be affected by such condition. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer that (except for changes contemplated by this Agreement and except as set forth in the Disclosure Schedule attached hereto), each of the following statements is true, correct and complete as of the date of this Agreement and will be true, correct and complete as of the Closing Date (each such statement to be made again by Seller on that date with the Closing Date being substituted for the date of this Agreement throughout this Article 4): 4.1 ORGANIZATION AND STANDING: ARTICLES AND BYLAWS. Seller and Company are corporations duly organized, validly existing and in good standing under the laws of the State of New York, have full power and authority to own their respective assets and properties and to carry on their respective business as presently conducted. Company is duly qualified and authorized to do business, and is in good standing as a foreign corporation, in each jurisdiction where the nature of its activities and of its properties (both owned and leased) make such qualification necessary, except where the failure to so qualify would not have a Material Adverse Effect. 4.2 AUTHORIZATION. All corporate action on the part of Seller and Company, and their respective officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement and the documents contemplated hereby, the performance of all of Seller's and Company's obligations hereunder and thereunder, and for the transfer of the Company Stock have been taken or will be taken prior to the Closing. This Agreement and the documents contemplated hereby, when executed and delivered, shall constitute valid and legally binding obligations of Seller and Company enforceable in accordance with their respective terms. 4.3 SUBSIDIARIES. Company has no Subsidiaries and does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity, nor is the Company, directly or indirectly, a participant in any joint venture, partnership or other entity. 4.4 CAPITALIZATION. The authorized capital stock of Company consists of 200,000 shares of Common Stock, par value $7,500 per share, of which 123,949 shares are issued and outstanding as of the date of this Agreement. All of the shares of Company Stock have been 10 duly authorized and validly issued and are fully paid and non-assessable. All of the shares of Company Stock were offered, issued, sold and delivered by Company in compliance with all applicable state and federal laws concerning the issuance of securities. None of the shares of Company Stock were issued in violation of any preemptive rights created by statute, or by Company's charter documents, or by any agreement to which Company may be bound. There are no outstanding shares of common stock, preferred stock or any other equity securities of Company, and there are no options, warrants, calls, conversion rights, commitments or agreements of any character to which Seller or Company may be bound, that do or may obligate Seller or Company to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of common stock, preferred stock or other equity securities or that do or may obligate Seller or Company to grant, extend or enter into any such option, warrant, call, conversion right, commitment or agreement. There are no outstanding arrangements, agreements, commitments or understandings of any kind affecting or relating to the voting, issuance, purchase, redemption, repurchase or transfer of any capital stock of Company or any other securities of Company. Seller and Company have not, or prior to the Closing will have not, become a party to or subject to any contract or obligation wherein any Person has a right or option to purchase or acquire any rights in any additional capital stock or securities of Company. Seller owns of record and beneficially, and has good and marketable title to all of the shares of Company Stock, free and clear of all Claims, Liens and Encumbrances. As a result of the transactions contemplated hereby, Buyer will be the record and beneficial owner of all outstanding capital stock of Company and rights to acquire capital stock of Company. 4.5 FINANCIAL STATEMENTS. Schedule 4.5 to the Disclosure Schedule hereto includes true, complete and correct copies of (i) Company's most recent Form 9; and (ii) Company's balance sheet as of December 31, 1997 (the end of its most recently completed fiscal year) and statements of income, cash flows and retained earnings for the year then ended (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with GAAP consistently applied and fairly present the financial position of Company as of the date thereof and the results of its operations and cash flows for the period then ended. There are no Company Liabilities, direct or indirect, fixed or contingent, which are not reflected or reserved in the balance sheet as of December 31, 1997, except for Liabilities incurred in the Ordinary Course of Business subsequent to December 31, 1997, which, either individually or in the aggregate, would not be material. To the Knowledge of Seller, there is no Basis for any assertion against Company of any Liability or obligation of any nature whatsoever that is not fully reflected or reserved in the Financial Statements which, either individually or in the aggregate, would be material. 4.6 MATERIAL CONTRACTS. True, correct and complete copies of all Material Contracts shall, at the request of Buyer, be furnished by Company to Buyer in connection with Buyer's due diligence investigation of Company. Each Material Contract so delivered is a valid and binding obligation of Company and is enforceable against Company and the other Person or Persons thereto, in accordance with its terms, subject to laws of general application relating to 11 bankruptcy, insolvency and the relief of debtors and subject to the availability of equitable remedies. Company has performed all obligations required to be performed by it to date and is not in default under or in breach of any term or provision of any Material Contract to which Company is a party, is subject or is otherwise bound, and no event has occurred that, with the giving of notice or the passage of time or both, would constitute such a default or breach under any Material Contract. To the Knowledge of Seller, no party with whom Company has a Material Contract is in default of its obligations thereunder. Except as set forth on Schedule 4.6 of the Disclosure Schedule, no consent or approval of any Person to any of the Material Contracts is necessary in order to permit Company to consummate the transactions contemplated hereby. 4.7 ASSETS OTHER THAN REAL PROPERTY. Company has good and marketable title to all properties and assets (other than real property which is subject to Section 4.8, below) owned or leased by Company, free and clear of all Liens except for: (i) Permitted Liens; and (ii) Liens, if any, that are not substantial in character, amount or extent and do not detract materially from the value, or interfere with present use or the sale or other disposition, of the property subject thereto or affected thereby. The assets and properties of Company constitute all the assets, properties, rights, privileges and interests necessary for the operation of Company's business. All of the vehicles, machinery and equipment of Company are in good working order and condition, ordinary wear and tear excepted. 4.8 REAL PROPERTY. Schedule 4.8 to the Disclosure Schedule sets forth a true, correct and complete list of all real property (the "Real Property") owned by Company and all Liens, Claims and Indebtedness encumbering such Property. Subject to the Liens, Claims and Indebtedness encumbering the Real Property, Company has good, marketable and insurable title to the Real Property. The improvements on the Real Property have been maintained in the Ordinary Course of Business. There are no condemnation or appropriation proceedings pending or threatened, or to the Knowledge of Seller any Basis therefore, against any of the Real Property or the improvements thereon. The use of the Real Property and the improvements thereon is in compliance with all Legal Requirements in all material respects. Schedule 4.8 to the Disclosure Schedule hereto also contains an accurate list and general description of all real property leases, subleases, licenses or similar agreements (the "Leases") to which Company is a party (copies of which have been previously furnished to Buyer), in each case setting forth (i) the landlord and tenant or sublessor and sublessee, as applicable, thereof and the date and term of each of the Leases; (ii) the legal description or street address of each property covered thereby; and (iii) a brief description (including size and function) of the principal improvements and buildings thereon (the "Leased Premises"). Company has valid leasehold interests in the Leased Premises, free and clear of all Liens and Claims, except for (i) Claims of lessors, co-lessees or sublessees in such matters as are reflected in the Leases; (ii) title exceptions affecting the fee estate of the lessor under such Leases; and (iii) other matters as described in the Disclosure Schedule. Company is not in default, and no facts or circumstances have occurred which, through the passage of time or both, or the giving of notice would constitute a default, under any Lease. The activities of Company, with respect to 12 the Leased Premises, are in all material respects permitted and authorized by applicable zoning laws, ordinances and regulations and all laws and regulations of any Governmental Entity. To the Knowledge of Company, the portions of the buildings on the Leased Premises that are used in the business of Company are each in good repair and condition (including without limitation, the electrical, mechanical, HVAC, plumbing, elevator, other building systems and structural components serving such premises, and the roofs are water-tight), and are in the aggregate sufficient to satisfy Company's current business activities as conducted thereat. 4.9 NO CONFLICTS. Neither the execution and delivery nor the performance of this Agreement by Seller and Company will result in any of the following: (i) a default or an event that, with notice or lapse of time or both, could be a default, breach or violation of (A) the Articles of Incorporation or Bylaws of Seller or Company, (B) any Material Contract; (ii) the termination of any Material Contract or the acceleration of the maturity of any Indebtedness or other material obligation of Company; (iii) the creation or imposition of any Lien (except for Permitted Liens) on any of the assets or properties of Company; (iv) the creation or imposition of any Lien on any shares of the Company Stock; or (v) a violation or breach of any writ, injunction or decree of any Governmental Entity or arbitrator to which Company is a party or by which any of its properties are bound. 4.10 LITIGATION. There are no Claims before any court or administrative agency pending or currently threatened against or with respect to Seller or Company (or to the Knowledge of Seller any Basis therefor), which question the validity of this Agreement or any action taken or to be taken in connection herewith, or which, individually or in the aggregate, might result in a Company Material Adverse Effect, or in any material impairment of the right or ability of Company to carry on its business as now conducted, or in any Liability or Loss on the part of Company in excess of reserves. Company is not a party or subject to, and none of its assets are bound by, the provisions of any order, writ, injunction, judgment, or decree of any Governmental Entity or arbitrator. 4.11 TAXES. Company has no Liability for any federal, state or local Taxes, except for Taxes which have accrued and are not yet payable. Company has filed or caused to be filed all Tax Returns required under applicable law to be filed on or before the Closing Date, Company has paid or made provision for all Taxes and other charges which have or may become due for the periods covered by such Tax Returns, and all such Tax Returns are true, correct and complete in all respects. None of the Tax Returns of Company are currently under investigation or audit, nor is an investigation or audit pending, and there has not been an investigation or audit of the Tax Returns of Company in the past seven (7) years. There are no outstanding agreements or waivers extending the statutory period of limitations applicable to any Tax Return for any period. The accounting treatment of all items of income, gain, loss, deduction and credit as reported on all Tax Returns and estimates filed by or on behalf of Company are true, correct and complete, and all deferred Taxes and all Taxes due for the period ending on the Closing Date have been accrued on the Balance Sheet of the December 31, 1997 Financial Statements. No Claim has ever been made by any Governmental Entity in 13 a jurisdiction where Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. All Taxes owed by Company or which Company is obligated to withhold from amounts owed or owing to any employee, independent contractor, stockholder, creditor or third party have been paid. There are no unresolved Claims concerning Company's Tax Liability, and to the Knowledge of Seller no Basis for any such Claims exist. 4.12 EMPLOYEES. Schedule 4.12 to the Disclosure Schedule hereto sets forth a complete list of all current employees of Company, title or job classification, and the current annual rate of compensation payable to each such employee. There are no unfair labor practice complaints, strikes, slowdowns, stoppages or other controversies pending or threatened, attempts to unionize or controversies threatened between Company and, or relating to, any of its employees, nor to the Knowledge of Seller any Basis therefore. Company is not a party to any collective bargaining agreement with respect to any of its employees or to a written employment contract with any of its employees, and there are no understandings with respect to the employment of any officer or employee of Company which are not terminable by Company without Liability on not more than thirty (30) days' notice. No officer, director, or employee is entitled to receive any payment of any amount under any existing agreement, Benefit Arrangement, Employment Plan or other benefit, or to the accrual or vesting of any other benefit or payment as a result of the consummation of any transactions contemplated by this Agreement. Company has complied with all applicable Legal Requirements which govern workers' compensation, equal employment opportunity and equal pay. Company's employment of each of its employees is in compliance with all immigration and naturalization laws of the United States. 4.13 CONSENTS. All consents, approvals, orders, or authorizations of, or registrations, qualifications, designations, declarations or filings with, any Governmental Entity or under any Material Contract or Company's most recent Form 9, required on the part of Company in connection with the valid execution and delivery of this Agreement and the exchange and cancellation of the Company Stock, or the consummation of any other transaction contemplated hereby have been obtained, or will be obtained and effective at or prior to the Closing. 4.14 OPERATING RIGHTS. Company has all operating authority, licenses, franchises, permits, certificates, consents, rights and privileges (collectively, "Licenses") as are necessary or appropriate to the operation of its business as now conducted. Such Licenses are in full force and effect, no violations have been or are expected to have been recorded in respect of any such Licenses, and no proceeding is pending or threatened, or to the Knowledge of Seller any Basis therefore, that could result in the revocation or limitation of any such Licenses. Company has conducted its business so as to comply in all material respects with all such Licenses. 14 4.15 COMPLIANCE WITH APPLICABLE LAWS. The properties, assets, business and operations of Company have been and are being maintained and conducted in compliance with all Legal Requirements to which Company is subject. No investigation or review by any Governmental Entity with respect to Company is pending or threatened, or to the Knowledge of Seller is there any Basis therefore, nor has any Governmental Entity indicated to Company an intention to conduct the same. 4.16 INSURANCE. Schedule 4.16 to the Disclosure Schedule hereto sets forth an accurate list, as of the date of the delivery to Buyer of the Disclosure Schedule, of all insurance policies carried by Company and all insurance loss runs or workmen's compensation claims received for the past two (2) policy years. Attached to Schedule 4.16 to the Disclosure Schedule are true, complete and correct copies of the summaries from the insurance company of all current insurance policies, all of which are in full force and effect, and a list of all pending insurance claims. All premiums payable under all such policies have been paid and Company is otherwise in full compliance with the terms of such policies (or other policies providing substantially similar insurance coverage). To the Knowledge of Seller, such policies of insurance are of the type and in amounts carried by Persons conducting businesses similar to that of Company. There is no threatened termination of or material premium increase with respect to, any of such policies. All claims previously made under such policies have been timely filed. 4.17 ABSENCE OF CHANGES. Except as set forth on Schedule 4.17 to the Disclosure Schedule, since January 1, 1998, there has not been (i) any change or amendment in the Articles of Incorporation, Bylaws or other governing instruments of Company; (ii) any sale or issuance of, or grant of options or rights to acquire, any shares of the Company Stock or other securities of Company or any declaration, setting aside, or payment of dividends or redemptions in respect of any shares of capital stock of Company, or any direct or indirect redemption, purchase, or other acquisition of such stock, or any agreement, understandings or commitments to do the same; (iii) any transfer or other disposition or pledge of, or the grant of options or rights to acquire, any of the outstanding shares of the Company Stock; (iv) any amendment, termination or revocation, or any threat of any amendment, termination, or revocation of any Material Contract; (v) any sale, transfer, mortgage, pledge, or subjection to Lien (other than Permitted Liens) of, on or affecting any of the assets of Company valued at or above $10,000 individually or in the aggregate; (vi) any increase in the compensation paid or payable or in the fringe benefits provided to any employee of Company, or the adoption of any Benefit Arrangements or Employee Plans not in existence in the fiscal year ended December 31, 1997; (vii) any damage, destruction or loss, whether or not covered by insurance, of any of the assets of Company; (viii) any purchase or lease, or commitment for the purchase or lease, of equipment or other capital items not disclosed in Company's Financial Statements which is in excess of the normal, ordinary and usual requirements of the business of Company; (ix) any change that by itself or together with other changes, has had a Material Adverse Effect; (x) any agreement or arrangement made by Seller to take any action which, if taken prior to the date hereof, would have made any representation or warranty set forth in 15 this Agreement untrue or incorrect as of the date when made; or (xi) the commencement or notice or threat of commencement of any Claim against Company or any of its affairs other than title insurance Claims in the Ordinary Course of Business, notice of which has or will be provided to Buyer. 4.18 EMPLOYEE PLANS. Schedule 4.18 to the Disclosure Schedule hereto sets forth a complete list of all Employee Plans and Benefit Arrangements maintained, administered or contributed to, or otherwise participated in, by Company. True and complete copies of each such Employee Plan or Benefit Arrangement, including amendments thereto, have been provided to Buyer, together with true and complete copies of (i) annual reports for the most recent three (3) years (Form 5500 Series including, if applicable, Schedules A and B thereto); (ii) all plan documents and the most recent summary plan description of each such Employee Plan, together with any modifications thereto; and (iii) the most recent favorable determination letter (if applicable) from the Internal Revenue Service for each such Employee Plan. None of the Employee Plans is a "multiemployer plan" as defined in Section 3(37) of ERISA or a "multiple employer plan" as covered in Section 412(c) of the Code, and the Company has not been obligated to make a contribution to any such multiemployer or multiple employer plan. All contributions (including all employer contributions and employee salary reduction contributions) which are due have been paid to each such Employee Plan or Benefit Arrangement and all contributions for any period ending on or before the Closing Date which are not yet due have been paid to each such Employee Plan or Benefit Arrangement or accrued in accordance with past custom and practice of Company. Each Employee Plan which is intended to be qualified under Section 401(a) of the Code is so qualified and each trust maintained pursuant thereto is exempt from income tax under Section 501(a) of the Code. Neither Company nor any Employee Plan, nor any trusts created thereunder, nor any trustee, administrator nor any other fiduciary thereof, has engaged in a "prohibited transaction," as defined in Section 406 of ERISA and Section 4975 of the Code, or any breach of fiduciary duty as defined in Part 4 of Subtitle B of Title I of ERISA. 4.19 INTELLECTUAL PROPERTY RIGHTS. (a) Company owns, or has the right to use, sell or license all Intellectual Property necessary or required for the conduct of its business as presently conducted and such rights to use, sell or license are reasonably sufficient for such conduct of Company's business. Company has taken all reasonable and practicable action designed to safeguard and maintain the secrecy and confidentiality of, and its proprietary right in, all of its Intellectual Property. (b) Neither the manufacture, marketing, license, sale or intended use of any Intellectual Property licensed or sold by Company or currently under development by Company violates any license or agreement between Company and any third party or infringes any Intellectual Property of any other party; and there is not pending or threatened, nor to the Knowledge of Seller any Basis therefor, any Claim contesting the validity, ownership or right to use, sell, license or dispose of any Intellectual Property or that the proposed use, sale, 16 license or disposition thereof conflicts or will conflict with the rights of any other party, nor to the Knowledge of Seller, is there any Basis for any such assertion. 4.20 ENVIRONMENT, HEALTH AND SAFETY. (a) Company has complied with all Environmental, Health and Safety Laws, except where failure to comply would not have a Material Adverse Effect, and no Claim or notice has been filed or commenced against it alleging any failure to so comply. Without limiting the generality of the preceding sentence, Company has obtained and been in compliance with all of the terms and conditions of all Licenses and other authorizations which are required under, and has complied with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables which are contained in, all Environmental, Health, and Safety Laws, except where failure to comply would not have a Material Adverse Effect. (b) Company has not handled or disposed of any substance, arranged for the disposal of any substance, exposed any employee or other individual to any substance or condition, or owned or operated any property or facility in any manner that could form a Basis for any present or future Claim against Company giving rise to any Liability, except where having done so would not have a Material Adverse Effect. Company has no Liability for damage to any site, location, or body of water (surface or subsurface), for any illness of or personal injury to any employee or other individual, or for any reason under any Environmental, Health, and Safety Law which could have a Material Adverse Effect. (c) All properties used in the Company's business are free of Hazardous Substances, except where the existence thereof would not have a Material Adverse Effect. 4.21 CERTAIN TRANSACTIONS. Except as set forth on Schedule 4.21 of the Disclosure Schedule, there are no existing or pending transactions, nor are there any agreements or understandings, between Company, on the one hand, and any officer or director of Company, or any person or entity affiliated with any of them, on the other hand, including, without limitation, any transactions, arrangements or understandings relating to the purchase or sale of goods or services or the sale, lease or use of any of the assets of or by Company, with or without adequate compensation, or to any indebtedness owed to or by Company, in any amount whatsoever. 4.22 BANK ACCOUNTS; POWERS OF ATTORNEY. Schedule 4.22 of the Disclosure Schedule sets forth any and all updates or revisions as of the date of this Agreement to Company's most recent Form 9, with respect to Company's bank accounts and/or investments. Schedule 4.22 of the Disclosure Schedule hereto also sets forth the name of each Person holding a general or special power of attorney from Company and a description of the terms of such power. 17 4.23 BROKERS' FEES. Seller and Company have no Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement. 4.24 FULL DISCLOSURE. Neither this Agreement, the representations and warranties by Seller contained herein, the Exhibits or Schedules hereto, nor any other written statement or certificate delivered or to be furnished to Buyer in connection herewith, when read together, contain any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. To the Knowledge of Seller, there is no fact which has not been disclosed to Buyer that would have a Material Adverse Effect or would affect the ability of Seller and Company to perform their obligations under this Agreement. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller that (except for changes contemplated by this Agreement) each of the following statements is true, correct and complete in all material respects as of the date of this Agreement and will be true, correct and complete in all material respects as of the Closing Date (each such statement to be made again by Buyer on that date with the Closing Date being substituted for the date of this Agreement throughout this Article 5): 5.1 ORGANIZATION AND STANDING; ARTICLES AND BYLAWS. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of California, has full power and authority to own its assets and properties and to carry on its business as presently conducted. Buyer is duly qualified and authorized to do business, and is in good standing as a foreign corporation, in each jurisdiction where the nature of its activities and properties (both owned and leased) make such qualification necessary, except where the failure to so qualify would not have a Material Adverse Effect. 5.2 AUTHORIZATION. All corporate action on the part of Buyer and its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement and the documents contemplated hereby, the performance of all of Buyer's obligations hereunder and thereunder, and for the purchase of the Company Stock have been taken or will be taken prior to the Closing. This Agreement and the documents contemplated hereby, when executed and delivered by Buyer, shall constitute valid and legally binding obligations of Buyer enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and subject to the availability of equitable remedies. 18 5.3 NO CONFLICTS. Neither the execution and delivery nor the performance of this Agreement by Buyer will result in any of the following: (i) a default or an event that, with notice or lapse of time or both, could be a default, breach or violation of (A) the Articles of Incorporation or Bylaws of Buyer, (B) any Material Contract of Buyer; (ii) the termination of any Material Contract of Buyer or the acceleration of the maturity of any Indebtedness or other material obligation of Buyer; (iii) the creation or imposition of any Lien (except for Permitted Liens) on any of the assets or properties of Buyer; (iv) the creation or imposition of any Lien on any shares of Buyer's Common Stock; or (v) a violation or breach of any writ, injunction or decree of any Governmental Entity to which Buyer is a party or by which any of its properties are bound. 5.4 GOVERNMENTAL CONSENTS. All consents, approvals, orders, or authorizations of, or registrations, qualifications, designations, declarations or filings with, any Governmental Entity, required on the part of Buyer in connection with the valid execution and delivery of this Agreement and the purchase of the Common Stock, or the consummation of any other transaction contemplated hereby have been obtained, or will be effective at the Closing. 5.5 BROKERS' FEES. Buyer is not a party to or obligated under any agreement with any broker, agent, or finder relating to the transactions contemplated hereby, and neither the execution of this Agreement nor the consummation of the transactions provided for herein will result in any liability to any broker, agent, or finder. 5.6 FULL DISCLOSURE. Neither this Agreement, the representations and warranties by Buyer contained herein, the Exhibits or Schedules hereto, nor any other written statement or certificate delivered or to be furnished to Seller in connection herewith, when read together, contain any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading. ARTICLE 6 CONDUCT OF BUSINESS PENDING CLOSING During the period commencing on the date hereof and continuing through the Closing Date, Seller and Company, jointly and severally, covenant and agree that, unless consented to in writing by Buyer, which consent shall not be unreasonably withheld: 6.1 QUALIFICATION. Company shall maintain all qualifications to transact business and remain in good standing in its jurisdiction of incorporation and in the foreign jurisdictions in which Company owns or leases any property or conducts any business. 6.2 ORDINARY COURSE. Company shall conduct its business in, and only in, the Ordinary Course of Business and, to the extent consistent with such business, shall not make or institute any unusual or novel methods of management, accounting, or operation that vary 19 materially from those methods used by the Company as of December 31, 1997. Company will use its best efforts to preserve its business organization intact, to keep available to Company its present officers and employees, and to preserve its present relationships with suppliers, customers, and others having business relationships with the Company. Company shall maintain its properties and assets in good condition and repair. 6.3 CORPORATE CHANGES. Company shall not (i) amend its Articles of Incorporation or Bylaws (or equivalent documents); (ii) acquire by merging or consolidating with, or agreeing to merge or consolidate with, or purchase any of the stock or assets of, or otherwise acquire, any business or any corporation, partnership, association or other business organization or division thereof; (iii) enter into any partnership or joint venture; (iv) declare, set aside, make or pay any dividend or other distribution in respect of its capital stock or purchase or redeem, directly or indirectly, any shares of its capital stock; (v) issue or sell any shares of its capital stock of any class or any options, warrants, conversion or other rights to purchase any such shares or any securities convertible into or exchangeable for such shares; or (vi) liquidate or dissolve or obligate itself to do so. 6.4 INDEBTEDNESS. Company shall not incur any Indebtedness, sell any debt securities or lend money to or guarantee the Indebtedness of any Person. Company shall not restructure or refinance its existing Indebtedness. 6.5 ACCOUNTING. Company shall not make any change in the accounting principles, methods or practices followed by it or depreciation or amortization policies or rates heretofore adopted by it. Company shall maintain its books, records, and accounts in accordance with GAAP applied on a basis consistent with that of prior periods. 6.6 COMPLIANCE WITH LEGAL REQUIREMENTS. Company shall comply promptly and in all material respects with all Legal Requirements imposed upon it, its operations and with respect to the transactions contemplated by this Agreement, and shall cooperate promptly with, and furnish information to, Buyer in connection with any such requirements imposed upon Buyer, or upon any of its Affiliates, in connection therewith or herewith. 6.7 DISPOSITION OF ASSETS. Except in the Ordinary Course of Business, Company shall not sell, transfer, license, lease or otherwise dispose of, or suffer or cause the encumbrance by any Lien other than Permitted Liens upon any of its properties or assets, tangible or intangible, or upon any interest therein. 6.8 COMPENSATION. Except in the Ordinary Course of Business, Company shall not (i) adopt or amend in any material respect any collective bargaining, bonus, profit-sharing, compensation, stock option, pension, retirement, deferred compensation, Employee Plan, Benefit Arrangement, or any other agreement, trust, fund or arrangement for the benefit of employees other than to comply with any Legal Requirement; or (ii) pay, or make any accrual or arrangement for payment of, any increase in compensation, bonuses or special 20 compensation of any kind, or any severance or termination pay to, or enter into any employment or loan or loan guarantee agreement with, Seller or any current or former officer, director, employee or consultant of Company. 6.9 MODIFICATION OR BREACH OF AGREEMENTS; NEW AGREEMENTS. Except in the Ordinary Course of Business, Company shall not terminate or modify, or commit or cause or suffer to be committed any act that will result in breach or violation of any term of or (with or without notice or passage of time, or both) constitute a default under or otherwise give any Person a basis for nonperformance under, any Material Contract, written or oral. Company shall refrain from becoming a party to any contract or commitment other than in the Ordinary Course of Business. Company shall meet all of its contractual obligations in accordance with their respective terms. 6.10 CAPITAL EXPENDITURES. Except in the Ordinary Course of Business, except for capital expenditures or commitments necessary to maintain its properties and assets in good condition and repair (the amount of which shall not exceed $15,000 individually or in the aggregate), Company shall not purchase or enter into any contract to purchase any capital assets. 6.11 CONSENTS. Company shall use its best efforts to obtain any consent, authorization or approval of, or exemption by, any Governmental Entity or Person required to be obtained or made by Company hereto in connection with the transactions contemplated hereby or the taking of any action in connection with the consummation thereof. 6.12 MAINTENANCE OF INSURANCE. Company shall maintain its policies of insurance in full force and effect on substantially the same terms and conditions as in effect on the date of this Agreement, and shall not do, permit or willingly allow to be done any act by which any of said policies of insurance may be suspended, materially impaired or canceled. 6.13 DISCHARGE. Company shall not cancel, compromise, release or discharge any Claim of Company upon or against any Person or waive any right of Company, and not discharge any Lien upon any asset of Company or compromise any debt or other obligation of Company to any Person other than Liens, debts or obligations with respect to current Liabilities of Company. 6.14 CLAIMS. Company shall not institute, settle or agree to settle any Claim before any Governmental Entity, except for title insurance Claims in the Ordinary Course of Business. 6.15 TAXES AND TAX ASSESSMENTS. Company shall pay, when due, and prior to the imposition or assessment of any interest, penalties or Liens by reason of the nonpayment of, all Taxes assessed against Company, its assets, properties or operations. Company shall furnish promptly to Buyer a copy of all notices of proposed assessment or similar notices or 21 reports that are received from any taxing authority and which relate to Company's operations for periods ending on or prior to the Closing Date. ARTICLE 7 ADDITIONAL COVENANTS 7.1 COVENANTS OF SELLER AND COMPANY. During the period from the date hereof through the Closing Date, Seller and Company agree to: (a) Comply promptly with all applicable Legal Requirements imposed upon them with respect to the transactions contemplated by this Agreement, and shall cooperate promptly with, and furnish information to, Buyer in connection with any such requirements imposed upon Buyer or upon any of its Affiliates in connection therewith or herewith; (b) Use their best efforts to obtain (and to cooperate with Buyer in obtaining) any consent, authorization or approval of, or exemption by, any Person required to be obtained or made by Seller and/or Company in connection with the transactions contemplated by this Agreement; (c) Use their best efforts to bring about the satisfaction of the conditions precedent to Closing set forth in Section 3.4, above; (d) Promptly advise Buyer orally and, within three (3) business days thereafter, in writing of any change in Company's business or condition that has had or would reasonably be expected to have a Material Adverse Effect on Company; (e) Deliver to Buyer prior to the Closing a written statement disclosing any untrue statement in this Agreement or any Exhibit or Schedule hereto (or supplement thereto) or document furnished pursuant hereto, or any omission to state any material fact required to make the statements herein or therein contained complete and not misleading, immediately upon the discovery of such untrue statement or omission, accompanied by a written supplement to any Exhibit or Schedule to this Agreement that may be affected thereby; provided, however, that the disclosure of such untrue statement or omission shall not prevent Buyer from terminating this Agreement pursuant to Section 8.1(b), below, at any time at or prior to the Closing in respect of any original untrue or misleading statement; (f) Within thirty (30) days after the date of this Agreement, deliver to Buyer the Disclosure Schedule; and (g) Promptly commence and diligently prepare, file and process, at Seller's cost and expense, all the necessary Regulatory Approvals from Governmental Entities that specifically relate to the title insurance business and the change of ownership of such business 22 from Seller to Buyer; provided, however, that Buyer expressly acknowledges and agrees that (i) such approvals are burdensome and may take several months to obtain; and (ii) Buyer shall not have a right to terminate this Agreement under Section 8.1(b), below, so long as Seller is diligently attempting to obtain such Regulatory Approvals. Buyer shall cooperate with Seller to the extent reasonably requested by Seller in obtaining the above Regulatory Approvals. 7.2 COVENANTS OF BUYER. During the period from the date hereof to the Closing Date, Buyer shall: (a) Comply promptly with all applicable Legal Requirements imposed upon it with respect to the transactions contemplated by this Agreement, and shall cooperate promptly with, and furnish information to, Seller in connection with any such requirements imposed upon Seller or Company or upon any of Seller's or Company's Affiliates in connection therewith or herewith; (b) Use its best efforts to obtain any consent, authorization or approval of, or exemption by, any Person required to be obtained or made by Buyer in connection with the transactions contemplated by this Agreement; (c) Use its best efforts to bring about the satisfaction of the conditions precedent to Closing set forth in Section 3.5 of this Agreement; and (d) Promptly advise Company orally and, within three (3) business days thereafter, in writing of any change in Buyer's business or condition that has had or would reasonably be expected to have a Material Adverse Effect on Buyer; 7.3 TAX ADVICE. Seller, Company and Buyer acknowledge that they have each received their own independent tax advice with respect to this Agreement and the transactions contemplated thereby, and are not in any way relying on any statements or advice of any other Party or any of such other Party's officers, directors, employees, agents or representatives with respect to such matters. 7.4 ACCESS AND INFORMATION. (a) During the period commencing on the date hereof and ending forty (40) days thereafter, Seller shall cause Company to afford to Buyer and to Buyer's accountants, counsel, and other representatives, reasonable access during regular business hours and without undue interruption to its business to all of its properties, books, contracts, commitments, records and personnel and, during such period, to cause Company to furnish promptly to Buyer all information concerning its business, properties and personnel as Buyer may reasonably request. 23 (b) Except to the extent permitted by the provisions of Section 7.7, below, Buyer shall hold in confidence, and shall use reasonable efforts to ensure that its employees and representatives hold in confidence, all such information supplied to it by Seller or Company concerning Company and shall not disclose such information to any third Person except as may be required by any Legal Requirement and except for information that (i) is or becomes generally available to the public other than as result of disclosure by Buyer or its representatives; (ii) becomes available to Buyer or its representatives from a third party other than Seller or Company, and Buyer or its representatives have no reason to believe that such third party is not entitled to disclose such information; (iii) is known to Buyer or its representatives on a non-confidential basis prior to its disclosure by Seller or Company; or (iv) is made available by Seller or Company to any other Person on a non-restricted basis. Buyer's obligations under the foregoing sentence shall expire on the Closing Date or, if the Closing does not occur, one (1) year after the date hereof. 7.5 EXPENSES. All costs and expenses (including, without limitation, all legal fees and expenses and costs) incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring the same. 7.6 CERTAIN NOTIFICATIONS. At all times from the date hereof to the Closing Date, each Party shall promptly notify the others in writing of the occurrence of any event that will or reasonably would be expected to result in the failure to satisfy any of the conditions specified in Sections 3.4 and 3.5, above. 7.7 PUBLICITY. At all times prior to the Closing Date, each Party shall obtain the consent of all other Parties hereto prior to issuing, or permitting any of its directors, officers, employees or agents to issue, any press release or other information to the press, employees of Company or any third party with respect to this Agreement or the transactions contemplated hereby; provided, however, that no party shall be prohibited from supplying any information to any of its representatives, agents, attorneys, advisors, and others to the extent necessary to complete the transactions contemplated hereby so long as such representatives, agents, attorneys, advisors, and others are made aware of the terms of this Section 7.7. Nothing contained in this Agreement shall prevent any party to this Agreement at any time from furnishing any required information to any Governmental Entity or authority pursuant to a Legal Requirement or from complying with its legal or contractual obligations; provided that the Party furnishing such information shall have used its reasonable best efforts to comply with this provision first, and in any event does so only with the advice of counsel. 7.8 FURTHER ASSURANCES. (a) Subject to the terms and conditions of this Agreement, each of the Parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable Legal 24 Requirements, to consummate and make effective the transactions contemplated by this Agreement. (b) If at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers or directors of Seller, Company and Buyer, as the case may be, shall take or cause to be taken all such necessary or convenient action and execute, and deliver and file, or cause to be executed, delivered and filed, all necessary or appropriate documentation. 7.9 POST-CLOSING EMPLOYMENT. Company shall terminate all of its employees as of the Closing Date. Company and Sellers acknowledge and agree that after the Closing Date (i) Buyer shall not be required to employ or retain any employee of Company or any other Person; and (ii) Buyer, in its sole and absolute discretion, may cause Company to retain all, some, or none or such employees. 7.10 EMPLOYEE BENEFITS. With respect to those employees of Company retained by Buyer pursuant to Section 7.9, above, as of the Closing Date, the Company's Benefit Arrangements and Employee Plans shall either be fully maintained by Buyer for such employees, or such employees and their eligible dependents, shall be consolidated into Buyer's Benefit Arrangements and Employee Plans with full takeover provisions ("Buyer Coverage"), such that, among other things, such employees and their eligible dependents who receive Buyer Coverage are (i) credited for service with Company to be applied against all service and waiting periods under Buyer Coverage; (ii) credited for any deductibles paid for the plan year under Company's Benefit Arrangements and Employee Plans to be applied against any deductibles under Buyer Coverage; and (iii) not excluded from Buyer Coverage for any pre-existing condition if such employee or eligible dependent was entitled to coverage under Company's Benefit Arrangements and Employee Plans as of the Closing Date. 7.11 POST-CLOSING UNDERWRITING AND OTHER CONTRACTUAL OBLIGATIONS. Except as otherwise expressly set forth in this Section 7.11, all of the terms and conditions of any and all pre-Closing contracts or agreements between Fidelity National Financial, Inc., a Delaware corporation, and its Subsidiaries and Affiliates (collectively, "Fidelity"), on the one hand, and Buyer, on the other hand (collectively, the "Fidelity Contracts"), shall survive the Closing and each Fidelity Contract shall remain in full force and effect for the duration of the respective term of such Fidelity Contract. Notwithstanding the preceding sentence: (a) With respect to any Trustee Sale Guaranty commitment originated by Buyer post-Closing, Buyer shall be entitled to underwrite the first One Hundred Thousand Dollars ($100,000) of such commitment with Company or underwrite the entire commitment with Fidelity. If Buyer elects to underwrite the first One Hundred Thousand Dollars ($100,000) of such commitment with Company, then Buyer shall have Fidelity reinsure the remaining portion of such commitment in excess of One Hundred Thousand Dollars ($100,000) and pay Fidelity a fee equal to six percent (6%) of the gross policy premium as and for a reinsurance fee. 25 If Buyer elects to have Fidelity underwrite the entire commitment, then Buyer shall pay Fidelity a fee of eleven percent (11%) of the gross policy premium in connection with each Trustee Sale Guaranty Policy; (b) With respect to any post-Closing non-Trustee Sale Guaranty commitments in a county in which Buyer is currently licensed (such counties are listed on Exhibit "B" hereto), Buyer shall underwrite the entire commitment with Fidelity and pay Fidelity a fee equal to eleven percent (11%) of the gross policy premium, as provided under the current Fidelity Contracts; (c) With respect to any post-Closing non-Trustee Sale Guaranty commitments originated by or referred to Buyer in a county not listed on Exhibit "B" hereto, Buyer shall be entitled to underwrite the first Fifty Thousand Dollars ($50,000) of such commitment with Company or underwrite the entire commitment with Fidelity. If Buyer elects to underwrite the first Fifty Thousand Dollars ($50,000) of such commitment with Company, then Buyer shall have Fidelity reinsure the remaining portion of such commitment in excess of Fifty Thousand Dollars ($50,000) and pay Fidelity a fee equal to six percent (6%) of the gross policy premium as and for a reinsurance fee. If Buyer elects to have Fidelity underwrite the entire commitment, then Buyer shall pay Fidelity a fee of eleven percent (11%) of the gross policy premium, as provided under the current Fidelity Contracts; (d) Post-Closing, Buyer shall (i) continue to pay Fidelity a monthly fee of one percent (1%) of total gross policy premiums generated by Buyer in the immediately preceding month, regardless of the underwriter utilized, in consideration for certain services provided to Buyer pre-Closing under the Fidelity Contracts, including accounting, legal, trust accounting, human resources and payroll; and (ii) for the first twenty-four (24) consecutive months following the Closing, pay Fidelity a fee of $8,333.33 per month in consideration for claims processing services for Company, preparation and filing of Form 9s for Company, and agency processing services for Company. If after the twenty-fourth (24th) month following the Closing, Buyer elects to continue to utilize the services of Fidelity set forth in clause (ii), above, then such services shall be provided to Buyer by Fidelity upon such terms and conditions as Buyer and Fidelity shall mutually agree; and (e) Fidelity shall continue to manage Company's investment portfolio post-Closing. In consideration for such services, Company shall pay Fidelity a monthly fee equal to 1.67 basis points of Company's average investment balance managed by Fidelity for the immediately preceding month. 7.12 USE OF NAME. Seller and/or an Affiliate of Seller owns or has an interest in the name American Title Insurance Company. Seller on behalf of itself and its Affiliates hereby authorizes Buyer to use such name, or a derivation thereof, for Company post-Closing. 26 ARTICLE 8 TERMINATION, AMENDMENT AND WAIVER 8.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing: (a) By mutual consent of Seller and Buyer; (b) By Seller, on the one hand, or by Buyer, on the other hand, if there has been a breach, failure to fulfill or default (collectively, a "Breach") on the part of the other Party (the "Breaching Party") of any of the representations and warranties contained herein or in the due and timely performance and satisfaction of any of the covenants, agreements or conditions contained herein; or (c) By Seller, on the one hand, or by Buyer, on the other hand, if there shall be a final non-appealable order of a Governmental Entity or arbitrator in effect preventing consummation of the transactions contemplated hereby; or there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the transactions contemplated hereby by any Governmental Entity or arbitrator which would make the consummation of such transactions illegal. 8.2 EFFECT OF TERMINATION. In the case of any termination of this Agreement pursuant to Section 8.1, above, this Agreement shall forthwith become void, and there shall be no Liability or obligation on the part of any Party or its officers, directors or shareholders. Notwithstanding the foregoing sentence, (i) the provisions of Section 7.4 and 7.5 shall remain in full force and effect and survive any termination of this Agreement; (ii) each Party shall remain liable for any Breach of this Agreement prior to its termination; and (iii) in the event of termination pursuant to Section 8.1(b), above, then notwithstanding the provisions of Section 7.5, above, the Breaching Party shall be liable to the non-breaching Party to the extent of the expenses incurred by such other party in connection with this Agreement and the transactions contemplated thereby. 8.3 AMENDMENT. This Agreement may be amended at any time by a written instrument executed by the Parties. Any amendment effected pursuant to this Section 8.3 shall be binding upon all Parties. 8.4 WAIVER. Any term or provision of this Agreement may be waived in writing at any time by the Party or Parties entitled to the benefits thereof. Any waiver effected pursuant to this Section 8.4 shall be binding upon all Parties hereto. No failure to exercise and no delay in exercising any right, power or privilege shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude the exercise of any other right, power or privilege. No waiver of any Breach of any covenant or agreement hereunder shall be deemed a waiver of a preceding or subsequent breach of the same or any 27 other covenant or agreement. The rights and remedies of each Party under this Agreement are in addition to all other rights and remedies, whether at law, in equity or otherwise, that such Party may have against the other Parties. ARTICLE 9 INDEMNIFICATION 9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Buyer and Seller contained in this Agreement or in any writing delivered pursuant hereto or at the Closing shall survive the Closing and the consummation of the transactions contemplated hereby for a period of eighteen (18) months after the Closing Date; provided that the representations and warranties contained in Sections 4.2, 4.4, 4.11, 4.20, and 5.2 shall continue until the expiration of the applicable statutes of limitations. 9.2 INDEMNIFICATION BY SELLER. Seller covenants and agrees with Buyer and its officers, directors, employees, shareholders, assigns, successors and affiliates (a "Buyer Indemnified Party") to indemnify and hold harmless a Buyer Indemnified Party from, against and in respect of any and all Losses suffered, sustained, incurred or paid by any Buyer Indemnified Party in connection with resulting from or arising out of, directly or indirectly: (a) any breach of any representation or warranty of Seller set forth in this Agreement or any certificate, document or instrument delivered by or on behalf of Seller in connection herewith; or (b) any non-fulfillment of any covenant or agreement on the part of Seller or Company in this Agreement. Payment shall not be a condition precedent to recovery under the above indemnities. 9.3 INDEMNIFICATION BY BUYER. Buyer covenants and agrees with Seller and its officers, directors, employees, shareholders, assigns, successors and affiliates (a "Seller Indemnified Party") to indemnify and hold harmless a Seller Indemnified Party from, against and in respect of any and all Losses suffered, sustained, incurred or paid by any Seller Indemnified Party in connection with resulting from or arising out of, directly or indirectly: (a) any breach of any representation or warranty of Buyer set forth in this Agreement or any certificate, document or instrument delivered by or on behalf of Buyer in connection herewith; or 28 (b) any non-fulfillment of any covenant or agreement on the part of Buyer in this Agreement. Payment shall not be a condition precedent to recovery under the above indemnities. 9.4 THIRD-PARTY CLAIMS. In the event any third party asserts any Claim with respect to any matter as to which the indemnities in this Agreement relate, the Party or Person against whom the Claim is asserted (the "Indemnified Party") shall give prompt notice to the other Party or Person (the "Indemnifying Party"), and the Indemnifying Party shall have the right at its election to take over the defense or settlement of the third-party Claim at its own expense by giving prompt notice to the Indemnified Party. If the Indemnifying Party does not give such notice and does not proceed diligently so to defend the third-party Claim within thirty (30) days after receipt of the notice of the third-party Claim, the Indemnifying Party shall be bound by any defense or settlement that the Indemnified Party may make as to those claims and shall reimburse the Indemnified Party for its Losses related to the defense or settlement of the third-party Claim, including all costs and expenses (including reasonable attorneys' fees and costs) incurred by the Indemnified Party in defending such Claim. The Parties shall cooperate in defending against any asserted third-party Claims. For purposes of this Article 9, the reference to this Agreement includes any certificate, Disclosure Schedule, Exhibit, list, summary or other information provided or delivered to a party by the Indemnifying Party or its agents and affiliates in connection with this Agreement. 9.5 ADDITIONAL INDEMNIFICATION PROVISIONS. Notwithstanding anything to the contrary in this Article 9, (i) Seller's and Buyer's aggregate Liability to each other under Sections 9.2 and 9.3, respectively, shall not exceed One Million Dollars ($1,000,000); (ii) Seller and Buyer shall not incur any Liability to each other under Sections 9.2 and 9.3, respectively, until the aggregate amount of the indemnification obligations exceeds Fifty Thousand Dollars ($50,000); (iii) Seller and Buyer shall not incur any Liability to each other under Sections 9.2 and 9.3, respectively, for an individual indemnification Claim less than One Thousand Dollars ($1,000); and (iv) in lieu of payment from Seller to Buyer of a valid indemnification Claim under Section 9.2, above, Buyer may elect to reduce the principal balance due under the Promissory Note by the amount of such valid Claim. 9.6 INDEMNIFICATION NON-EXCLUSIVE. Subject to the limitations set forth in Sections 9.1 and 9.5, above, the indemnification provisions of this Article 9 are in addition to, and not in derogation of, any statutory, equitable or common-law remedy any Party may have for breach of representation, warranty, covenant or agreement. 9.7 ACCESS AND INFORMATION. With respect to any Claim for indemnification hereunder, the Indemnified Party will give to the Indemnifying Party and its counsel, accountants and other representatives full and free access during normal business hours and upon the giving of reasonable prior notice to their books and records relating to such Claims, and to their employees, accountants, counsel and other representatives, all without charge to 29 the Indemnifying Party, except for reimbursement of reasonable out-of-pocket expenses. The Indemnified Party agrees to maintain any of its books and records which may relate to a Claim for indemnification hereunder for such period of time as may be necessary to enable the Indemnifying Party to resolve such Claim; provided that the failure to do so shall not relieve the Indemnifying Party of any obligation hereunder unless the Indemnifying Party demonstrates that the failure to do so substantially prejudiced the Indemnifying Party in the defense of any third-party proceeding, and then only to the extent so prejudiced. 9.8 MITIGATION. The Indemnified Parties agree to mitigate their Losses and use their reasonable efforts to collect any indemnifiable damages from any available insurer or third-party indemnitors before collecting from the Indemnifying Party; provided, however, nothing in the foregoing sentence shall preclude any Indemnified Party from filing a Claim against the Indemnifying Party from the outset. If any amounts are recovered from an insurer or third party after payment to an Indemnified Party, the recovering party (or parties) shall promptly pay over to such Indemnifying Party (or Parties) any such recovered amounts, but only to the extent of any Losses with respect to such matter. 9.9 RIGHT OF SET-OFF. Any Party to this Agreement shall be entitled to set-off against any amounts due to another Party under the terms of this Agreement or under any additional agreement, any amounts due from such other Party under the terms of this Agreement. ARTICLE 10 GENERAL PROVISIONS 10.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents, made and to be performed entirely within the State of California. 10.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the Parties hereto. 10.3 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules hereto, and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the Parties with regard to the subject matter hereof and no Party shall be liable or bound to any other Party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any Person, other than the Parties hereto and their respective successors and assigns, any rights, remedies, obligations, or Liabilities under or by reason of this Agreement, except as expressly provided herein. 30 10.4 SEVERABILITY. In the event any provision of this Agreement shall be invalid, illegal, or unenforceable, it shall, to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the Parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 10.5 NOTICE. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given (i) if delivered personally (including by overnight express or messenger), upon delivery; (ii) if delivered by registered or certified mail, return receipt requested, upon the earlier of actual delivery or three (3) days after being mailed; or (iii) if given by facsimile, upon confirmation of transmission by facsimile, in each case to the Parties at the following addresses: (a) If to Seller or Company (pre-Closing), addressed to: Fidelity National Title Insurance Company of New York 3916 State Street, Suite 300 Santa Barbara, California 93105 Attn: Frank P. Willey, Executive Vice President Facsimile: (805) 898-7191 With a copy to: Fidelity National Financial, Inc. 3916 State Street, Suite 300 Santa Barbara, California 93105 Attn: Andrew F. Puzder, Executive Vice President Facsimile: (805) 898-7149 (b) If to Buyer or Company (post-Closing), addressed to: American Title Company 2510 North Red Hill Avenue Santa Ana, California 92705 Attn: Michael C. Lowther, Chief Executive Officer Facsimile: (809) 332-7230 10.6 CONSTRUCTION. Parties to this Agreement have participated jointly in the negotiation and drafting of this Agreement and have had competent counsel of their own choosing. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 31 10.7 HEADINGS. The headings of the Articles and Sections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 10.8 COUNTERPARTS. This Agreement may be executed by facsimile and in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 10.9 RECITALS, SCHEDULES, AND EXHIBITS. The Recitals, Schedules and Exhibits to this Agreement are incorporated herein and, by this reference, made a part hereof as if fully set forth at length herein. [SIGNATURES ON FOLLOWING PAGE] 32 IN WITNESS WHEREOF, the foregoing Agreement and Plan of Reorganization is hereby executed as of the date first above written. SELLER: FIDELITY NATIONAL TITLE INSURANCE COMPANY OF NEW YORK, a New York corporation By: /s/ Frank P. Willey ------------------------------------ Its: E.V.P ------------------------------------ COMPANY: NATIONAL TITLE INSURANCE OF NEW YORK, INC., a New York corporation By: /s/ [Illegible] ------------------------------------ Its: E.V.P. and C.F.O. ------------------------------------ BUYER: AMERICAN TITLE COMPANY, a California corporation By: /s/ Michael Lowther ------------------------------------ Its: ------------------------------------ ACCEPTED AND AGREED TO WITH RESPECT TO SECTION 7.11 ONLY: FIDELITY NATIONAL FINANCIAL, INC., a Delaware corporation By: /s/ Frank P. Willey ------------------------------------ Its: President ------------------------------------ 33 EXHIBIT "A" PROMISSORY NOTE $2,000,000 _________________ ,1998 FOR VALUE RECEIVED, AMERICAN TITLE COMPANY, a California corporation ("Obligor"), promises to pay to FIDELITY NATIONAL TITLE INSURANCE COMPANY OF NEW YORK, a New York corporation ("Holder"), at 2 Park Avenue, 3rd Floor, New York, New York 10016, or order, the principal sum of Two Million Dollars ($2,000,000), together with interest thereon at the rate of ten percent (10%) per annum for actual days elapsed. This Promissory Note is being delivered by Obligor to Holder in accordance with Sections 2.2 and 3.3(a) of that certain Stock Purchase Agreement (the "Agreement"), dated March __ ,1998, by and among Obligor, Holder and National Title Insurance Company of New York, Inc., a New York corporation ("Company"), pursuant to which Obligor purchased from Holder all of the outstanding capital stock of Company. The principal balance due hereunder is subject to reduction pursuant to Section 9.5(iv) of the Agreement. Principal and interest due hereunder shall be amortized over a period of five (5) years, and paid by Obligor to Holder in equal monthly installments commencing on ________ 1, 1998, and continuing for each consecutive month thereafter through and including _________ 1, 2008. For purposes of clarification, such payments shall be due and payable in accordance with the Payment and Amortization Schedule attached hereto as Exhibit "A." Obligor may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will be applied first to unpaid interest and then to reduce principal. Obligor will be in default of this Promissory Note if any of the following events occur (an "Event of Default"): (a) Obligor fails to make any payment when due, which default is not cured within ten (10) days; (b) Obligor breaks any promise Obligor has made to Holder, or Obligor fails to perform any of its obligations promptly at the time and in the manner provided in this Promissory Note, the Agreement or in any other agreement or loan Obligor has with Holder; (c) any representation or statement made to Holder by Obligor or on Obligor's behalf is false or misleading in any material respect; or (d) either Obligor becomes insolvent, a receiver is appointed for all or any part of Obligor's property, Obligor makes an assignment for the benefit of creditors, or any proceeding is commenced by Obligor or against Obligor under any bankruptcy or insolvency laws. Upon the occurrence of an Event of Default the entire unpaid principal amount, together with all unpaid interest accrued thereon, shall be immediately due and payable and Holder may proceed to exercise any rights or remedies it may have under this Promissory Note or such other rights and remedies that Holder may have at law, in equity or otherwise. In the event this Promissory Note is turned over to an attorney at law for collection after an Event of Default, in addition to the principal balance and all accrued interest, Holder shall be entitled to recover from Obligor all costs of collection, including but not limited to reasonable attorneys' fees, and all such costs and expenses shall be payable on demand. Obligor hereby waives diligence, presentment, protest and demand, notice of protest, dishonor and nonpayment of this Promissory Note and expressly agrees that, without in any way affecting the liability of Obligor hereunder, Holder may extend the time for payment of principal and/or interest hereunder. Obligor further waives, to the fullest extent permitted by law, the right to plead any and all statute of limitations as a defense to any demand on this Promissory Note. No failure on the part of Holder to exercise any right or remedy hereunder, whether before or after an Event of Default, shall constitute a waiver thereof, and no waiver of any past Event of Default shall constitute a waiver of any future Event of Default. This Promissory Note may not be modified or amended orally, but only by an agreement in writing signed by the party against whom such change is sought. Should any one or more of the provisions of this Promissory Note be determined illegal or unenforceable, all other provisions shall nevertheless remain effective. This Promissory Note has been delivered to Holder and accepted by Holder in the State of California. If there is a lawsuit, Obligor agrees upon Holder's request to submit to the jurisdiction of the courts of the State of California. This Promissory Note shall be governed by and construed in accordance with the laws of the State of California as those laws are applied to written contracts between residents of said jurisdiction to be performed within said jurisdiction. IN WITNESS WHEREOF, Obligor, intending to be legally bound hereby, has caused this Promissory Note to be duly executed and delivered as of the day and year first above written. AMERICAN TITLE COMPANY, a California corporation By: ------------------------------ Its: ------------------------------ 2 EXIBIT "A" PAYMENT AMORTIZATION SCHEDULE PRINCIPLE AMOUNT: $2.000,000 INTEREST RATE: 10% LIFE OF LOAN (MONTHS): 60
Payment Interest Principle Remaining Month: Amount Amount: Amount: Principle: - --------- --------- --------- --------- ------------ 1 42,494.09 16,666.67 25,827.42 1,974,172.58 2 42,494.09 16,451.44 26,042.65 1,948,129.93 3 42,494.09 16,234.42 26,259.67 1,921,870.25 4 42,494.09 16,015.59 26,478.50 1,895,391.75 5 42,494.09 15,794.93 26,699.16 1,868,692.59 6 42,494.09 15,572.44 26,921.65 1,841,770.94 7 42,494.09 15,348.09 27,146.00 1,814,624.94 8 42,494.09 15,121.87 27,372.21 1,787,252.73 9 42,494.09 14,893.77 27,600.32 1,759,652.41 10 42,494.09 14.663.77 27,830.32 1,731,822.09 11 42,494.09 14,431.85 28,062.24 1,703,759.85 12 42,494.09 14,198.00 28,296.09 1,675,463.76 13 42,494.09 13,962.20 28,531.89 1,646,931.87 14 42,494.09 13,724.43 28,769.66 1,618,162.21 15 42,494.09 13,484.69 29,009.40 1,589,152.81 16 42,494.09 13,242.94 29,251.15 1,559,901.66 17 42,494.09 12,999.18 29,494.91 1,530,406.75 18 42,494.09 12,753.39 29,740.70 1,500,666.05 19 42,494.09 12,505.55 29,988.54 1,470,677.51 20 42,494.09 12,255.65 30,238.44 1,440,439.07 21 42,494.09 12,003.66 30,490.43 1,409,948.64 22 42,494.09 11,749.57 30,744.52 1,379,204.12 23 42,494.09 11,493.37 31,000.72 1,348,203.40 24 42,494.09 11,235.03 31,259.06 1,316,944.34 25 42,494.09 10,974.54 31,519.55 1,285,424.78 26 42,494.09 10,711.87 31,782.22 1,253,642.57 27 42,494.09 10,447.02 32,047.O7 1,221,595.50 28 42,494.09 10,179.96 32,314.13 1,189,281.37 29 42,494.09 9,910.68 32,583.41 1,156,697.96 30 42,494.09 9,639.15 32,854.94 1,123,843.02 31 42,494.09 9,365.36 33,128.73 1,090,714.29 32 42,494.09 9,089.29 33,404.80 1,057,309.49 33 42,494.09 8.810.91 33,683.18 1,023,626.31 34 42,494.09 8,530.22 33,963.87 989,662.44 35 42,494.09 8,247.19 34.246.90 955,415.54 36 42,494.09 7,961.80 34,532.29 920,883.24 37 42,494.09 7,674.03 34,820.06 886,063.18 38 42,494.09 7,383.86 35,110.23 850,952.95 39 42,494.09 7,091.27 35,402.81 815,550.14 40 42,494.09 6,796.25 35,697.84 779,852.30 41 42,494.09 6,498.77 35,995.32 743,856.98 42 42,494.09 6,198.81 36,295.28 707,561.70 43 42,494.09 5,896.35 36,597.74 670,963.95 44 42,494.09 5,591.37 36,902.72 634,061.23 45 42,494.09 5,283.84 37,210.25 596,850.99 46 42,494.09 4,973.76 37,520.33 559,330.65 47 42,494.09 4,661.09 37,833.00 521,497.65 48 42,494.09 4,345.81 38,148.28 483,349.38 49 42,494.09 4.027.91 38,466.18 444,883.20 50 42,494.09 3,707.36 38,786.73 406,096.47 51 42,494.09 3,384.14 39,109.95 366,986.52 52 42,494.09 3,058.22 39,435.87 327,550.65 53 42,494.09 2,729.59 39,764.50 287,786.15 54 42,494.09 2,398.22 40,095.87 247,690.28 55 42,494.09 2,064.09 40,430.00 207,260.27 56 42,494.09 1,727.17 40,766.92 166,493.35 57 42,494.09 1,387.44 41,106.64 125,386.71 58 42,494.09 1,044.89 41,449.20 83,937.51 59 42,494.09 699.48 41,794.61 42,142.90 60 42,494.09 351.19 42,142.90 (0.00)
EXHIBIT "B" LIST OF COUNTIES Alameda Contra Costa Fresno Kern Los Angeles Maricopa Orange Riverside Sacramento San Bernadino San Diego San Mateo Santa Barbara Santa Clara Ventura EX-2.5 8 EXHIBIT 2.5 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT ("THE AGREEMENT") is entered into by and between Pacific Coast Title of Santa Barbara County, a California corporation ("Seller"), and American Title Company, a California corporation ("Purchaser"), as of this 9th day of August, 1997. RECITALS 1. Seller owns one hundred percent (100%) of the issued and outstanding shares of the common stock (the "Stock") of Santa Barbara Title Company, a California corporation (the "Company"), and there are no other outstanding classes or series of stock or options, warrants or rights to acquire any shares of stock of the Company. 2. Purchaser desires to acquire one hundred percent (100%) of the Stock. 3. Seller and Purchaser desire to set forth their mutual understanding regarding the terms and conditions upon which the purchase of the Stock will be consummated. NOW, THEREFORE, for and in consideration of the above premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby expressly acknowledged, the parties hereto do hereby agree as follows: I. SALE AND PURCHASE. Subject to the terms and conditions contained herein, at a closing (as defined in Section 2 hereof), Seller shall transfer the Stock to Purchaser. Such transfer shall be evidenced by the delivery to Purchaser of one or more certificates representing the Stock accompanied by duly executed stock powers. 1. CLOSING. Subject to satisfaction of each of the conditions precedent contained in Section 8 hereof, the purchase of the Stock shall be consummated at a closing (the "Closing") to take place at the offices of the Company at 17911 Von Karman Ave., Suite 300, Irvine, CA 92614 upon receipt of the approval of the Department of Insurance of the State of California to this transaction. 2. PURCHASE PRICE. The consideration (the "Purchase Price") to be paid by Purchaser for the purchase of the Stock shall be One Hundred Sixty Thousand Dollars ($160,000.00), which shall be paid at the Closing in the following manner: 1 a. Subject to the terms set forth in Section 3(c) below, One Hundred Fifty Thousand Dollars ($150,000.00) shall be delivered to Seller at the Closing either by cashier's check or wire transfer to an account designated by Seller; and b. Ten Thousand Dollars ($10,000) shall be placed in an escrow account with an escrow agent acceptable to both parties for a period as further described in (c) below. c. Seller and Purchaser agree to the placement of $10,000.00 in an escrow account which amount would have otherwise been payable to Seller as part of the Purchase Price for the Stock in accordance with Section 2 above, to cover all outstanding payables, or other unasserted obligations. If after a period of 30 days from the date of Closing there are remaining funds held in the escrow Seller shall be entitled to receive such funds in full settlement of all amounts otherwise due to Seller under Section 2 above. d. At Closing all of the outstanding trustee work under the name of Pacific Coast Title will transfer to Santa Barbara Title Company. 3. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents and warrants to Purchaser as follows: a. ORGANIZATION AND AUTHORITY. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the state of California. Seller has all requisite power, authority and legal right to enter into this Agreement and, upon receipt of all required regulatory approvals, if any, and the expiration of all required waiting periods, to consummate the transactions contemplated herein. b. ENFORCEABILITY: NO VIOLATION. This Agreement constitutes a valid and binding obligation of Seller enforceable against Seller in accordance with its terms, subject to general principles of equity. Neither the execution and delivery of this Agreement nor the effectuation by Seller of the transactions contemplated hereby (i) will violate any statute or law, or any rule, regulation, order, writ, injunction or decree of any court or governmental authority, or (ii) will violate or conflict with or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default), under, or will result in the termination of, or accelerate the performance required by, any term or provision of (A) the charter or bylaws of Seller, or (B) any contract, commitment, understanding, arrangement, agreement or restriction of any kind or character to which Seller is a party or by which Seller or any of its assets or properties may be bound or affected. Except for filings, consents, approvals or authorizations which will have been made or obtained or actions which will have been taken at or prior to the Closing, no filing with, or consent, approval, authorization or action by, any governmental authority is required in connection with the execution and delivery by Seller of this Agreement or the effectuation by it of the transactions contemplated herein. 2 c. CAPITAL STRUCTURE. The authorized capital stock of the Company consists solely of 10,000 shares of common stock, $1.00 par value, of which 10,000 shares are issued and outstanding. d. TITLE TO STOCK. Seller has good, valid and defensible title to the Stock, free and clear of any lien, mortgage, pledge, voting trust, restriction on sale, proxy or encumbrance and upon consummation of the purchase and sale of the Stock, Seller will deliver such Stock, free and clear of any lien, mortgage, pledge, voting trust, restriction on sale, proxy or encumbrance (other than those imposed by applicable securities laws or created by Purchaser). e. BROKERS OR FINDERS. There is no agent's, broker's or finder's fee or commission payable in connection with the transactions contemplated by this Agreement by virtue of or resulting from any action or agreement by Seller, or any of its representatives, affiliates or associates. f. TAX RETURNS. To the best of Seller's knowledge, all federal, state and local taxes owed by the Company for prior years have been paid and any current federal, state and local taxes will be paid at or prior to the Closing. There are no pending matters or obligations of the Seller or Company related to taxes owed for periods prior to the Closing which have not been disclosed to Purchaser. g. FINANCIAL STATEMENTS. Attached as Schedule A are true, correct and complete copies of (i) the audited financial statements of the Company, including the balance sheets of the Company as at July 31, 1997 (the "Company Balance Sheets"), and the Statements of Operations, Stockholder's Equity and Cash Flows for the three fiscal years then ended, together with the reports thereon of independent certified public accountants (such audited financial statement, including the notes and schedules thereto, if any, are hereinafter referred to as the "Company Financial Statements"); and h. ABSENCE OF UNDISCLOSED LIABILITIES. Except to the extent reflected on the Company Balance Sheet as of July 31, 1997 or on Schedule B attached hereto, the Company does not have any indebtedness, liability or obligation of any nature, whether absolute, accrued, contingent or otherwise, related to or arising from the operation of the business or the ownership, possession or use of any assets, other than those which have arisen since July 31, 1997 in the ordinary course of business on terms and conditions and in amounts consistent with past practices and on terms not more onerous than available to other corporations. Company represents that it will leave all payable current as of the Closing. i. ACTIONS, SUITS, ETC. Schedule C sets forth as of the date of this Agreement all actions, suits, claims, complaints, charges, hearings, investigations, arbitrations (or other dispute resolution proceedings) or other proceedings pending or threatened in writing (or to its knowledge otherwise) against, by or affecting the Company in any court or panel or before any arbitrator or governmental agency, domestic or foreign, other than (1) actions related to garnishments 3 of employee wages, (2) routine matters covered by insurance, (3) policy claims, and (4) matters in which the Company is the plaintiff or claimant and no counterclaim has been asserted. The Company has not been charged with, and to the best of its knowledge is not under investigation with respect to, any charge concerning any violation of any provision of any federal, state or other applicable law or administrative regulation in respect to its business, except as set forth in Schedule D. Except as set forth in Schedule D, there are no judgments unsatisfied against the Company and no consent decrees to which the Company is subject. The Company is not involved in or threatened with any labor dispute which could have a material adverse effect on the business and operations of the Company. j. MATERIAL CONTRACTS. Schedule E sets forth an accurate, correct and complete list of all instruments, commitments, agreements, arrangements and understandings related to the business to which the Company is a party or bound, or pursuant to which the Company is a beneficiary, meeting any of the descriptions set forth below (the "Material Contracts"): (1) Real Estate Leases, Personal Property Leases, insurance policies, licenses of Intellectual Property, Technical Information or Software, Agency Agreements, Employment Contracts and Benefit Plans; (2) Any contract for capital expenditures or for the purchase of goods or services in excess of $20,000, except those incurred in the ordinary course of business and to be performed in six months or less; (3) Any instrument evidencing indebtedness (other than routine purchase orders), any liability for borrowed money, any obligation for the deferred payment of the purchase price for property in excess of $25,000 (excluding normal trade payables), or any instrument guaranteeing any indebtedness, obligation or liability. (4) Any advertising contract not terminable without payment or penalty on sixty (60) days (or less) notice; (5) Any deed, lease, easement, agreement or other instrument affecting any right, title or interest in or to real property; (6) Any contract with any government or any agency or instrumentality thereof; (7) Any license or royalty agreement; (8) Any power of attorney, proxy or similar instrument; 4 (9) Any contract for the purchase or sale of any assets in excess of $50,000 other than in the ordinary course of business or granting an option or preferential rights to purchase or sell any assets in excess of $50,000; (10) Any contract containing covenants not to compete in any line of business or with any person in any geographical area; (11) Any contract relating to the acquisition of a business or the equity of any other person; (12) Any other contract, commitment, agreement, arrangement or understanding related to the business (other than those excluded by an express exception from the descriptions set forth in subsections; (13) Above which provides for payment or performance by either party thereto having an aggregate value of $50,000 or more, and is not terminable without payment or penalty on sixty (60) days (or less) notice. Accurate, correct and complete copies of each Material Contract have been made available to Purchaser. Each Material Contract is in full force and effect and is valid, binding and enforceable as to the Company in accordance with its terms. To Seller's knowledge, each other party has complied in all material respects with all material commitments and obligations on its part to be performed or observed under each Material Contract. No event has occurred which is or, after the giving of notice or passage of time, or both, would constitute a material default under or a material breach of any Material Contract by the Company or, to the knowledge of Seller, by any other party. The Company has not received written notice or to its knowledge been given other notice of an intention to cancel or terminate a Material Contract or to exercise or not exercise options or rights under a Material Contract. The Company has not received any written or, to its knowledge, other notice of a default, offset or counterclaim under any Material Contract, or any other written or, to its knowledge, other communication calling upon the Company to comply with any provision of any Material Contract or asserting noncompliance by the Company. Except as disclosed in this Agreement, the consummation of the transactions contemplated hereby without notice to or consent or approval of any party, will not constitute a default under or a breach of any provision of a Material Contract, and the Company will have and may enjoy and enforce all rights and benefits under each Material Contract after Closing. There is no security interest, lien, encumbrance or claim of any kind on the Company under any Material Contract. 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser hereby represents and warrants to Seller as follows: a. ORGANIZATION AND AUTHORITY. Purchaser is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California. Purchaser has all requisite power, authority and legal right to enter into this Agreement and, upon 5 receipt of all required regulatory approvals, if any, and the expiration of all required waiting periods, to consummate the transactions contemplated herein. b. ENFORCEABILITY; NO VIOLATION. This Agreement constitutes a valid and binding obligation of Purchaser enforceable against Purchaser in accordance with its terms, subject to general principles of equity. Neither the execution and delivery of this Agreement nor the effectuation by Purchaser of the transactions contemplated hereby (i) will violate any statute or law, or any rule, regulation, order, writ, injunction or decree of any court or governmental authority, or (ii) will violate or conflict with or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default), under, or will result in the termination of, or accelerate the performance required by, any term or provision of (A) the charter or bylaws of Purchaser, or (B) any contract, commitment, understanding, arrangement, agreement or restriction of any kind or character to which Purchaser is a party or by which Purchaser or any of its assets or properties may be bound or affected. Except for filings, consents, approvals or authorizations which will have been made or obtained or actions which will have been taken at or prior to the Closing, no filing with, or consent, approval, authorization or action by, any governmental authority is required in connection with the execution and delivery by Purchaser of this Agreement or the effectuation by it of the transactions contemplated herein. c. INVESTIGATION AND REVIEW. Purchaser, with the assistance and advice of its accountants and other advisors whom it has deemed appropriate, will have a full opportunity to complete a review of all information pertaining to the business and financial operations of the Company which will be provided directly to Purchaser or to which Purchaser will be given access either by the Seller or the Seller's representatives. Purchaser will, in addition, be given the opportunity to request additional information concerning the Company's assets, liabilities, books, records and financial status, and will receive full and adequate responses to any such requests. Purchaser shall complete its investigation and review on or before August , 1997. d. BROKERS OR FINDERS . There are no agent's, broker's or finder's fees or commission payable in connection with the purchase of the Stock by virtue of or resulting from any action or agreement of Purchaser or Purchaser's representatives, affiliates or associates. 5. PRE-CLOSING COVENANT OF SELLER. Prior to the Closing, Seller shall not make any cash payments or expenditures out of the Company except for payment of administrative, operational, and maintenance expenses incurred in the normal course of business. 6. CONDITIONS PRECEDENT FOR PURCHASER. The obligations of Purchaser to consummate the purchase of the Stock pursuant to the terms of this Agreement are subject to the satisfaction, prior to or at the Closing, of each of the following conditions, provided, however, that any or all such conditions may be waived in whole or in part by Purchaser: 6 a. SELLER'S COMPLIANCE WITH REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and warranties made by Seller in this Agreement shall have been true and correct when made and shall be true and correct in all respects at the date of the Closing with the same force and effect as if such representations and warranties were made at and as of the Closing date, and Seller shall have performed or complied with all agreements, covenants and conditions required by this Agreement to be performed or complied with by Seller prior to or at the Closing. b. NO LEGAL PROCEEDINGS. At the Closing, no suit, action or other legal or administrative proceeding before any court or other governmental agency shall be pending or threatened by third parties not affiliated with Purchaser or Seller in connection with this Agreement or the consummation of the transactions contemplated herein. c. CERTIFICATE. The Purchaser shall have been furnished at Closing with a certificate of Seller, certifying the matters specified in Section 8(a) above. 7. REPRESENTATIONS AND WARRANTIES TO SURVIVE. Unless otherwise provided herein, all representations and warranties contained in this Agreement and in any certificate or other document delivered pursuant to this Agreement shall survive Closing only for the period ending eighteen (18) months after the Closing. 8. BINDING EFFECT ON THIS AGREEMENT. This Agreement, together with the certificates, affidavits, confidentiality agreements, releases and other instruments delivered by or on behalf of the parties pursuant to this Agreement, constitute the entire contract between the parties, and no party shall be liable for or bound to any warranties, representations or agreements except as specifically set forth herein, therein or in such certificates, affidavits, confidentiality agreements, releases or other instruments. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective heirs, legal representatives, successors and assigns of the parties hereto. Nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto and their respective heirs, legal representatives and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 9. ASSIGNMENT. Seller may not assign its rights or obligations hereunder without the prior written consent of the Purchaser. Purchaser has the right to assign all of its rights and obligations hereunder to any of its underwriting subsidiaries. 10. APPLICABLE LAW. This Agreement is made pursuant to, will be construed under, and will be conclusively deemed for all purposes to have been executed and delivered under, the laws of the State of California. The appropriate state or federal courts located in Orange County, California shall have jurisdiction over all matters arising under the Agreement 7 or any certificates or instruments delivered in connection herewith and will be the proper form in which to adjudicate such matters. 11. NOTICES. All notices, demands and other communications hereunder shall be in writing and will be deemed to have been duly given when delivered or mailed, first class postage pre-paid by certified mail, return receipt requested: If to Seller: PACIFIC COAST TITLE COMPANY OF SANTA BARBARA COUNTY 1333 E. Mountain Drive Santa Barbara, CA 93108 MCL [Initialed] JJB [Initialed] If to Purchaser: American Title Company 17911 Von Karman Ave., Suite 300 Irvine, CA 92614 Such addresses may be changed from time to time by written notice to the other party. 12. SECTION AND OTHER HEADINGS. The headings contained in this Agreement and in any certificates or instruments delivered in connection herewith are for reference purposes only and will not effect in any way the meaning or interpretation of this Agreement. 13. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which will be deemed an original and all of which together will constitute one instrument. 14. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, the legality, validity, and enforceability of the remaining provisions of this Agreement shall not be effected thereby. In lieu of such illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be legal, valid, and enforceable. 15. FORBEARANCE; WAIVER. Forbearance or failure to pursue any legal or equitable remedy or right available to a party upon default or breach under this Agreement shall not constitute waiver of such right, nor shall any such forbearance, failure or actual waiver imply or constitute waiver of subsequent default or breach. 16. EXPENSES. Each party hereto shall pay all expenses and fees incurred by such party incident to this Agreement, and in connection with the consummation of the 8 purchase of the Stock. The prevailing party in a legal proceeding based upon this Agreement shall be entitled to reasonable attorney's fees and court costs in addition to any other recoveries allowed by law. IN WITNESS WHEREOF, the undersigned parties hereto have executed this Agreement effective on the date first stated above. MCL [Initialed] JJB [Initialed] SELLERS: --------------------------------------------- PACIFIC COAST TITLE COMPANY OF SANTA BARBARA COUNTY /s/ [Illegible] ---------------------------- BY: Its: President PURCHASER: --------------------------------------------- AMERICAN TITLE COMPANY /s/ Michael C. Lowther ---------------------------- BY: Michael C. Lowther Its: CEO 9 EX-3.1 9 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION Wayne D. Diaz and M'Liss Jones Kane hereby certify that: 1. They are the President and Secretary, respectively, of ATC Holdings, Inc., a California corporation (the "Corporation"). 2. The Articles of Incorporation of this Corporation are amended and restated in full to read as follows: I. The name of this corporation is "AMERICAN NATIONAL FINANCIAL, INC." II. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business or the practice of a profession permitted to be incorporated by the California Corporations Code. III. A. CLASSES OF STOCK. This Corporation is authorized to issue two classes of stock to be designated, respectively, as "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is fifty-five million (55,000,000) shares. Fifty million (50,000,000) shares shall be Common Stock and five million (5,000,000) shares shall be Preferred Stock. B. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and the liquidation preferences of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status they had prior to the adoption of the resolution originally fixing the number of shares of such series. C. STOCK SPLIT. Upon the amendment of this Article III to read as hereinabove set forth, each outstanding share of Common Stock is divided into six point zero five two eight (6.0528) shares of Common Stock. IV. The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. V. The Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, approval of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the Corporation and its shareholders. Any repeal or modification of this Article shall be prospective and shall not affect the rights under this Article in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. 3. The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of the shareholders of the Corporation in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the Corporation is 465,421 shares of common stock. The number of shares voting in favor of the amendment and restatement equaled or exceed the vote required. The percentage vote required was more that 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. DATED: August 19, 1998 /s/ Wayne D. Diaz ------------------------------- Wayne D. Diaz, President /s/ M'Liss Jones Kane ------------------------------- M'Liss Jones Kane, Secretary EX-3.2 10 EXHIBIT 3.2 BYLAWS OF ATC HOLDINGS, INC. (A CALIFORNIA CORPORATION) ARTICLE I - OFFICES Section 1. The principal executive office of ATC HOLDINGS, INC. (the "Corporation") shall be at such place inside or outside the State of California as the Board of Directors may determine from time to time. Section 2. The Corporation may also have offices at such other places as the Board of Directors may from time to time designate, or as the business of the Corporation may require. ARTICLE II - SHAREHOLDERS' MEETINGS Section 1. ANNUAL MEETINGS. The annual meeting of the shareholders of the Corporation for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting shall be held at such place and at such time as may be fixed from time to time by the Board of Directors and stated in the notice of the meeting. If the annual meeting of the shareholders be not held as herein prescribed, the election of directors may be held at any meeting thereafter called pursuant to these Bylaws. Section 2. SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose whatsoever, unless otherwise prescribed by statute, may be called at any time by the Chairman of the Board, the President, or by the Board of Directors, or by one or more shareholders holding not less than ten percent (10%) of the voting power of the Corporation. Section 3. PLACE. All meetings of the shareholders shall be at any place within or without the State of California designated by the Board of Directors or by written consent of all the persons entitled to vote thereat, given either before or after the meeting. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the Corporation. Section 4. NOTICE. Notice of meetings of the shareholders of the Corporation shall be given in writing to each shareholder entitled to vote, either personally or by first-class mail or other means of written communication, charges prepaid, addressed to the shareholder at his address appearing on the books of the Corporation or given by the shareholder to the Corporation for the purpose of notice. Notice of any such meeting of shareholders shall be sent to each shareholder entitled thereto not less than ten (10) nor more than sixty (60) days before the meeting. Said notice shall state the place, date and hour of the meeting and, (1) in the case of special meetings, the general nature of the business to be transacted, and no other business may be transacted, or (2) in the case of annual meetings, those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders, but subject to Section 601(f) of the California Corporations Code any proper matter may be presented at the meeting for shareholder action, and (3) in the case of any meeting at which directors are to be elected, the names of the nominees intended at the time of the mailing of the notice to be presented by management for election. Section 5. ADJOURNED MEETINGS. Any shareholders' meeting may be adjourned from time to time by the vote of the holders of a majority of the voting shares present at the meeting either in person or by proxy. Notice of any adjourned meeting need not be given unless a meeting is adjourned for forty-five (45) days or more from the date set for the original meeting. Section 6. QUORUM. The presence in person or by proxy of the persons entitled to vote a majority of the shares entitled to vote at any meeting constitutes a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. In the absence of a quorum, any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but no other business may be transacted, except as provided above. Section 7. SHAREHOLDER ACTION BY WRITTEN CONSENT. Any action which may be taken at any meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided, however, that (1) unless the consents of all shareholders entitled to vote have been solicited in writing, notice of any shareholder approval without a meeting by less than unanimous written consent shall be given as required by the California Corporations Code, and (2) directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. Any written consent may be revoked by a writing received by the Secretary of the Corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. Section 8. WAIVER OF NOTICE. The transactions of any meeting of shareholders, however called and noticed, and whenever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice, or a consent to the holding of the meeting, or an approval of the minutes 2 thereof. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 9. VOTING. The voting at all meetings of shareholders need not be by ballot, but any qualified shareholder before the voting begins may demand a stock vote whereupon such stock vote shall be taken by ballot, each of which shall state the name of the shareholder voting and the number of shares voted by such shareholder, and if such ballot be cast by a proxy, it shall also state the name of such proxy. At any meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person, or by proxy appointed in a writing subscribed by such shareholder and bearing a date not more than eleven (11) months prior to said meeting, unless the writing states that it is irrevocable and is held by a person specified in Section 705(e) of the California Corporations Code, in which event it is irrevocable for the period specified in said writing and said Section 705(e). Section 10. RECORD DATES. In the event the Board of Directors fixes a day for the determination of shareholders of record entitled to vote as provided in Section 1 of Article V of these Bylaws, then, subject to the provisions of the General Corporation Law of the State of California, only persons in whose name shares entitled to vote stand on the stock records of the Corporation at the close of business on such day shall be entitled to vote. If no record date is fixed: The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is given; and The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board of Directors shall fix a new record date if the meeting is adjourned for more than forty-five (45) days. Section 11. CUMULATIVE VOTING FOR ELECTION OF DIRECTORS. Provided the candidate's name has been placed in nomination prior to the voting and one or more shareholders has given notice at the meeting prior to the voting of the shareholder's intent to cumulate the shareholder's votes, every 3 shareholder entitled to vote at any election for directors shall have the right to cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder shall think fit. The candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected. ARTICLE III - BOARD OF DIRECTORS Section 1. POWERS. Subject to any limitations in the Articles of Incorporation or these Bylaws and to any provision of the California Corporations Code requiring shareholder authorization or approval for a particular action, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by, or under the direction of, the Board of Directors. The Board of Directors may delegate the management of the day-to-day operation of the business of the Corporation to a management company or other person provided that the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised, under the ultimate direction of the Board of Directors. Section 2. NUMBER, TENURE AND QUALIFICATIONS. The number of directors that shall constitute the whole board shall be not less than five (5) nor more than nine (9), the exact number of directors may be fixed from time to time within such limit by a duly adopted resolution of the Board of Directors or shareholders. Directors need not be shareholders. Directors shall hold office until the next annual meeting of shareholders and until their respective successors are elected. If any such annual meeting is not held, or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. Directors need not be shareholders. Section 3. REGULAR MEETINGS. A regular annual meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide for other regular meetings from time to time by resolution. Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, or the President or any Vice President, or the Secretary or any two (2) directors. Written notice of the time and place of all special meetings of the Board of Directors shall be delivered personally or by telephone or telegraph to each director at least forty-eight (48) hours before the meeting, or sent to each director by first-class mail, postage prepaid, at least four (4) days before the meeting. Such notice need not specify the purpose of the meeting. Notice of any meeting of the Board of Directors need not be given to any director who signs a waiver 4 of notice, whether before or after the meeting, or who attends the meeting without protesting prior thereto or at its commencement, the lack of notice to such director. Section 5. PLACE OF MEETINGS. Meetings of the Board of Directors may be held at any place within or without the State of California, which has been designated in the notice, or if not stated in the notice or there is no notice, the principal executive office of the Corporation or as designated by the resolution duly adopted by the Board of Directors. Section 6. PARTICIPATION BY TELEPHONE. Members of the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Section 7. QUORUM. A majority of the Board of Directors shall constitute a quorum at all meetings. In the absence of a quorum a majority of the directors present may adjourn any meeting to another time and place. If a meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place shall be given prior to the time of the reconvened meeting to the directors who were not present at the time of adjournment. Section 8. ACTION AT MEETING. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board of Directors. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 9. WAIVER OF NOTICE. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting, or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 10. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. Section 11. REMOVAL. The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or who has been convicted of a felony. The entire Board of Directors or any individual director may be removed from office without cause by a vote of shareholders holding a majority of the outstanding shares entitled to vote at an election of directors; provided, however, that unless the entire Board is removed, no individual 5 director may be removed when the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes cast were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director's most recent election were then being elected. In the event an office of a director is so declared vacant or in case the Board or any one or more directors be so removed, new directors may be elected at the same meeting. Section 12. RESIGNATIONS. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 13. VACANCIES. Except for a vacancy created by the removal of a director, all vacancies in the Board of Directors, whether caused by resignation, death or otherwise, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual, regular or special meeting of the shareholders. Vacancies created by the removal of a director may be filled only by approval of the shareholders. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election by written consent requires the consent of a majority of the outstanding shares entitled to vote. Section 14. COMPENSATION. No stated salary shall be paid directors, as such, for their services, but, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of such Board; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 15. COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two (2) or more directors, to serve at the pleasure of the Board of Directors. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have all the authority of the Board of Directors in the management of the business and affairs of the Corporation, except with respect to (a) the approval of any action requiring shareholders' approval or approval of the outstanding shares, (b) the filling of vacancies on the Board or any committee, (c) the fixing of compensation of directors for serving on the Board or a committee, (d) the adoption, amendment or repeal of Bylaws, (e) the amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable, (f) a distribution to shareholders, 6 except at a rate or in a periodic amount or within a price range determined by the Board, and (g) the appointment of other committees of the Board or the members thereof. ARTICLE IV - OFFICERS Section 1. NUMBER AND TERM. The officers of the Corporation shall be a Chairman of the Board, a President, one or more Vice-Presidents, a Secretary and a Chief Financial Officer, all of which shall be chosen by the Board of Directors. In addition, the Board of Directors may appoint such other officers as may be deemed expedient for the proper conduct of the business of the Corporation, each of whom shall have such authority and perform such duties as the Board of Directors may from time to time determine. The officers to be appointed by the Board of Directors shall be chosen annually at the regular meeting of the Board of Directors held after the annual meeting of shareholders and shall serve at the pleasure of the Board of Directors. If officers are not chosen at such meeting of the Board of Directors, they shall be chosen as soon thereafter as shall be convenient. Each officer shall hold office until his successor shall have been duly chosen or until his removal or resignation. Section 2. INABILITY TO ACT. In the case of absence or inability to act of any officer of the Corporation and of any person herein authorized to act in his place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer, or any director or other person whom it may select. Section 3. REMOVAL AND RESIGNATION. Any officer chosen by the Board of Directors may be removed at any time, with or without cause, by the affirmative vote of a majority of all the members of the Board of Directors. Any officer chosen by the Board of Directors may resign at any time by giving written notice of said resignation to the Corporation. Unless a different time is specified therein, such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors. Section 4. VACANCIES. A vacancy in any office because of any cause may be filled by the Board of Directors for the unexpired portion of the term. Section 5. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the Board. Section 6. PRESIDENT. The President shall be the general manager and chief executive officer of the Corporation, subject to the control of the Board of Directors, and as such shall preside at all meetings of shareholders, shall have general supervision of the affairs of the Corporation, shall sign or countersign or authorize another officer to sign all certificates, contracts, and other instruments of the Corporation as authorized by the Board of Directors, shall make reports to the 7 Board of Directors and shareholders, and shall perform all such other duties as are incident to such office or are properly required by the Board of Directors. Section 7. VICE PRESIDENT. In the absence of the President, or in the event of such officer's death, disability or refusal to act, the Vice President, or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their selection, or in the absence of such designation, then in the order of their selection, shall perform the duties of President, and when so acting, shall have all the powers and be subject to all restrictions upon the President. The Vice President shall have such powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. Section 8. SECRETARY. The Secretary shall see that notices for all meetings are given in accordance with the provisions of these Bylaws and as required by law, shall keep minutes of all meetings, shall have charge of the seal and the corporate books, and shall make such reports and perform such other duties as are incident to such office, or as are properly required by the President or by the Board of Directors. The Assistant Secretary or the Assistant Secretaries, in the order of their seniority, shall, in the absence or disability of the Secretary, or in the event of such officer's refusal to act, perform the duties and exercise the powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. Section 9. CHIEF FINANCIAL OFFICER. The Chief Financial Officer may also be designated by the alternate title of "Treasurer." The Chief Financial Officer shall have custody of all moneys and securities of the Corporation and shall keep regular books of account. Such officer shall disburse the funds of the Corporation in payment of the just demands against the Corporation, or as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors from time to time as may be required of such officer, an account of all transactions as Chief Financial Officer and of the financial condition of the Corporation. Such officer shall perform all duties incident to such office or which are properly required by the President or by the Board of Directors. The Assistant Treasurer or the Assistant Treasurers, in the order of their seniority, shall, in the absence or disability of the Chief Financial Officer, or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. Section 10. SALARIES. The salaries of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that such officer is also a director of the Corporation. 8 Section 11. OFFICERS HOLDING MORE THAN ONE OFFICE. Any two or more offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. Section 12. APPROVAL OF LOAN TO OFFICERS. The Corporation may upon the approval of the Board of Directors alone, make loans or money or property to, or guarantee the obligations of, any officer of the Corporation or its parent or subsidiary, whether or not a director, or adopt an employee ;benefit plan or plans authorizing such loans or guaranties provided that (i) the Board of Directors Determines that such a loan or guaranty or plan may reasonably be expected to benefit the Corporation, (ii) the Corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the California Corporations Code) on the date of approval by the Board of Directors, and (iii) the approval of the Board of Directors is by a vote sufficient without counting the vote of any interested director or directors. ARTICLE V - MISCELLANEOUS Section 1. RECORD DATE AND CLOSING OF STOCK BOOKS. The Board of Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to receive payment of any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any other lawful action. The record date so fixed shall not be more than sixty (60) nor less than ten (10) days prior to the date of the meeting or event for the purposes of which it is fixed. When a record date is so fixed, only shareholders of record at the close of business on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date. The Board of Directors may close the books of the Corporation against transfers of shares during the whole or any part of a period of not more than sixty (60) days prior to the date of a shareholders' meeting, the date when the right to any dividend, distribution, or allotment of rights vests, or the effective date of any change, conversion or exchange of shares. Section 2. CERTIFICATES. Certificates of stock shall be issued in numerical order and each shareholder shall be entitled to a certificate signed in the name of the Corporation by the Chairman of the Board or the President or a Vice President, and the Chief Financial Officer or the Secretary or an Assistant Secretary, certifying to the number of shares owned by such shareholder. Any or all of the signatures on the certificate may be facsimile. Prior to the due presentment for registration of transfer in the stock transfer book of the Corporation, the registered owner shall be treated as the person exclusively entitled to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner, except as expressly provided otherwise by the laws of the State of California. Section 3. REPRESENTATION OF SHARES IN OTHER CORPORATIONS. Shares of other corporations standing in the name of this Corporation may be voted or represented and all incidents 9 thereto may be exercised on behalf of the Corporation by the Chairman of the Board President or the Vice President and the Chief Financial Officer or the Secretary or an Assistant Secretary. Section 4. FISCAL YEAR. The fiscal year of the Corporation shall end on the 31st day of December. Section 5. ANNUAL REPORTS. The Annual Report to shareholders, described in the California Corporations Code, is expressly waived and dispensed with. Section 6. AMENDMENTS. Bylaws may be adopted, amended, or repealed by the vote or the written consent of shareholders entitled to exercise a majority of the voting power of the Corporation. Subject to the right of shareholders to adopt, amend, or repeal Bylaws, Bylaws may be adopted, amended, or repealed by the Board of Directors, except that a Bylaw amendment thereof changing the authorized number of directors may be adopted by the Board of Directors only if these Bylaws permit an indefinite number of directors and the Bylaw or amendment thereof adopted by the Board of Directors changes the authorized number of directors within the limits specified in these Bylaws. Section 7. INDEMNIFICATION OF CORPORATE AGENTS. The Corporation shall indemnify each of its agents against expenses, judgments, fines, settlements and other amounts, actually and reasonably incurred by such person by reason of such person's having been made or having been threatened to be made a party to a proceeding to the fullest extent permissible under the California Corporations Code and the Corporation shall advance the expenses reasonably expected to be incurred by such agent in defending any such proceeding upon receipt of the undertaking required by subdivision (f) of Section 317 of the California Corporations Code. The terms "agent", "proceeding" and "expenses" made in this Section 7 shall have the same meaning as such terms in said Section 317. 10 EX-10.6 11 EXHIBIT 10.6 Fidelity National Title INSURANCE COMPANY ISSUING AGENCY AGREEMENT This Agreement is made this 1 day of JULY, 1997 between FIDELITY NATIONAL TITLE INSURANCE COMPANY, a California corporation ("Company"), and American Title Company ("Agent") (collectively, the "Parties"). In consideration of the mutual benefits accruing and subject to the terms and conditions hereof, the Parties agree as follows: The Schedules indicated below are attached and incorporated by reference: [ x ] Schedule A: Effective Date of Agreement, Agent's Territory, Liability Limit, Compensation, General Liability of Agent [ x ] Schedule B: Corporate Agent's Bond and Insurance Requirements [ x ] Schedule C: Exclusivity [ ] Schedule D: Personal Guarantee 1. APPOINTMENT AND AUTHORITY OF AGENT Company appoints Agent solely to countersign and issue title insurance commitments, binders, guarantees, endorsements, title insurance policies of Company, or any other form whereby Company assumes liability (collectively, "Title Assurances") in Agent's Territory set forth in Schedule A. 2. RESPONSIBILITY OF AGENT A. Affirmative Covenants. Agent shall: l. Receive and process applications for Title Assurances in accordance with the provisions of state law, in conformity with usual and customary practices and procedures, prudent underwriting principles and in full compliance with manuals. instructions, and bulletins of Company from time to time given to Agent. 2. Maintain a Policy Register (the "Policy Register") referencing the Agent's file number, policy number, date of issue, name of insured, amount of policy, premium charged, and the description of land insured. A legible copy of the Policy Register shall be tendered to Company upon termination of this Agreement or at any time as requested by Company. 3. Make available for examination by Company, at any time during normal business hours and with reasonable prior notice from Company during the term of this Agreement, all financial records and records relating to the issuance of Company's Title Assurances by Agent. 4. Provide to Company copies of any audited and any unaudited financial reports or data submitted to any regulatory agencies with jurisdiction over Agent. 5. Permit Company and its examiners, auditors, and independent certified public accountants to enter Agent's business promises for the purpose of inspecting same or performing a financial, procedural, technical or forms audit. 6. Comply with all applicable federal, state and local laws including statutes, ordinances, rules, regulations and judicial opinions. 7. Obtain Company's prior approval where funds are to be held under an escrow and/or indemnity agreement in order to facilitate the issuance of a Title Assurance without exception to or with affirmative coverage over a specific defect, lien or encumbrance. The funds and property held under any such escrow and/or indemnity agreement, together with the original documents evidencing the escrow/indemnity, shall be transferred to Company on request of Company. 8. Keep safely and segregated, in an FDIC insured escrow/trust account, which is subject to audit by Company, all monies that may be entrusted to Agent by Company, or others, in the course of: (i) Agent's business operations; and, (ii) the issuance of Company's Title Assurances hereunder. Agent shall exercise a fiduciary duty with respect to the owners of the funds so deposited. Agent shall be solely liable for any and all losses arising by reason of Agent's improper, unauthorized, reckless or premature disbursement of any escrowed funds. 9. Retain for seven (7) years, or such other time period required by law, an original or legible copy of its file to evidence the determination of insurability. 10. IF AGENT IS A CORPORATION OR PARTNERSHIP, DISCLOSE TO COMPANY ANY CHANGE IN THE CONTROLLING INTEREST IN SAID CORPORATION OR PARTNERSHIP WITHIN FIVE (5) BUSINESS DAYS OF THE CHANGE. A CHANGE IN THE CONTROLLING INTEREST SHALL BE DEEMED TO OCCUR WHEN AN OWNER OF MORE THAN FIFTY PERCENT (50%) OF THE CAPITAL STOCK OF SAID CORPORATION CEASES TO OWN MORE THAN FIFTY PERCENT (50%) OF SAID STOCK, OR WHEN THERE IS A SALE OF SUBSTANTIALLY ALL OF AGENT'S ASSETS OR WHEN THERE IS A CHANGE IN MORE THAN FIFTY PERCENT (50%) OWNERSHIP OF THE INTEREST(S) IN THE PARTNERSHIP. B. Negative Covenants. Agent shall not, without the prior written approval of Company's corporate underwriting department: 1. Accept service of process on behalf of Company. Page 1 of 6 2. Incur debts in the name of Company. 3. Issue any Title Assurance in a liability amount in excess of the Risk Limit stated in Schedule A. 4. Commit Company to insure any Extra Hazardous Risk as defined herein. 5. Alter any Title Assurance or other form furnished by Company or commit Company to any particular interpretation of provisions or terms of any Title Assurance. 6. Receive any funds including escrow, settlement or closing funds, in the name of Company, but shall receive funds solely in Agent's name. 7. Use Company's name in any manner inconsistent with the terms and conditions of this Agreement. 8. Issue any Title Assurance on land in which any officer, director, shareholder or partner of Agent has an interest. 3. RESPONSIBILITY OF COMPANY Company shall: A. Furnish to Agent, without cost, the then currently approved forms of Title Assurances which Agent is authorized to issue hereunder. B. Provide Agent with any relevant Company manuals, underwriting bulletins and/or instructions which may now or hereafter be issued by Company. C. Be responsible for remitting payment of all Premium taxes. D. Determine all underwriting questions submitted by Agent. E. Arrange for reinsurance when necessary, but only to the extent reinsurance is reasonably available. F. Furnish its Insured Closing Service Letter to each of Agent's qualified customers requesting same. 4. COMPENSATION A. Agent shall remit to Company a percentage of the gross Premiums as set for in Schedule A on all Title Assurances issued by Agent. Agent shall hold Company's percentage of gross Premiums in trust for Company until such time as such remittances are made to Company. B. No later than the tenth (10th) of each calendar month Agent shall submit to company copies, with Premium charged set forth thereon, of all Title Assurances issued by Agent during the previous calendar month, remit the Company's percentage of the Premium charged for such Title Assurances and shall return all spoiled, obsolete or canceled policies accumulated during the previous calendar month. 5. REINSURANCE AND COINSURANCE If reinsurance or coinsurance is purchased, the cost shall be deducted from the Title Assurance Premium before determining the compensation due to Agent and the remaining Premium together with the cost of the reinsurance or coinsurance shall be remitted to Company, except as otherwise agreed in writing between the Parties. 6. ALLOCATION OF LOSSES A. Agent's General Liability shall be as set forth in Schedule A for any Loss sustained or incurred as a result of the issuance of Title Assurances by Agent, unless otherwise mandated by state and federal law. B. In the event that a Loss sustained or incurred for a matter arising under this Agreement resulted or arose from the negligent, willful or reckless conduct of Agent, Agent's employees or any independent contractor relied upon by Agent, then Agent shall reimburse Company for the Loss. The instances where Agent shall be liable to Company under this subparagraph shall include, without limitation, the following: 1. Failure of Agent to comply with the terms and conditions of this Agreement or with the manuals, underwriting bulletins and/or instructions given to Agent by Company. 2. Issuance of Title Assurances which contain errors or omissions which could reasonably have been detected by Agent from the commitment, examiner's report, title search or abstract. 3. Loss arising from escrow or Non-Title Assurance operations of Agent including, but not limited to, preparation of documents, providing abstracting services, providing accommodation services and the handling and disbursement of funds. 4. Any Loss arising out of the issuance of an insured closing service letter naming Agent. 5. Commission of fraud, conspiracy, dishonesty, misrepresentation or defalcation by Agent or Agent's aiding and abetting therein. 6. Any act, or failure to act, of Agent which results in Company sustaining Loss for bad faith, deceptive trade practices, unfair claim practices, consumer protection violations or punitive damages. C. Agent shall be liable to Company for any Loss resulting to Company by reason of Agent's failure to comply with the terms and conditions of this Agreement. D. Recovery of Loss under a claim will first be applied to reimbursement of Company's Loss, then the balance, if any, to reimburse Agent's loss. However, if Agent renders material assistance in achieving recovery of a Loss, then the recovered funds will be applied: (i) first, to reimburse Company's recovery related expenses; (ii) second, to Agent's recovery related expenses; and, (iii) third, to Company and Agent in accordance with the percentage of loss paid by each party. 7. CLAIMS, LITIGATION AND ADMINISTRATIVE PROCEEDINGS A. Agent shall immediately notify Company of and immediately forward to Company: 1. Any claim, or threatened claim, under any Title Assurance issued hereunder. 2. Any judicial action or proceeding affecting or purporting to affect: (i) Company's interest; or (ii) the rights of an insured or proposed insured under a Title Assurance issued by Agent. 3. Any administrative proceeding, including any written complaints or inquiries, by any insurance department or regulatory agency involving: (i) one or both of the Parties; or (ii) a Title Assurance issued by Agent. Agent shall provide an initial notification to Company describing the allegations and basic known facts. This initial notification shall be provided, at the addresses and telephone numbers set forth herein, by: (i) telephone advice; and, (ii) overnight courier; or, (iii) facsimile transmission. Initial notification shall be provided to Company within three (3) business days of Agent becoming aware of any of the matters described in this Page 2 of 6 subparagraph 7 A. Following this initial notification Agent shall forward, as soon as reasonably possible, all relevant documents to Company by overnight courier or certified or registered mail. Agent agrees to keep Company fully advised and to promptly forward all relevant communications and other writings or documents. Agent shall acknowledge receipt of any notice in the manner set forth by Company. B. Agent agrees that Company shall be fully authorized and empowered, in its absolute discretion, to control, defend, prosecute, settle, compromise, and/or dispose of any claim, litigation or proceeding for which: (i) Company may be liable; and/or (ii) an insured under a Title Assurance may be liable. Company shall have the rights to select and approve any counsel representing Company or an insured under a Title Assurance. Unless specifically authorized by Company in writing, Agent shall have no right to defend, deny, settle, compromise, or dispose of any action against Company or an insured. Company shall have no obligation to provide a defense to Agent. 8. TERMINATION OF AGREEMENT This Agreement shall be in force for a period of five (5) years, thereafter to be renewed upon renegotiation by both parties. 9. PAYMENT OF COSTS AND EXPENSES If either party shall institute an action against the other for breach of this Agreement, the unsuccessful party shall pay court costs and reasonable attorneys' fees to the successful party. 10. NOTICES All notices permitted or required to be given under this Agreement shall be in writing addressed as shown below, and may be: (i) personally delivered; or, (ii) delivered by express courier service; or (iii) mailed by certified or registered United States Mail. The effective date of notice shall be: (i) the date of delivery for personal or express courier deliveries; (ii) the date shown on the "return card" for certified or registered mail if delivery is by certified or registered mail. Said notices shall be addressed as follows: Original to Company: Fidelity National Title Insurance Company 17911 Von Karman Avenue, Suite 300 Irvine, California 92714 Original to Agent: American Title Company c/o: Wayne Diaz or Mike Lowther The person and/or address for notice may be changed by written notice. Telephone and telefax numbers are shown for purpose of preliminary claim and/or legal proceedings notice under paragraph 7 of this Agreement. 11. GENERAL PROVISIONS A. Assignment. This Agreement is not assignable by either party without the prior written consent of the other. This Agreement is, however, binding on and inures to the benefit of any corporate successors or assigns of Company and Agent. B. Counterparts. This Agreement may be executed in counterparts which shall collectively constitute a single agreement. C. Waiver. By failing to exercise any of its rights hereunder, Company shall not be deemed to have waived any breach on the part of Agent or to have released Agent from any of its obligations hereunder. The waiver by either party of a breach of any provision of this Agreement shall not be deemed a continuing waiver or a waiver of any subsequent breach of any provision of this Agreement. D. Severability. If any one or more of the terms of this Agreement shall be adjudged unenforceable, void, or voidable, the remaining terms shall not be affected thereby and shall be valid and enforceable to the full extent permitted by law. E. Continuing Obligations. In the event this Agreement is terminated, the obligations to make any payments, including without limitation Agent's share of any Loss under paragraph 6 herein, to provide notification as to claims and to provide access to records and files shall continue beyond the date of termination. F. Headings. The subject headings of the paragraphs and subparagraphs of this Agreement are included for convenience and shall not affect the construction or interpretation of any of their provisions. G. Time of the Essence. Time shall be of the essence with respect to all terms of this Agreement. H. Further Cooperation. Each of the Parties hereto shall execute and deliver any and all additional documents and other assurances and shall do any and all acts and things reasonably necessary in connection with the performance of their obligations hereunder and to carry out the intent of the Parties. I. Entire Agreement. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof, supersedes all prior discussions, understandings or agreements between the Parties and shall not be amended, modified, or otherwise changed in any manner except in writing by the Parties. 12. DEFINITION OF TERMS A. Loss. Loss shall mean sums paid or to be paid by Company, in cash or otherwise, to settle or compromise claims under any of Company's Title Assurances issued by Agent. Loss shall include, but not be limited to, expenses, costs and attorneys' fees actually paid or incurred in connection with investigation, negotiation, litigation, or settlement of such Page 3 of 6 claim which ultimately requires payment of any sum by Company. Loss, as defined herein, shall be reduced by the value of any recoveries actually realized by Company. B. Premium. Premium shall mean the amount payable or paid in accordance with Company's rates in effect or as otherwise approved by Company in writing for the issuance of Title Assurances. C. Extra Hazardous Risks. Extra Hazardous Risks shall mean all risks which result in a liability not normally assumed by the Company. Extra Hazardous Risks include, without limitation, the issuance of a Title Assurance without a Schedule "B" exception for any of the following matters where said matters affect the subject property: 1. Unrecorded construction/mechanics' liens which may gain priority over the interest insured where Agent is aware that the owner, general contractor or a subcontractor may not be paying its debts as they become due. 2. Any interest of the applicable state, the United States or other governmental entity in tidelands, swamp and overflow waters, existing streams or rivers or lands which currently or formerly were beneath a navigable waterbody. 3. Outstanding subsurface rights containing a right of entry. 4 Existing liens and encumbrances. 5. Bankruptcy, insolvency or creditors' rights. 6. Major encroachments. 7. Non-imputation of knowledge. 8. Indian land or restricted Indian title. 9. Pending actions and litigation. 10. Any risk involving a title about which Agent has knowledge of an existing dispute or of risks, adverse claims or questions of title known in the community. IN WITNESS WHEREOF, the Parties have caused this Agreement to be properly executed by their respective representatives having full authority to do so. AGENT: COMPANY: AMERICAN TITLE COMPANY FIDELITY NATIONAL TITLE INSURANCE COMPANY By: /s/ WAYNE DIAZ By: /s/ M'LISS JONES KANE -------------------------------- ------------------------------------ President ATTEST: /s/ MICHAEL LOWTHER ATTEST: /s/ [Illegible] ---------------------------- -------------------------------- Its: [Signature] Its: [Signature] -------------------------------- ----------------------------------- NOTIFICATION IN COMPLIANCE WITH SECTION 606(A) OF "THE FAIR CREDIT REPORTING ACT" In making this Agreement, it is understood that an investigative report may be made whereby information is obtained through personal interviews with third parties such as family members, business associates, financial sources, friends, neighbors or others with whom you are acquainted. This inquiry includes information as to your character, general reputation, personal characteristics, and mode of living, whichever may be applicable. You have the right to make a written request within a reasonable period of time for a complete and accurate disclosure of additional information concerning the nature and scope of the investigation. Attached and made a part of the Agreement by and between Fidelity National Title Insurance Company ("Company") and American Title Company ("Agent"). Page 4 of 6 SCHEDULE A EFFECTIVE DATE OF AGREEMENT, AGENT'S TERRITORY LIABILITY LIMIT, COMPENSATION, GENERAL LIABILITY OF AGENT 1. Effective Date of Original Agreement: Date the California Department of Insurance approves the sale of 60% of American Title Company to American Title Company Holdings, Inc. 2. Effective Date of Extension: 3. Agent's Territory: Kern County Alameda County Contra Costa County Fresno County Los Angeles County Madera County Orange County Riverside County San Bernardino County Sacramento County San Diego County San Mateo County Santa Clara County Ventura County 4. Liability Limit: On any Title Assurance which has liability in excess of $1,000,000.00, Agent shall first review and obtain Company's written approval prior to issuing the Title Assurance. 5. Compensation: Agent shall pay Company twelve percent (11%) of the gross premiums on all Title Assurances issued by Agent. There shall be an additional 1% Management Fee. Management Fee shall be for accounting services including but not limited to accounting profit and loss and balance sheet information, corporate legal including underwriting, human resources including insurance and 401K, statutory auditing including the preparation of all statutory reports and federal and state tax returns. In the event that Agent no longer needs management's services, upon ninety (90) days' prior notice to Company said fee and services shall terminate. 6. General Liability of Agent: Subject to the provisions of subparagraph 6B above, Agent shall be liable for the first $5,000.00 of any Loss sustained or incurred by Company as a result of the issuance of the Title Assurances by Agent. 7. Governing Law: This Agreement is to be construed, enforced, and governed according to and by the laws of the State of California in all respects. SCHEDULE B CORPORATE AGENT'S BOND AND INSURANCE REQUIREMENTS 1. Agent shall, at its own expense, maintain a blanket fidelity bond in a principal sum of at least Fifty Thousand Dollars and No Cents ($50,000.00) in a form and issued by a company acceptable to Company and naming Company as an additional insured or payee. 2. Agent shall, at its own expense, maintain errors and omissions liability insurance in a principal sum of at least Two Hundred Fifty Thousand Dollars and No Cents ($250,000.00) per occurrence and Five Hundred Thousand Dollars and No Cents ($500,000.00) total annually, in a form and issued by a company acceptable to Company, with a deductible of no more than Five Thousand Dollars and No Cents ($5,000.00) and naming Company as an additional insured or payee. 3. Agent shall annually furnish Company with true copies of the bond(s) and policy together with current premium receipts for said bond(s) and insurance. 4. Upon request of Company, Agent agrees to notify its fidelity bond or errors and omissions insurance carrier of any claim for which Agent may be liable to Company. SCHEDULE C EXCLUSIVITY During the term of this Agreement, Agent shall not act as Agent for or in any manner aid the procurement of any Title Assurance for any other title insurance company except Fidelity National Title Insurance Company of California unless: (i) Company declines to issue insurance with respect to a particular transaction (in which case Agent may use any title insurance company of its choosing with respect to that particular transaction): (ii) Lessor otherwise consents to the Lessee's use of another underwriter; or (iii) a customer of Lessee declines to accept title insurance from Lessor. Page 5 of 6 The coincidental use by a competitive title insurer of an abstract or title report prepared by Agent shall not be construed as a violation of this provision. In the event that control of the Company is transferred to an independent third party, outside of the Fidelity companies (which shall include any Fidelity affiliate, subsidiary or employee), Agent shall have the right to cause this Agreement to become non-exclusive for the remainder of the term of the Agreement. COMPLIANCE WITH CALIFORNIA LAND TITLE ASSOCIATION ACCOUNT, OVERSIGHT AND CONTROL GUIDELINES Company and Agent hereby agree that effective January 1, 1996, Agent shall comply with the California Land Title Association Account Review Processes and Oversight and Internal Control Guidelines, the American Land Title Association Escrow Internal Control Guidelines for Title Insurance Companies, Agencies and Approved Attorneys and Employee Affidavit (collectively referred to as the "Guidelines") in compliance with Section 12389.8 of the California Insurance Code. Agent shall comply with the procedures set out in said Guidelines as they may be further modified from time to time by Company in order to comply with requirements of the Department of Insurance or the California Insurance Code. In the event of any disparity between said Guidelines and the California Insurance Code, the provision of the Insurance Code shall prevail. Page 6 of 6 EX-10.7 12 EXHIBIT 10.7 ISSUING AGENCY AGREEMENT This Agreement is made this 25th day of August, 1997, between FIDELITY NATIONAL TITLE INSURANCE COMPANY, a California corporation ("Company"), and Santa Barbara Title Company, a California Corporation ("Agent") (collectively, the "Parties"). In Consideration of the mutual benefits accruing and subject to the terms and conditions hereof, the Parties agree as follows: The Schedules indicated below are attached and incorporated by reference: [ X ] Schedule A: Effective Date of Agreement, Agent's Territory, Liability Limit, Compensation, General Liability of Agent [ X ] Schedule B: Corporate Agent's Bond and Insurance Requirements [ X ] Schedule C: Exclusivity [ ] Schedule D: Personal Guarantee l. APPOINTMENT AND AUTHORITY OF AGENT Company appoints Agent solely to countersign and issue title insurance commitments, binders, guarantees, endorsements, title insurance policies of Company, or any other form whereby Company assumes liability (collectively, "Title Assurance"j in Agent's Territory set forth in Schedule A. 2. RESPONSIBILITY OF AGENT A. Affirmative Covenants. Agent Shall: 1. Receive and process applications for Title Assurances in accordance with the provisions of state law, in conformity with usual and customary practices and procedures, prudent underwriting principles and in full compliance with manuals, instructions, and bulletins of company from time to time given to Agent. 2. Maintain a Policy Register (the "Policy Register") referencing the Agent's file number, policy number, date of issue, name of insured, amount of policy, premium charged, and the description of land insured. A legible copy of the policy Register shall be tendered to Company upon termination of this Agreement or at any time as requested by Company. 3. Make available for examination by Company, at any time during normal business hours and with reasonable prior notice from Company during the term of this Agreement, all financial records and records relating to the issuance of Company's Title Assurances by Agent. 4. Provide to Company copies of any audited and any unaudited financial reports or data submitted to any regulator agencies with jurisdiction over Agent. 5. Permit Company and its examiners, auditors, and independent certified public accountants to enter Agent's business premises for the purpose of inspecting same of performing a financial, procedural, technical or forms audit. 6. Comply with all applicable federal, state and local laws including statutes, ordinances, rules, regulations and judicial opinions. 7. Obtain Company's prior approval where funds are to be held under an escrow and/or indemnity agreement in order to facilitate the issuance of a Title Assurance without exception to or with affirmative coverage over a specific defect, lien or encumbrance. The funds and property held under any such escrow and/or indemnity agreement, together with the original documents evidencing the escrow/indemnity, shall be transferred to Company on request of Company. 8. Keep safely and segregated, in a FDIC insured escrow/trust account, which is subject to audit by Company, all monies that may be entrusted by Agent by Company, or others, in the course of: (i) Agent's business operations; and, (ii) the issuance of Company's Title Assurances hereunder. Agent shall exercise a fiduciary duty with respect to the owners of the funds so deposited. Agent shall be solely liable for any and all losses arising by reason of Agent's improper, unauthorized, reckless or premature disbursement of any escrowed funds. 9. Retain for seven (7) years, or such other time period required by law, an original or legible copy of its file to evidence the determination of insurability. 10. If Agent is a corporation or partnership, disclose to Company any change in the controlling interest in said corporation or partnership within five (5) business days of the change. A change in the controlling interest shall be deemed to occur when an owner of more then fifty percent (50%) of the capital stock of said corporation ceases to own more than fifty percent (50% ) of said stock, or when there is a sale of substantially all of Agent's assets or when there is a change in more than fifty percent (50% ) ownership of the interest(s) in the partnership. B. Negative Covenants. Agent shall not, without the prior written approval of Company's corporate underwriting department: 1. Accept service of process on behalf of Company. 2. Incur debts in the name of Company. 3. Issue any Title Assurance in a liability amount in excess of the Risk Limit stated in Schedule A. 4. Commit Company to insure any Extra Hazardous Risk as defined herein. 5. Alter any Title Assurance or other form furnished by Company or commit Company to any particular interpretation of provisions or terms of any Title Assurance. 6. Receive any funds including escrow settlement or closing funds, in the name of Company, but shall receive funds solely in Agent's name. 7. Use Company's name in any manner inconsistent with the terms and conditions of this Agreement. 8. Issue any Title Assurance on land in which any officer, director, shareholder or partner of Agent has an interest. 1 3. RESPONSIBILITY OF COMPANY Company shall: A. Furnish to Agent. without cost, the then currently approved forms of Title Assurances which Agent is authorized to issue hereunder. B. Provide Agent with any relevant Company manuals, underwriting bulletins and/or instructions which may now or hereafter be issued by Company. C. Be responsible for remitting payment of all Premium taxes. D. Determine all underwriting questions submitted by Agent. E. Arrange for reinsurance when necessary, but only to the extent reinsurance is reasonably available. F. Furnish its Insured Closing Service Letter to each of Agent's qualified customers requesting same. 4. COMPENSATION A. Agent shall remit to Company a percentage of the gross Premiums as set for in Schedule A on all Title Assurances issued by Agent. Agent shall hold Company's percentage of gross Premiums in trust for Company until such time as such remittances are made to Company. B. No later than the tenth (10th) of each calendar month Agent shall submit to company copies, with Premium charged set forth thereon, of all Title Assurances issued by Agent during the previous calendar month, remit the Company's percentage of the Premium charged for such Title Assurances and shall return all spoiled, obsolete or canceled policies accumulated during the previous calendar month. 5. REINSURANCE AND COINSURANCE If reinsurance or coinsurance is purchased, the cost shall be deducted from the Title Assurance Premium before determining the compensation due to Agent and the remaining Premium together with the cost of the reinsurance or coinsurance shall be remitted to Company, except as otherwise agreed in writing between the Parties. 6. ALLOCATION OF LOSSES A. Agent's General Liability shall be as set forth in Schedule A for any Loss sustained or incurred as a result of the issuance of Title Assurances by Agent, unless otherwise mandated by state and federal law. B. In the event that a Loss sustained or incurred for a matter arising under this Agreement resulted or arose from the negligent, willful or reckless conduct of Agent, Agent's employees or any independent contractor relied upon by Agent, then Agent shall reimburse Company for the Loss. The instances where Agent shall be liable to Company under this subparagraph shall include, without limitation, the following: 1. Failure of Agent to comply with the terms and conditions of this Agreement or with the manuals, underwriting bulletins and/or instructions given to Agent by Company. 2. Issuance of Title Assurances which contain errors or omissions which could reasonably have been detected by Agent from the commitment, examiner's report, title search or abstract. 3. Loss arising from escrow or Non-Title Assurance operations of Agent including, but not limited to, preparation of documents, providing abstracting services, providing accommodation services and the handling and disbursement of funds. 4. Any Loss arising out of the issuance of an insured closing service letter naming Agent. 5. Commission of fraud, conspiracy, dishonesty, misrepresentation or defalcation by Agent or Agent's aiding and abetting therein. 6. Any act, or failure to act, of Agent which results in Company sustaining Loss for bad faith, deceptive trade practices, unfair claim practices, consumer protection violations or punitive damages. C. Agent shall be liable to Company for any Loss resulting to Company by reason of Agent's failure to comply with the terms and conditions of this Agreement. D. Recovery of Loss under a claim will first be applied to reimbursement of Company's Loss, then the balance, if any, to reimburse Agent's loss. However, if Agent renders material assistance in achieving recovery of a Loss, then the recovered funds will be applied: (i) first, to reimburse Company's recovery related expenses; (ii) second, to Agent's recovery related expenses; and, (iii) third, to Company and Agent in accordance with the percentage of loss paid by each party. 7. CLAIMS, LITIGATION AND ADMINISTRATIVE PROCEEDINGS A. Agent shall immediately notify Company if Agent becomes aware of: l. Any claim, or threaten claim, under any Title Assurance issued hereunder. 2. Any judicial action or proceeding affecting or purporting to affect: (i) Company's interest; or (ii) the rights of an insured or proposed insured under a Title Assurance issued by Agent. 3. Any administrative proceeding, including any written complaints or inquiries, by any insurance department or regulatory agency involving: (i) one or both of the Parties; or (ii) a Title Assurance issued by Agent. Agent shall provide an initial notification to Company describing the allegations and basic known facts. This initial notification shall be provided, at the addresses and telephone numbers set forth herein, by: (i) telephone advice; and, (ii) overnight courier, or, (iii) facsimile transmission. Initial notification shall be provided to Company within three (3) business days of Agent becoming aware of any of the matters described in this subparagraph 7 A. Following this initial notification Agent shall forward, as soon as reasonably possible, all relevant documents to Company by overnight courier or certified or registered mail. Agent agrees to keep Company fully advised and to promptly forward all relevant communications and other writings or documents. Agent shall acknowledge receipt of any notice in the manner set forth by Company. 2 B. Agent agrees that Company shall be fully authorized and empowered, in its absolute discretion, to control, defend, prosecute, settle, compromise, and/or dispose of any claim, litigation or proceeding for which: (i) Company may be liable; and/or (ii) an insured under a Title Assurance may be liable. Company shall have the rights to select and approve any counsel representing Company or an insured under a Title Assurance. Unless specifically authorized by Company in writing, Agent shall have no right to defend, deny, settle, compromise, or dispose of any action against Company or an insured. Company shall have no obligation to provide a defense to Agent. 8. TERMINATION OF AGREEMENT A. This Agreement may be terminated by either party without cause upon thirty (30) days' written notice to the other party. B. This Agreement may be terminated by Company upon ten (10) day's written notice to Agent upon the occurrence of: (i.) A material failure of Agent to fulfill the obligations created under this Agreement, unless Agent cures such default to satisfaction of Company within such time; or (ii.) A change, not approved by Company, in the controlling interest in Agent, if Agent is a corporation or partnership. C. This Agreement may be immediately terminated by Company if: (i.) Financial irregularities are disclosed as result of an audit or examination of Agent's records or upon failure of Agent to allow review of its financial records or records relating to issuance of Company's Title Assurances by Agent. (ii.) Agent applies for, consents to, or commences a case seeking liquidation, insolvency, receivership or bankruptcy, voluntary or involuntary, or has a conservator or rehabilitator appointed, or has its license or permit to do business suspended or canceled, or if the State covered by the Agreement, Federal authorities or any regulatory body or court shall commence a proceeding, which proceeding if successful, would lead to cancellation of Agent's permit or license to do business. (iii.) Company ceases to transact business in Agent's territory. D. Upon termination of this agreement, Agent shall promptly furnish to Company all funds, property and agreements held as security for affirmative assurances given by Agent with respect to Company's Title Assurances, together with a complete accounting and immediate payment of any and all unpaid premiums owing to Company, and Agent shall return to Company the Policy Register, all unused forms, blanks and supplies, and all manuals, bulletins and instructions furnished by Company to Agent. Should Agent fail or refuse to return any or all of the above, Company shall have the right to enter Agent's premises and remove same. Agent may retain a copy of the Policy Register for its files and for its exclusive use in complying with the surviving obligations as set forth herein. 9. PAYMENT OF COSTS AND EXPENSES If either party shall institute an action against the other for breach of this Agreement, the unsuccessful party shall pay court costs and reasonable attorneys' fees to the successful party. 10. NOTICES All notices permitted or required to be given under this Agreement shall be in writing addressed as shown below, and may be: (i) personally delivered; or, (ii) delivered by express courier service; or (iii) mailed by certified or registered United States Mail. The effective date of notice shall be: (i) the date of delivery for personal or express courier deliveries; (ii) the date shown on the "return card" for certified or registered mail if delivery is by certified or registered mail. Said notices shall be addressed as follows: Original to Company: Fidelity National Tile Insurance Company 17911 Von Karman Avenue, Suite 410 Irvine, California 92614-6253 Attn.: Western agency Department With a Copy to: Fidelity National Tile Insurance Company 17911 Von Karman Avenue, Suite 300 Irvine, California 92614-6253 National Claims Administration Original to Agent: Santa Barbara Title Company 205 East Carrillo Street Santa Barbara, CA 93102 The person and/or address for notice may be changed by written notice. Telephone and telefax numbers are shown for purposes of preliminary claim and/or legal proceedings notice under paragraph 7 of this Agreement. 11. GENERAL PROVISIONS A. Assignment. This Agreement is not assignable by either party without the prior written consent of the other. This Agreement is. however, binding on and inures to the benefit of any corporate successors or assigns of Company and Agent. B. Counterparts. This Agreement may be executed in counterparts which shall collectively constitute a single agreement. C. Waiver. By failing to exercise any of its rights hereunder, Company shall not be deemed to have waived any breach on the part of Agent or to have released Agent from any of its obligations hereunder. The waiver by either party of a breach of any provision of this Agreement shall not be deemed a continuing waiver or a waiver of any subsequent breach of any provision of this Agreement. D. Severability. If any one or more of the terms of this Agreement shall be adjudged unenforceable, void, or voidable, the remaining terms shall not be affected thereby and shall be valid and enforceable to the full extent permitted by law. E. Continuing Obligations. In the event this Agreement is terminated, the obligations to make any payments, including without limitation Agent's share of any Loss under paragraph 6 herein, to provide notification as to claims and to provide access to records and files shall continue beyond the date of termination. 3 F. Headings. The subject headings of the paragraphs and subparagraphs of this Agreement are included for convenience and shall not affect the construction of interpretation of any of their provisions. G. Time of the Essence. Time shall be of the essence with respect to all terms of this Agreement. H. Further Cooperation. Each of the Parties hereto shall execute and deliver any and all additional documents and other assurances and shall do any and all acts and things reasonably necessary in connection with the performance of their obligations hereunder and to carry out the intent of the Parties. I. Entire Agreement. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof, supersedes all prior discussions, understandings or agreements between the Parties and shall not be amended, modified, or otherwise changed in any manner except in writing by the Parties. 12. DEFINITION OF TERMS A. Loss. Loss shall mean sums paid or to be paid by Company, in cash or otherwise, to settle or compromise claims under any of Company's Title Assurances issued by Agent. Loss shall include, but not bc limited to, expenses, costs and attorneys' fees actually paid or incurred in connection with investigation, negotiation, litigation, or settlement of such claim which ultimately requires payment of any sum by Company. Loss, as defined herein, shall be reduced by the value of any recoveries actually realized by Company. B. Premium. Premium shall mean the amount payable or paid in accordance with Company's rates in effect or as otherwise approved by Company in writing for the issuance of Title Assurances. C. Extra Hazardous Risks. Extra Hazardous Risks shall mean all risks which result in a liability not normally assumed by the Company. Extra Hazardous Risks include, without limitation, the issuance of a Title Assurance without a Schedule "B" exception for any of the following matters where said matters affect the subject property: l. Unrecorded construction/mechanics' liens which may gain priority over the interest insured where Agent is aware that the owner, general contractor or a subcontractor may not be paying its debts as they become due. 2. Any interest of the applicable state, the United States or other governmental entity in tidelands, swamp and overflow waters, existing streams or rivers or lands which currently or formerly were beneath a navigable waterbody. 3. Outstanding subsurface rights containing a right of entry. 4. Existing liens and encumbrances. 5. Bankruptcy, insolvency or creditors' rights. 6. Major encroachments. 7. Non-imputation of knowledge. 8. Indian land or restricted Indian title. 9. Pending actions and litigation. 10. Any risk involving a title about which agent has knowledge of an existing dispute or of risks, adverse claims or questions of title known in the community. IN WITNESS WHEREOF, the Parties have caused this Agreement to be properly executed by their respective representatives having full authority to do so. AGENT: Santa Barbara Title Company, COMPANY: a California Corporation FIDELITY NATIONAL TITLEI INSURANCE COMPANY By: /s/ Dennis R. Duffy By: /s/ M'Liss Jones Kane -------------------------------- ------------------------------- Dennis Duffy M'Liss Jones Kane Operations Manager Senior Vice President ATTEST: ---------------------------- Its: ------------------------------- NOTIFICATION IN COMPLIANCE WITH SECTION 606(A) OF "THE FAIR CREDIT REPORTING ACT" In making this Agreement, it is understood that an investigative report may be made whereby information is obtained through personal interviews with third parties such as family members, business associates, financial sources, friends, neighbors or others with whom you are acquainted. This inquiry includes information as to your character, general reputation, personal characteristics, and mode of living, whichever may be applicable. You have the right to make a written request within a reasonable period of time for a complete and accurate disclosure of additional information concerning the nature and scope of the investigation. 4 SCHEDULE A Attached and made a part of the Agreement between Fidelity National Title Insurance Company ("Company") and Santa Barbara Title Company, a California Corporation("Agent"). EFFECTIVE DATE OF AGREEMENT, AGENT'S TERRITORY LIABILITY LIMIT, COMPENSATION, GENERAL LIABILITY OF AGENT l. Effective Date of Original Agreement: August 14th, 1997 2. Effective date of Extension (if any): 3. Agent's Territory: Santa Barbara County 4. Liability Limit On any Title Assurance which has liability in excess of $ 1,000,000.00, Agent shall first review and obtain Company's written approval prior to issuing the Title Assurance. 5. Compensation: Agent shall pay Company twelve percent (11%) of the gross premiums on all Title Assurances issued by Agent. There shall be an additional 1% Management Fee. Management Fee shall be for accounting services including but not limited to accounting profit and loss and balance sheet information, corporate legal including underwriting, human resources including insurance and 401K, statutory auditing including the preparation of all statutory reports and federal and state tax returns. In the event that Agent no longer needs management's services, upon ninety (90) days' prior notice to Company said fee and services shall terminate. 6. General Liability of Agent: Subject to the provisions of subparagraph 6 B above, Agent shall be liable for the first $5,000.00 of any Loss sustained or incurred by Company as a result of the issuance of the Title Assurances by Agent. 7. Governing Law. This Agreement is to be construed, enforced, and governed according to and by the laws of the State of California in all respects. SCHEDULE B CORPORATE AGENT'S BOND AND INSURANCE REQUIREMENTS l. Agent shall, at its own expense, maintain a blanket fidelity bond in a principal sum of at least Fifty Thousand Dollars and No Cents ($50,000.00) in a form and issued by a company acceptable to Company and naming Company as an additional insured or payee. 2. Agent shall, at its own expense, maintain errors and omissions liability insurance in a principal sum of a least Two Hundred Fifty Thousand Dollars and No Cents ($250,000.00) per occurrence and Five Hundred Thousand Dollars and No Cents ($500,000.00) total annually, in a form and issued by a company acceptable to Company, with a deductible of no more than Five Thousand Dollars and No Cents (5,000.00) and naming Company as an additional insured or payee. 3. Agent shall annually furnish Company with true copies of the bond(s) and policy together with current premium receipts for said bond(s) and insurance. 4. Upon request of Company, Agent agrees to notify its fidelity bond or errors and omissions insurance carrier of any claim for which Agent may be liable to Company. SCHEDULE C EXCLUSIVITY During the term of this Agreement, Agent shall not act as Agent for or in any manner aid the procurement of any Title Assurance for any other title insurance company except Fidelity National Title Insurance Company unless: (i) Company declines to issue insurance with respect to a particular transaction (in which case Agent may use any title insurance company of its choosing with respect to that particular transaction): (ii) Lessor otherwise condents to the Lessee's use of another underwriter; or (iii) a customer of Lessee declines to accept title insurance from Lessor. 5 The coincidental use by a competitive title insurer of an abstract or title report by Agent shall not be construed as a violation of this provision. In the event that control of the Company is transferred to an independent third party, outside of the Fidelity companies (which shall include any Fidelity affiliate, subsidiary or employee), Agent shall have the right to cause this Agreement to become non-exclusive for the remainder of the term of the Agreement. COMPLIANCE WITH CALIFORNIA LAND TITLE ASSOCIATION ACCOUNT, OVERSIGHT AND CONTROL GUIDELINES Company and Agent hereby agree that effective January I, 1996, Agent shall comply with the California Land Title Association Account Review Processes and Oversight and Internal Control Guidelines, the American Land Title Association Escrow Internal Control Guidelines for Title Insurance Companies, Agencies and Approved Attorneys and Employee Affidavit (collectively referred to as the "Guidelines") in compliance with Section l2389.6 of the California Insurance Code. Agent shall comply with the procedures set out in said Guidelines as they may be further modified from time to time by Company in order to comply with requirements of the Department of Insurance or the California Insurance Code. In the event of any disparity between said Guidelines and the California Insurance Code, the provision of the Insurance Code shall prevail. 6 SCHEDULE A EFFECTIVE DATE OF AGREEMENT, AGENT'S TERRITORY LIABILITY LIMIT, COMPENSATION, GENERAL LIABILITY OF AGENT 1. Effective Date of Original Agreement: Date the California Department of Instance approves the sale of 60% of American Title Company to American Title Company Holdings, Inc. 2. Effective Date of Extension: 3. Agent's Territory: Kern County Alameda County Contra Costa County Fresno County Los Angeles County Madera County Orange County Riverside County San Bernardino County Sacramento County San Diego County San Mateo County Santa Clara County Ventura County 4. Liability Limit: On any Title Assurance which has liability in excess of $1,000,000.00, Agent shall first review and obtain Company's written approval prior to issuing the Title Assurance. 5. Compensation: Agent shall pay Company twelve percent (11%) of the gross premiums on all Title Assurances issued by Agent. There shall be an additional 1% Management Fee. Management Fee shall be for accounting services including but not limited to accounting profit and loss and balance sheet information, corporate legal including underwriting, human resources including insurance and 401K, statutory auditing including the preparation of all statutory reports and federal and state tax returns. In the event that Agent no longer needs management's services, upon ninety (90) days' prior notice to Company said fee and services shall terminate. 6. General Liability of Agent: Subject to the provisions of subparagraph 6B above, Agent shall be liable for the first $5,000.00 of any Loss sustained or incurred by Company as a result of the issuance of the Title Assurances by Agent. 7. Governing Law: This Agreement is to be construed, enforced, and governed according to and by the laws of the State of California in all respects. SCHEDULE B CORPORATE AGENT'S BOND AND INSURANCE REQUIREMENTS 1. Agent shall, at its own expense, maintain a blanket fidelity bond in a principal sum of at least Fifty Thousand Dollars and No Cents ($50,000.00) in a form and issued by a company acceptable to Company and naming Company as an additional insured or payee. 2. Agent shall, at its own expense, maintain errors and omissions liability insurance in a principal sum of at least Two Hundred Fifty Thousand Dollars and No Cents ($250,000.00) per occurrence and Five Hundred Thousand Dollars and No Cents ($500,000.00) total annually, in a form and issued by a company acceptable to Company, with a deductible of no more than Five Thousand Dollars and No Cents ($5,000.00) and naming Company as an additional insured or payee. 3. Agent shall annually furnish Company with true copies of the bond(s) and policy together with current premium receipts for said bond(s) and insurance. 4. Upon request of Company, Agent agrees to notify its fidelity bond or errors and omissions insurance carrier of any claim for which Agent may be liable to Company. SCHEDULE C EXCLUSIVITY During the term of this Agreement, Agent shall not act as Agent for or in any manner aid the procurement of any Title Assurance for any other title insurance company except Fidelity National Title Insurance Company of California unless: (i) Company declines to issue insurance with respect to a particular transaction (in which case Agent may use any title insurance company of its choosing with respect to that particular transaction): (ii) Lessor otherwise consents to the Lessee's use of another underwriter; or (iii) a customer of Lessee declines to accept title insurance from Lessor. Page 5 of 6 The coincidental use by a competitive title insurer of an abstract or title report prepared by Agent shall not be construed as a violation of is provision. In the event that control of the Company is transferred to an independent third party, outside of the Fidelity companies (which shall include any Fidelity affiliate, subsidiary or employee), Agent shall have the right to cause this Agreement to become non-exclusive for the remainder of the term of the Agreement. COMPLIANCE WITH CALIFORNIA LAND TITLE ASSOCIATION ACCOUNT, OVERSIGHT AND CONTROL GUIDELINES Company and Agent hereby agree that effective January 1, 1996, Agent shall comply with the California Land Title Association Account Review Processes and Oversight and Internal Control Guidelines, the American Land Title Association Escrow Internal Control Guidelines for Title Insurance Companies, Agencies and Approved Attorneys and Employee Affidavit (collectively referred to as the "Guidelines") in compliance with Section 12389.6 of the California Insurance Code. Agent shall comply with the procedures set out in said Guidelines as they may be further modified from time to time by Company in order to comply with requirements of the Department of Insurance or the California Insurance Code. In the event of any disparity between said Guidelines and the California Insurance Code, the provision of the Insurance Code shall prevail. Page 6 of 6 EX-10.8 13 EXHIBIT 10.8 IMPERIAL BANK CREDIT AGREEMENT This Agreement is made by and between ATC HOLDINGS, INC. ("Borrower") and Imperial Bank, a California banking corporation, ("Bank"). Subject to the terms and conditions of the Loan Documents (as defined below), Bank shall make loans to Borrower from time to time as advances are requested by Borrower until October 3, 1997, not to exceed, in the aggregate, $6,000,000.00. To induce Bank to make loans to Borrower and in consideration of any loan or loans Bank may make to Borrower, Borrower warrants and agrees as follows: A. REPRESENTATIONS OF BORROWER Borrower represents and warrants that: 1) EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and existing and in good standing under the laws of California, without limit as to the duration of its existence and is authorized and in good standing to do business in the State of California; Borrower has corporate 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 2) AGREEMENT AUTHORIZED. The execution, delivery and performance of this Agreement 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, by-laws, or Articles of Association, 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. 3) NO CONFLICT. The execution, delivery and performance of this Agreement 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. 4) LITIGATION. There is no litigation or other proceeding pending or threatened against or affecting 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. 5) FINANCIAL CONDITION. The balance sheet of Borrower as of March 31, 1997, 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. 6) 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 C.3 hereof. 7) 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. 8) 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. 9) REGULATION U. The proceeds of the Loan shall not be used to purchase or carry margin stock (as defined within Regulation U of the Board of Governors of the Federal Reserve system). B. AFFIRMATIVE COVENANTS OF BORROWER Borrower agrees that so long as it is indebted to Bank, under borrowings, or other indebtedness, it will, unless Bank shall otherwise consent in writing: 1) 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. 2) 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 to property insurance have Bank named as loss payee in a Lenders "Loss Payable" Endorsement Form 438BFU or equivalent. 3) 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: 2 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 adequate with respect thereto. 4) 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) As soon as available, and in any event within forty five (45) days after the close of each quarter of each fiscal year of Borrower, commencing with the quarter next ending, a balance sheet, profit and loss statement and reconciliation of Borrower's capital 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, prepared in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower; b) As soon as available, and in any event within one hundred and twenty (120) days of fiscal year end, a report of Borrower as of the close of and for each fiscal year, all in reasonable detail, prepared on an audited basis 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) In connection with each fiscal year end financial statement furnished to Bank hereunder, any management letter of Borrower's independent certified public accountant; d) Budgets, operating plans, and such other information relating to the affairs of Borrower as the Bank may reasonably request from time to time; e) Personal financial statements and individual tax returns of all guarantors of loans to Borrower, annually or otherwise as the Bank may reasonably request from time to time; f) As soon as available, and in any event within forty five (45) days after the close of each quarter of each fiscal year of American Title Company, commencing with the quarter next ending, a balance sheet, profit and loss statement and reconciliation of American Title Company's capital accounts as of the close of such period and covering operations for the portion of American Title Company's fiscal year ending on the last day of such period, all in reasonable detail, prepared in accordance with generally accepted accounting principles on a basis consistently maintained by American Title Company and certified by an appropriate officer of American Title Company; g) As soon as available, and in any event within one hundred and twenty (120) days of fiscal year end, a report of American Title Company as of the close of and for each fiscal year, all in reasonable detail, prepared on an audited basis by an independent certified public accountant selected by American Title Company and reasonably acceptable to Bank, in 3 requirement of the Federal Reserve Board and uncollected funds. Any deficiencies shall be charged directly to the Borrower on a monthly basis. 7) ATTORNEY'S FEES. Pay promptly to Bank without demand after notice, with interest thereon from the date of expenditure at the rate applicable to any loans from Bank to Borrower, reasonable attorneys' fees and all costs and expenses paid or incurred by Bank in collecting or compromising any such 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. 8) FINANCIAL COVENANTS. Maintain the following financial covenants: a) Tangible Net Worth of not less than $200,000.00; b) Net current assets (Working Capital) of not less than $(250,000.00); [initialed] ML [initialed] MD All financial covenants and financial information referenced herein shall be interpreted and prepared in accordance with generally accepted accounting principals applied on a basis consistent with previous years. Compliance with financial covenants shall be calculated and monitored on a quarterly basis. C. NEGATIVE COVENANTS OF BORROWER Borrower agrees that so long as it is indebted to Bank, it will not, without Bank's written consent: 1. TYPE OF BUSINESS; MANAGEMENT. Make any substantial change in the character of its business; or make any change in its executive management. 2. OTHER INDEBTEDNESS. Other than in the ordinary course of business and consistent with past practices, 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 March 31, 1997, excluding those obligations being refinanced by Bank. 3. LIENS AND ENCUMBRANCES. Other than in the ordinary course of business and consistent with past practices, create, incur, or assume any mortgage, pledge, encumbrance, lien or charge of any kind upon any asset now owned, other than liens for taxes not delinquent and liens in Bank's favor, except for those already existing as of March 31, 1997. 4. 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 commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Ind., or certificates of deposit maturing more than one (1) year from the date of investment therein issued by Bank; or guarantee or otherwise become liable upon the 4 3. LIENS AND ENCUMBRANCES. Other than in the ordinary course of business and consistent with past practices, create, incur, or assume any mortgage, pledge, encumbrance, lien or charge of any kind upon any asset now owned, other than liens for taxes not delinquent and liens in Bank's favor, except for those already existing as of March 31, 1997. 4. 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 commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Ind., or certificates of deposit maturing more than one (1) year from the date of investment therein issued by Bank; 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. 5. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or otherwise acquire the assets or business of any person or other entity; 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. 6. CAPITAL EXPENDITURES. Make or incur obligations for capital expenditures, which includes purchase money indebtedness or capital lease obligations, in excess of $500,000.00 in any one fiscal year. 7. LEASE LIABILITY. Make or incur additional liability for payments of rent under leases of real property in excess of $250,000.00 or personal property in excess of $250,000.00 in any one fiscal year. D. EVENTS OF DEFAULT The occurrence of any of the following 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: 1) FAILURE TO PAY. Failure to pay any installment of principal or interest on any indebtedness of Borrower to Bank. 2) BREACH OF COVENANT. Failure of Borrower to perform any other term or condition of this Agreement binding upon Borrower. 3) 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. 5 4) 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. 5) JUDGMENTS, ATTACHMENTS. Any money judgment, 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 later than five days prior to the date of any proposed sale thereunder. 6) 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 be consented to. 7) FAILURE TO MEET DEPARTMENT OF INSURANCE REQUIREMENTS. Failure of American Title Company to meet the net worth and working capital requirements, as they may exist from time to time, imposed upon American Title Company by the State of California Department of Insurance. 8) ADVERSE ACTION. Any action taken by the State of California Department of Insurance which would adversely effect the continued operation of American Title Company's business, including the issuance of any notice of intended adverse action by the Department of Insurance. 9) FAILURE TO MEET MINIMUM TANGIBLE NET WORTH. Failure of American Title Company to maintain Tangible Net Worth of no less than $2,500,000.00. E. MISCELLANEOUS PROVISIONS 1) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Bank or any holder of any note issued by Borrower to Bank, 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 issued in connection with a loan that Bank may make hereunder, are cumulative to, and not exclusive of, any rights or remedies otherwise available. 2) 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. 3) INUREMENT. The benefits of this Agreement shall inure to the successors and assigns of Bank and the permitted successors and assigns of Borrower. 4) 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. 6 5) OFFSET. In addition to and not in limitation of all rights of offset that Bank or other holder of any note issued by Borrower in favor of Bank may have under applicable law, Bank or other holder of such notes 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 outstanding under any such note any and all balances, credits, deposits, accounts or monies of Borrower then or thereafter with Bank or other holder, within ten (10) days after the Event of Default, and notice of the occurrence of any Event of Default by Bank to Borrower. 6) 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) TIME OF THE ESSENCE. Time is hereby declared to be of the essence of this Agreement and of every part hereof. 8) INTEGRATION CLAUSES. Except for documents and instruments specifically referenced herein, the Agreement constitutes the entire agreement between Bank and Borrower regarding the Loan, and all prior communications verbal or written between Borrower and Bank shall be of no further effect or evidentiary value. In the event of a conflict or inconsistency among any other documents and instruments and this Agreement, the provisions of this Agreement shall prevail. 9) ACCOUNTING. All accounting terms shall have the meanings applied under generally accepted accounting principles unless otherwise specified. 10) MODIFICATION. This Agreement may be modified only by a writing signed by both parties hereto. 11) SUPPLEMENTAL PRINCIPAL PAYMENTS. Borrower agrees that seventy five percent (75%) of the annual excess cash flow of American Title Company, as defined below, will be utilized as supplemental principal payments to debt. Such payments are to be applied to principal in inverse order of maturity and are to be made prior to the end of the first quarter following the end of each fiscal year. EXCESS CASH FLOW OF AMERICAN TITLE COMPANY: 1. Net Profit After Tax of American Title Company 2. Plus: Depreciation and Amortization 3. Equals American Title Company Operating Cash Flow 4. Less: American Title Company CPLTD 5. Less: American Title Company Capital Expenditures 6. Equals American Title Company Net Operating Cash Flow 7. Multiply by ATC Holdings, Inc. ownership percentage (60%) 8. Less: ATC Holdings, Inc. CPLTD 9. Less: ATC Holdings, Inc. Capital Expenditures 10. Equals: Excess Cash Flow of American Title Company 11. Multiply by seventy five percent (75%) 12. Equals: Supplemental Principal Payment 7 12) RELEASE OF GUARANTORS. Providing that no Event of Default exists, each of the personal guarantees taken in support of any loans extended to Borrower pursuant to this Agreement shall be reduced according to the following schedule:
OUTSTANDING LOAN BALANCE PERCENTAGE OF ORIGINAL GUARANTEE AMOUNT $6,000,000 100% $5,400,000 90% $4,800,000 80% $4,200,000 70% $3,600,000 60% $3,000,000 50%
13) COLLATERAL. Loan will be secured by a first priority lien on all corporate assets of Borrower and one hundred percent (100%) of the Common Stock of Borrower. This Agreement is executed on behalf of the parties by duly authorized representatives as of August 7, 1997. IMPERIAL BANK ("Bank") By: [Illegible] Date: 8-7-97 ATC HOLDINGS, INC. ("Borrower") By: /s/ Michael Lowther By: /s/ Wayne Diaz Date: ------------------------------------ 8 EX-10.9 14 EXHIBIT 10.9 [IMPERIAL BANK LOGO] NOTE $6,000,000.00 Beverly Hills, California August 7, 1997 On November 3, 2002, and as hereinafter provided, for value received, the undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking corporation, or order, at its Financial Services Group office, the principal sum of $6,000,000.00 or such sums up to the maximum if so stated, as the Bank may now or hereafter advance to or for the benefit of the undersigned in accordance with the terms hereof, together with interest from date of disbursement or N/A, whichever is later, on the unpaid principal balance / / at the rate of % per year /X/ at the rate of 0.000% per year in excess of the rate of interest which Bank has announced as its prime lending rate (the "Prime Rate"), which shall vary concurrently with any change in such Prime Rate, or $250.00, whichever is greater. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance is outstanding, divided by 360, which shall, for interest computation purposes, be considered one year. Interest shall be payable /X/ monthly / / quarterly / / included with principal /X/ in addition to principal / / beginning September 3, 1997, and if not so paid shall become a part of the principal. All payments shall be applied first to interest, and the remainder, if any, on principal, /X/ (if checked), Principal shall be payable in installments of $33,334.00, or more, each installment on the 3rd day of each month, beginning May 3, 1998. Advances not to exceed any unpaid balance owing at any one time equal to the maximum amount specified above, may be made at the option of Bank. Any partial prepayment shall be applied to the installments, if any, in inverse order of maturity. Should default be made in the payment of principal or interest when due, or in the performance or observance, when due, of any item, covenant or condition of any deed or trust, security agreement or other agreement (including amendments or extensions thereof) securing or pertaining to this note, at the option of the holder hereof and without notice of demand, the entire balance of principal and accrued interest then remaining unpaid shall (a) become immediately due and payable, and (b) thereafter bear interest, until paid in full, at the increased rate of 5% per year in excess of the rate provided for above, as it may vary from time to time. Defaults shall include, but not be limited to, the failure of the maker(s) to pay principal or interest when due; the filing as to each person obligated hereon, whether as maker, co-maker, endorser or guarantor (individually or collectively referred to as the "Obligor") of a voluntary or involuntary petition under the provisions of the Federal Bankruptcy Act; the issuance of any attachment or execution against any asset of any Obligor; the death of any Obligor; or any deterioration of the financial condition of any Obligor which results in the holder hereof considering itself, in good faith, insecure. /X/ If any installment payment or principal balance payment due hereunder is delinquent ten or more days, Obligor agrees to pay a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of the holder of this note to accept payment of any installment past due or less than the total unpaid principal balance after maturity. If this note is not paid when due, each Obligor promises to pay all costs and expenses of collection and reasonable attorney's fees incurred by the holder hereof on account of such collection, plus interest at the rate applicable to principal, whether or not suit is filed hereon. Each Obligor shall be jointly and severally liable hereon and consents to renewals, replacements and extensions of time for payment hereof, before, at, or after maturity; consents to the acceptance, release or substitution of security for this note; and waives demand and protest and the right to assert any statute of limitations. Any married person who signs this note agrees that recourse may be had against separate property for any obligations hereunder. The indebtedness evidenced hereby shall be payable in lawful money of the United States. In any action brought under or arising out of this note, each Obligor, including successor(s) or assign(s) hereby consents to the application of California law, to the jurisdiction of any competent court within the State of California, and to service of process by any means authorized by California law No single or partial exercise of any power hereunder, or under any deed of trust, security agreement or other agreement in connection herewith shall preclude other or further exercises thereof or the exercise of any other such power. The holder hereof shall at all times have the right to proceed against any portion of the security for this note in such order and in such manner as such holder may consider appropriate, without waiving any rights with respect to any of the security. Any delay or omission on the part of the holder hereof in exercising any right hereunder, or under any deed of trust, security agreement or other agreement, shall not operate as a waiver of such right, or of any other right, under this note or any deed of trust, security agreement or other agreement in connection herewith. See Letter Agreement dated August 7, 1997 and Reference Provision ATC Holding, Inc. - ------------------------------------ ---------------------------------- By /s/ Michael Lowther - ------------------------------------ ---------------------------------- By /s/ Wayne Diaz - ------------------------------------ ---------------------------------- EX-10.10 15 EXHIBIT 10.10 August 7, 1997 ATC HOLDINGS, INC. 17911 Von Karman, Suite #500 Irvine, CA 92714 Reference is made to that certain Note dated August 7, 1997 executed by you evidencing Imperial Bank's (Bank) loan to you in the amount of $6,000,000.00 (Note). Notwithstanding the terms contained in the Note for the payment of monthly interest as it accrues, you shall be allowed to pay monthly interest on the unpaid principal balance of the Note at a rate lower than the accrual rate stated in the Note (Payment Rate) with the remaining balance of the monthly interest which is accruing on the Note being charged on a monthly basis against any unused Net Earnings Credit calculated by Bank in connection with deposit accounts maintained or cause to be maintained by you with Bank calculated on a monthly basis, less the sum of all costs of Bank for services provided to you during such month, computed in accordance with Bank's normal and customary standards and Bank's reasonable determination of the amounts thereof shall be final and binding upon you. The initial Payment Rate shall be 0.25% per annum and shall be subject to increase at any time and from time to time in Bank's absolute discretion based on the availability of Earning Credit. Sincerely, ACKNOWLEDGED: D.M. Farmer ATC HOLDINGS, INC. Senior Vice President By: /s/ Michael Lowther -------------------------------- By: /s/ Wayne Diaz -------------------------------- The following provisions are hereby added to the Note between ATC HOLDINGS, INC. and IMPERIAL BANK. "REFERENCE PROVISION 1. Other than (i) non-judicial 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 Note ("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 the 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 County where the real property securing this Agreement, if any, is located or Los Angeles 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 of 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 Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date 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 Section 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. 2. 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. 3. 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 law, 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. 4. 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, Section 1280 through Section 1294,2 of the CCP amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding." Initial Here ML ------ Initial Here WD ------ EX-10.11 16 EXHIBIT 10.11 STANDARD SUBLEASE American Industrial Real Estate Association [LOGO] 1. PARTIES. This Sublease, dated, for reference purposes only, January 28, 1998, is made by and between Fidelity National Title Insurance Company (herein called "Sublessor") and American Title Company (herein called "Sublessee"). 2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee hereby subleases from Sublessor for the term, at the rental, and upon all of the conditions set forth herein, that certain real property situated in the County of Orange, State of California, commonly known as 17911 Von Karman Avenue, 2nd Floor, Irvine, California and described as Approximately 20,934 square feet. Said real property, including the land and all improvements thereon, is hereinafter called the "Premises". 3. TERM. 3.1 TERM. The term of this Sublease shall be for Two (2) years, four (4) months and eleven (11) days commencing on April 1, 1998 and ending on July 11, 2000 unless sooner terminated pursuant to any provision hereof. 3.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement date, if for any reason Sublessor cannot deliver possession of the Premises to Sublessee on said date, Sublessor shall not be subject to any liability therefore, nor shall such failure affect the validity of this Lease or the obligations of Sublessee hereunder or extend the term hereof, but in such case Sublessee shall not be obligated to pay rent until possession of the Premises is tendered to Sublessee; provided, however, that if Sublessor shall not have delivered possession of the Premises within sixty (60) days from said commencement date, Sublessee may, at Sublessee's option, by notice in writing to Sublessor within ten (10) days thereafter, cancel this Sublease, in which event the parties shall be discharged from all obligations thereunder. If Sublessee occupies the Premises prior to said commencement date, such occupancy shall be subject to all provisions hereof, such occupancy shall not advance the termination date and Sublessee shall pay rent for such period at the initial monthly rates set forth below. 4. RENT. Sublessee shall pay to Sublessor as rent for the Premises equal monthly payments of $33,494.40, in advance, on the _____ day of each month of the term hereof. Sublessee shall pay Sublessor upon the execution hereof $ zero as rent for n/a. Rent for any period during the term hereof which is for less than one month shall be a prorata portion of the monthly installment. Rent shall be payable in lawful money of the United States to Sublessor at the address stated herein or to such other persons or at such other places as Sublessor may designate in writing. 5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution hereof $ zero as security for Sublessee's faithful performance of Sublessee's obligations hereunder. If Sublessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Sublease, Sublessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Sublessor may become obligated by reason of Sublessee's default, or to compensate Sublessor for any loss or damage which Sublessor may suffer thereby. If Sublessor so uses or applies all or any portion of said deposit, Sublessee shall within ten (10) days after written demand therefore deposit cash with Sublessor in an amount sufficient to restore said deposit to the full amount hereinabove stated and Sublessee's failure to do so shall be a material breach of this Sublease. Sublessor shall not be required to keep said deposit separate from its general accounts. If Sublessee performs all of Sublessee's obligations hereunder, said deposit, or so much thereof as has not theretofore been applied by Sublessor, shall be returned, without payment of interest or other increment for its use to Sublessee (or at Sublessor's option, to the last assignee, if any, of Sublessee's interest hereunder) at the expiration of the term hereof, and after Sublessee has vacated the Premises. No trust relationship is created herein between Sublessor and Sublessee with respect to said Security Deposit. 6. USE. 6.1 USE. The Premises shall be used and occupied only for general office and for no other purpose. 6.2 COMPLIANCE WITH LAW. (a) Sublessor warrants to Sublessee that the Premises, in its existing state, but without regard to the use for which Sublessee will use the Premises, does not violate any applicable building code regulation or ordinance at the time that this Sublease is executed. In the event that it is determined that this warranty has been violated, then it shall be the obligation of the Sublessor, after written notice from Sublessee, to promptly, at Sublessor's sole cost and expense, rectify any such violation. In the event that Sublessee does not give to Sublessor written notice of the violation of this warranty within 1 year from the commencement of the term of this Sublease, it shall be conclusively deemed that such violation did not exist and the correction of the same shall be the obligation of the Sublessee. (b) Except as provided in paragraph 6.2(a), Sublessee shall, at Sublessee's expense, comply promptly with all applicable statutes, ordinances, rules, regulations, orders, restrictions of record, and requirements in effect during the term or any part of the term hereof regulating the use by Sublessee of the Premises. Sublessee shall not use or permit the use of the Premises in any manner that will tend to create waste or a nuisance or, if there shall be more than one tenant of the building containing the Premises, which shall tend to disturb such other tenants. 6.3 CONDITION OF PREMISES. Except as provided in paragraph 6.2(a) Sublessee hereby accepts the Premises in their condition existing as of the date of the execution hereof, subject to all applicable zoning, municipal, county and state laws, ordinances, and regulations governing and regulating the use of the Premises, and accepts this Sublease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Sublessee acknowledges that neither Sublessor nor Sublessor's agents have made any representation or warranty as to the suitability of the Premises for the conduct of Sublessee's business. 7. MASTER LEASE. 7.1 Sublessor is the lessee of the Premises by virtue of a lease, hereinafter referred to as the "Master Lease", a copy of which is attached hereto marked Exhibit 1, dated July 3, 1997 wherein CarrAmerica Realty Corporation is the lessor, hereinafter referred to as the "Master Lessor". 7.2 This Sublease is and shall be at all times subject and subordinate to the Master Lease. 7.3 The terms, conditions and respective obligations of Sublessor and Sublessee to each other under this Sublease shall be the terms and conditions of the Master Lease except for those provisions of the Master Lease which are directly contradicted by this Sublease in which event the terms of this Sublease document shall control over the Master Lease. Therefore, for the purposes of this Sublease, wherever in the Master Lease the word "Lessor" is used it shall be deemed to mean the Sublessor herein and wherever in the Master Lease the word "Lessee" is used it shall be deemed to mean the Sublessee herein. 7.4 During the term of this Sublease and for all periods subsequent for obligations which have arisen prior to the termination of this Sublease, Sublessee does hereby expressly assume and agree to perform and comply with, for the benefit of Sublessor and Master Lessor, each and every obligation of Sublessor under the Master Lease EXCEPT for the following paragraphs which are excluded therefrom: n/a 7.5 The obligations that Sublessee has assumed under paragraph 7.4 hereof are hereinafter referred to as the "Sublessee's Assumed Obligations". The obligations that Sublessee has NOT assumed under paragraph 7.4 hereof are hereinafter referred to as the "Sublessor's Remaining Obligations". 7.6 Sublessee shall hold Sublessor free and harmless of and from all liability, judgments, costs, damages, claims or demands, including reasonable attorneys fees, arising out of Sublessee's failure to comply with or perform Sublessee's Assumed Obligations. 7.7 Sublessor agrees to maintain the Master Lease during the entire term of this Sublease, subject, however, to any earlier termination of the Master Lease without the fault of the Sublessor, and to comply with or perform Sublessor's Remaining Obligations and to hold Sublessee free and harmless of and from all liability, judgments, costs, damages, claims or demands arising out of Sublessor's failure to comply with or perform Sublessor's Remaining Obligations. 7.8 Sublessor represents to Sublessee that the Master Lease is in full force and effect and that no default exists on the part of any party to the Master Lease. 8. ASSIGNMENT OF SUBLEASE AND DEFAULT. 8.1 Sublessor hereby assigns and transfers to Master Lessor the Sublessor's interest in this Sublease and all rentals and income arising therefrom, subject however to terms of Paragraph 8.2 hereof. 8.2 Master Lessor, by executing this document, agrees that until a default shall occur in the performance of Sublessor's Obligations under the Master Lease, that Sublessor may receive, collect and enjoy the rents accruing under this Sublease. However, if Sublessor shall default in the performance of its obligations to Master Lessor then Master Lessor may, at its option, receive and collect, directly from Sublessee, all rent owing and to be owed under this Sublease. Master Lessor shall not, by reason of this assignment of the Sublease nor by reason of the collection of the rents from the Sublessee, be deemed liable to Sublessee for any failure of the Sublessor to perform and comply with Sublessor's Remaining Obligations. 8.3 Sublessor hereby irrevocably authorizes and directs Sublessee, upon receipt of any written notice from the Master Lessor stating that a default exists in the performance of Sublessor's obligations under the Master Lease, to pay to Master Lessor the rents due and to become due under the Sublease. Sublessor agrees that Sublessee shall have the right to rely upon any such statement and request from Master Lessor, and that Sublessee shall pay such rents to Master Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Sublessor to the contrary and Sublessor shall have no right or claim against Sublessee for any such rents so paid by Sublessee. 8.4 No changes or modifications shall be made to this Sublease without the consent of Master Lessor. 9. CONSENT OF MASTER LESSOR. 9.1 In the event that the Master Lease requires that Sublessor obtain the consent of Master Lessor to any subletting by Sublessor then, this Sublease shall not be effective unless, within 10 days of the date hereof, Master Lessor signs this Sublease thereby giving its consent to this Subletting. 9.2 In the event that the obligations of the Sublessor under the Master Lease have been guaranteed by third parties then this Sublease, nor the Master Lessor's consent, shall not be effective unless, within 10 days of the date hereof, said guarantors sign this Sublease thereby giving guarantors consent to this Sublease and the terms thereof. 9.3 In the Event that Master Lessor does give such consent then: (a) Such consent will not release Sublessor of its obligations or alter the primary liability of Sublessor to pay the rent and perform and comply with all of the obligations of Sublessor to be performed under the Master Lease. (b) The acceptance of rent by Master Lessor from Sublessee or any one else liable under the Master Lease shall not be deemed a waiver by Master Lessor of any provisions of the Master Lease. (c) The consent to this Sublease shall not constitute a consent to any subsequent subletting or assignment. (d) In the event of any default of Sublessor under the Master Lease, Master Lessor may proceed directly against Sublessor, any guarantors or any one else liable under the Master Lease or this Sublease without first exhausting Master Lessor's remedies against any other person or entity liable thereon to Master Lessor. (e) Master Lessor may consent to subsequent sublettings and assignments of the Master Lease or this Sublease or any amendments or modifications thereto without notifying Sublessor nor any one else liable under the Master Lease and without obtaining their consent and such action shall not relieve such persons from liability. (f) In the event that Sublessor shall default in its obligations under the Master Lease, then Master Lessor, at its option and without being obligated to do so, may require Sublessee to attorn to Master Lessor in which event Master Lessor shall undertake the obligations of Sublessor under this Sublease from the time of the exercise of said option to termination of this Sublease but Master Lessor shall not be liable for any prepaid rents nor any security deposit paid by Sublessee, nor shall Master Lessor be liable for any other defaults of the Sublessor under the Sublease. 9.4 The signatures of the Master Lessor and any Guarantors of Sublessor at the end of this document shall constitute their consent to the terms of this Sublease. 9.5 Master Lessor acknowledges that, to the best of Master Lessor's knowledge, no default presently exists under the Master Lease of obligations to be performed by Sublessor and that the Master Lease is in full force and effect. 9.6 In the event that Sublessor defaults under its obligations to be performed under the Master Lease by Sublessor, Master Lessor agrees to deliver to Sublessee a copy of any such notice of default. Sublessee shall have the right to cure any default of Sublessor described in any notice of default within ten days after service of such notice of default on Sublessee. If such default is cured by Sublessee then Sublessee shall have the right of reimbursement and offset from and against Sublessor. 10. BROKERS FEE. 10.1 Upon execution hereof by all parties, Sublessor shall pay to Orion Realty Group, a licensed real estate broker, (herein called "Broker"), a fee as set forth in a separate agreement between Sublessor and Broker, or in the event there is no separate agreement between Sublessor and Broker, the sum of $ zero for brokerage services rendered by Broker to Sublessor in this transaction. 10.2 Sublessor agrees that if Sublessee exercises any option or right of first refusal granted by Sublessor herein, or any option or right substantially similar thereto, either to extend the term of this Sublease, to renew this Sublease, to purchase the Premises, or to lease or purchase adjacent property which Sublessor may own or in which Sublessor has an interest, or if Broker is the procuring cause of any lease, sublease, or sale pertaining to the Premises or any adjacent property which Sublessor may own or in which Sublessor has an interest, then as to any of said transactions Sublessor shall pay to Broker a fee, in cash, in accordance with the schedule of Broker in effect at the time of the execution of this Sublease. Notwithstanding the foregoing, Sublessor's obligation under this Paragraph 10.2 is limited to a transaction in which Sublessor is acting as a sublessor, lessor or seller. 10.3 Master Lessor agrees, by its consent to this Sublease, that if Sublessee shall exercise any option or right of first refusal granted to Sublessee by Master Lessor in connection with this Sublease, or any option or right substantially similar thereto, either to extend the Master Lease, to renew the Master Lease, to purchase the Premises or any part thereof, or to lease or purchase adjacent property which Master Lessor may own or in which Master Lessor has an interest, or if Broker is the procuring cause of any other lease or sale entered into between Sublessee and Master Lessor pertaining to the Premises, any part thereof, or any adjacent property which Master Lessor owns or in which it has an interest, then as to any of said transactions Master Lessor shall pay to Broker a fee, in cash, in accordance with the schedule of Broker in effect at the time of its consent to this Sublease. 10.4 Any fee due from Sublessor or Master Lessor hereunder shall be due and payable upon the exercise of any option to extend or renew, as to any extension or renewal; upon the execution of any new lease, as to a new lease transaction or the exercise of a right of first refusal to lease; or at the close of escrow, as to the exercise of any option to purchase or other sale transaction. 10.5 Any transferee of Sublessor's interest in this Sublease, or of Master Lessor's interest in the Master Lease, by accepting an assignment thereof, shall be deemed to have assumed the respective obligations of Sublessor or Master Lessor under this Paragraph 10. Broker shall be deemed to be a third-party beneficiary of this paragraph 10. 11. ATTORNEY'S FEES. If any party or the Broker named herein brings an action to enforce the terms hereof or to declare rights hereunder, the prevailing party in any such action, on trial and appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the Court. The provision of this paragraph shall inure to the benefit of the Broker named herein who seeks to enforce a right hereunder. ADDITIONAL PROVISIONS. [If there are no additional provisions draw a line from this point to the next printed word after the space left here. If there are additional provisions place the same here.] 12.2 Subject to the addendum to the Master Lease, during the term, Sub-lessee and its employees shall be entitled to use, within the project's parking area (as defined in the Master Lease) an aggregate of eleven (11) reserved parking stalls and sixty-four (64) unreserved parking stalls. 12.3 TERMINATION CONSIDERATION: In the event that the Master Lessor elects to terminate this sub-lease as provided in Section 3 of the Addendum to the Master Lease and pays the termination consideration as provided in Section 4 of the Addendum, Sub-lessee shall be entitled to receive from Master Lessor its prorata share of any termination consideration paid by Master Lessor. If this Sublease has been filled in it has been prepared for submission to your attorney for his approval. No representation or recommendation is made by the real estate broker or its agents or employees as to the legal sufficiency, legal effect, or tax consequences of this Sublease or the transaction relating thereto. Executed at Santa Barbara, California Fidelity National Title Insurance Company ----------------------------- --------------------------------------------- on February , 1998 By /s/ William A. Imparato --------------------------------------- ------------------------------------------- address 3916 State Street, 3rd Floor By William A. Imparato, Vice President ---------------------------------- ------------------------------------------- Santa Barbara, California 93105 "Sublessor" (Corporate Seal) - ----------------------------------------- Executed at Irvine, California American Title Company ------------------------------ --------------------------------------------- on February , 1998 By /s/ Wayne Diaz -------------------------------------- ------------------------------------------- address 17911 Von Karman Avenue By Wayne Diaz, President ---------------------------------- ------------------------------------------- Irvine, CA 92714 "Sublessee" (Corporate Seal) - ----------------------------------------- Executed at ------------------------------ --------------------------------------------- on By --------------------------------------- ------------------------------------------- address By ---------------------------------- ------------------------------------------- - ----------------------------------------- "Master Lessor" (Corporate Seal) Executed at ------------------------------ --------------------------------------------- on --------------------------------------- --------------------------------------------- address ---------------------------------- --------------------------------------------- - ----------------------------------------- "Guarantors"
NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071. (213) 687-8777. EX-21 17 EXHIBIT 21 Subsidiaries of the Registrant American Title Company, a California corporation American Document Services, Inc., a California corporation West Point Appraisal Services, Inc., a California corporation West Point Support Services, Inc., a California corporation West Point Properties, Inc., a California corporation Santa Barbara Title Company, a California corporation Landmark REO Management Services, Inc, a Kansas corporation Nations Title Insurance of Arizona, Inc., an Arizona corporation EX-23.1 18 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors American Financial National, Inc.: The audit referred to in our report dated August 27, 1998 relating to the consolidated financial statements of American Financial National, Inc. as of and for the year ended December 31, 1997, included the related financial statement schedules as of and for the year ended December 31, 1997, included in the registration statement. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audit. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. The audit referred to in our report dated August 27, 1998 relating to the financial statements of ANFI Predecessor included the related financial statement schedules as of December 31, 1996, and for each of the years in the two-year period ended December 31, 1996 and the six months ended June 30, 1997, included in the registration statement. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audit. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Orange County, California August 27, 1998 EX-23.2 19 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors American National Financial, Inc.: The audit referred to in our report dated August __, 1998 relating to the consolidated financial statements of American National Financial, Inc. as of and for the year ended December 31, 1997, included the related financial statement schedules as of and for the year ended December 31, 1997, included in the registration statement. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audit. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. The audits referred to in our report dated August __, 1998 relating to the financial statements of ANFI Predecessor, as defined in note 1 to the financial statements, included the related financial statement schedules as of December 31, 1996, and for each of the years in the two-year period ended December 31, 1996 and for the six months ended June 30, 1997, included in the registration statement. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. Orange County, California August __, 1998 EX-27 20 EXHIBIT 27
5 6-MOS 12-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 JUN-30-1998 DEC-31-1997 6,153,584 7,223,635 2,087,398 0 9,816,547 7,909,626 (1,103,051) (1,100,449) 0 0 20,394,986 15,768,546 3,979,127 3,141,892 (586,749) (418,222) 27,531,780 22,364,943 11,678,349 10,051,167 5,372,490 6,472,500 0 0 0 0 0 0 4,208,890 1,122,847 27,531,780 22,364,943 0 0 45,275,351 33,525,309 0 0 36,612,723 29,547,381 0 0 0 0 0 0 8,662,628 3,977,928 3,532,039 1,774,417 5,130,589 2,203,511 0 0 0 0 0 0 3,086,043 1,122,847 1.06 .38 1.01 .38
-----END PRIVACY-ENHANCED MESSAGE-----