ESCROW AGREEMENT
This ESCROW AGREEMENT is made and entered into as of January 31, 1997
("Escrow Agreement") by and among Security Title Insurance Agency of Utah, Inc.
(the "Escrow Agent"), Celtic Investment, Inc., a Delaware corporation
("Celtic"), Reese Howell Jr. ("Howell") and Roger Davis ("Davis", and, together
with Howell, the "Shareholders").
WHEREAS, Celtic, Celtic Merger Sub, Inc., a Utah corporation, Salt Lake
Mortgage Corp., a Utah corporation ("SLM"), and the Shareholders are parties to
an Agreement and Plan of Merger of even date herewith (the "Merger Agreement")
pursuant to which Celtic has agreed to acquire SLM, upon the terms and subject
to the conditions in the Merger Agreement;
WHEREAS, the parties have agreed in the Merger Agreement that the value of
SLM is dependent upon, among other things, the financial performance of SLM on a
near term basis;
WHEREAS, the financial performance of SLM, and therefore its value, is
dependent upon additional capital made available for use by SLM in its
operations;
WHEREAS, Celtic has agreed to use its best efforts to obtain such
additional capital for use in SLM's operations;
WHEREAS, the parties have agreed that in the event such additional capital
is made available to SLM and, if thereafter, SLM does not achieve certain
financial performance criteria then the value of SLM was not as great as
originally agreed to by the parties and in such event some of the Escrow Shares
(as hereafter defined) issued to the Shareholders should be returned to Celtic;
WHEREAS, if the financial performance criteria are achieved by SLM or if
Celtic does not make additional capital available to SLM, then all of the Celtic
Common Stock issued to the Shareholders pursuant to the Merger Agreement shall
be retained by Shareholders;
WHEREAS, Section 2.8 of the Merger Agreement provides for the Shareholders
to deposit into escrow 500,000 shares (the "Escrow Shares" or "Escrowed Shares")
of the common stock, par value $.001 per share, of Celtic ("Celtic Common
Stock");
WHEREAS, each of the Shareholders shall, simultaneously with the execution
and delivery of this Agreement, deliver 250,000 shares of Celtic Common Stock to
the Escrow Agent; and
WHEREAS, Celtic and the Shareholders wish to enter into this Escrow
Agreement providing for the terms and conditions upon which the Escrow Shares
will be held and released by the Escrow Agent and the Escrow Agent wishes to act
as Escrow Agent pursuant to the terms and conditions of this Escrow Agreement.
NOW, THEREFORE, in consideration of the premises and intending to be
legally bound hereby, the parties hereto agree as follows:
Section 1. Appointment of Escrow Agent; Deposits into Escrow Account. The
parties hereto designate Security Title Insurance Agency of Utah, Inc. to act as
Escrow Agent hereunder, and Security
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Title Insurance Agency of Utah, Inc. hereby accepts such appointment and agrees
to act as Escrow Agent hereunder upon the terms and subject to the conditions
hereinafter set forth. On the date of this Escrow Agreement each Shareholder is
transferring 250,000 shares of Celtic Common Stock to the Escrow Agent, together
with stock powers endorsed in blank by such Shareholder.
Section 2. Rights as Shareholders. Until an Escrow Share is delivered to
Celtic in accordance with the terms hereof, each Shareholder shall have all
rights of ownership of such Escrow Share, except as otherwise specifically
provided herein and subject to the lien created hereby, including the right to
receive dividends thereon and the right to vote such shares. The Escrow Agent
shall have no responsibility for either the payment of dividends with respect to
the Escrow Shares or the voting of such shares.
Section 3. Release of Escrow Shares and Delivery.
a. Definitions.
"ACI" For any measuring period shall be equal to
the quotient obtained by dividing (i) the
sum of the amount of the "Capital Infusion"
at the close of business on each day of the
relevant measuring period by (ii) the number
of calendar days in the relevant measuring
period.
"API" Means for any period all amounts which, in
conformity with GAAP, would be included in
the pre-tax net income on a consolidated
income statement of the SLM Group for such
period plus an amount equal to the sum of:
(i) adjustments required pursuant to Accounting Procedures Bulletin 16 and 17
(including without limitation, goodwill amortization and transactional
expense amortization);
(ii) adjustments resulting from the costs (including attorneys' fees and other
out- of-pocket costs) of obtaining a debt based Capital Infusion or any
other debt financing of the SLM Group to the extent they exceed in
connection with any such financing a one time origination fee of 3% and a
commitment fee on the unused portion of the facility of up to 1/4%;
(iii)any interest included in determining Net Income to the extent that such
interest
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resulted from an applicable interest rate in excess of either the prime interest
rate of Citibank N.A. as in effect from time to time, or, if the relevant
credit facility is priced off the London Interbank Offering Rate, then such
rate plus 1-1/2%;
(iv) adjustments resulting from the costs (including attorneys' fees and other
out- of-pocket costs) of obtaining any equity based Capital Infusion or any
other equity financing of the SLM Group to the extent they exceed in the
connection with any such financing a one time cost, including underwriting
fees, of 8%;
(v) any salary or other compensation which the Shareholders voluntarily elect
to forego (prior to paying any bonus to the Shareholders, Celtic and SLM
shall consult with them and allow one or both of them to defer receipt of
(prior to a final decision to forgo) all or part of any such bonus in order
to facilitate the use of this Section by them); and
(vi) with respect to the Second Measuring Period only, API shall also include
all revenue with respect to any business which has been booked or committed
to by the SLM Group as of the last day of such period to the extent that
such booked or committed business is actually completed.
"Capital Infusion"The cash proceeds of any new debt financing provided by Celtic
or a third party to SLM or any preferred or common equity financing
provided to SLM by Celtic Parent, or any combination thereof.
"Cause" Shall have the meaning assigned to it in the Employment Agreement (the
"Howell Employment Agreement") dated as of the date of
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this Agreement between Howell, Celtic and SLM.
"Celtic Parent" Means Celtic and any Subsidiary of Celtic other than a member of
the SLM Group.
"First Measuring Period" The period of 13 consecutive calendar months commencing
on the date that Celtic delivers the Initial Capital Notice.
"Initial Capital Notice" Means a notice to the Shareholders delivered by ------
Celtic to the effect that the SLM Group received a Capital Infusion in an
amount greater than or equal to $1.0 million. Such funds may be used,
subject to the approval of the Board of Directors of SLM, by the SLM Group
without restriction in connection with the origination, funding, purchase
and sale of real estate mortgages.
"Second Capital Notice" Means a notice to the Shareholders delivered by ------
Celtic to the effect that SLM has received a Capital Infusion in an amount
greater than or equal to $1.0 million. Such funds may be used, subject to
the approval of the Board of Directors of SLM, by the SLM Group without
restriction in connection with the origination, funding, purchase and sale
of real estate mortgages.
"Second Measuring Period" The period of 12 consecutive calendar months ------
commencing on the first day after the last day of the First Measuring
Period, or if Escrow Shares have been released pursuant to Section 3(c)(i)
or 3(c)(ii), the period of 12 consecutive calendar months commencing on the
date that Celtic delivers the Second Capital Notice.
"SLM Group" Means SLM, any Subsidiary of SLM, and Advantage and, solely for the
purposes of the definition of API, any such person and any entity which is
a part of Celtic Parent but only to the extent such entity is engaged in
the business of mortgage brokerage, real estate brokerage,
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real estate development and sales and construction financing.
"Voluntary Termination"Shall have the meaning assigned to it in the Howell
Employment Agreement.
b. General ProvisionsAny investment in or loan or advance by
any member of the SLM Group to any member of Celtic Parent and the
purchase price of any assets purchased by any member of the SLM Group from
any member of Celtic Parent shall be deemed to be a reduction of the
amount of the Capital Infusion. If a Capital Infusion or other debt or
equity financing is provided by Celtic Parent to the SLM Group and such
funds were obtained by Celtic Parent from an external financing source
then Celtic shall not charge any incremental fee, expense, charge or other
mark-up to the SLM Group with respect to such funds.
c. Release for Failure to Provide Capital Infusion
(i) If the Initial Capital Notice is not delivered
prior to the six-month anniversary of this
Agreement or a purported Initial Capital Notice is
delivered during such period but is determined not
to have been validly delivered then 250,000 of the
Escrow shares shall immediately be released to the
Shareholders and there shall be no First Measuring
Period.
(ii) If the ACI is less than $1.0 million during the
First Measuring Period then 250,000 of the Escrow
Shares shall immediately be released to the
Shareholders and there shall be no First Measuring
Period.
(iii) If shares are released pursuant to either Section
3(c)(i) or 3(c)(ii) then a Second Capital Notice
may be delivered; and, if a Second Capital Notice
may be delivered but no such notice is delivered
prior to the eighteen month anniversary of this
Agreement, or a purported Second Capital Notice is
delivered prior to such date but is determined not
to have been validly delivered, then 250,000 of
the Escrow Shares shall immediately be released to
the Shareholders and there shall be no Second
Measuring Period.
(iv) If the ACI for the Second Measuring Period is less
than $1.0 million, then all of the then escrowed
Escrow Shares shall immediately be released to the
Shareholders and there shall be no Second
Measuring Period.
d. Release Based on Celtic StatusIf the SLM Group shall lose any
qualification, license or franchise it then holds as a result of (i) any actions
or failures to act by
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Celtic Parent or any officer, director, employee, agent or consultant of
Celtic Parent or (ii) the status, background or any prior action or
failure to act of or by Celtic Parent or any officer, director, employee,
agent or consultant of Celtic Parent, then all then Escrowed Shares shall
immediately be released to the Shareholders.
e. Release Based on Celtic Activities. If any mortgage
brokerage, real estate brokerage, real estate development or sales or
construction financing activity is engaged in by any member of Celtic
Parent and such activities shall not be under the operational control and
authority of the Board of Directors of SLM then all then Escrowed Shares
shall immediately be released to the Shareholders. For the avoidance of
doubt the parties agree that the taking of, administration of and exercise
of rights under mortgages and deeds of trust as part of a collateral
package incidental to the factoring business engaged in by Celtic Parent
shall not constitute mortgage brokerage or real estate brokerage for
purposes of the preceding sentence.
f. Release Based on Celtic InterferenceIf Howell shall cease
for any reason to be Chairman, President and CEO of SLM (other than as a
result of (x) a Voluntary Termination by Howell of his employment or (y) a
termination by SLM of Howell's employment for Cause) or if the business
plan of SLM as proposed by Howell is rejected or thwarted by the Board of
Directors of SLM or Celtic (other than with the written consent of Howell)
or either such board interferes with the execution of such business plan
to any extent then in any such case all then Escrowed Shares shall
immediately be released to the Shareholders.
g. Release Based on SLM Group Financial Performance.
(i) A number of Escrowed Shares equal to quotient obtained by dividing (i) API
during the First Measuring Period minus $600,000, minus, but only if the
ACI is greater than $1.0 million, one tenth of the amount by which ACI
during the First Measuring Period exceeds $1.0 million, and (ii) 2; shall
be released to the Shareholders pursuant to Sections 3(g)(iv) and 3(i)
hereof. If there is no First Measuring Period then this paragraph shall
have no effect.
(ii) A number of Escrowed Shares equal to quotient obtained by dividing (i) API
during the Second Measuring Period minus $600,000 minus, but only if the
ACI is greater than $1.0 million, one tenth of the amount by which ACI
during the Second Measuring Period exceeds $1.0 million, and (ii) 2; shall
be released to the Shareholders pursuant to Section 3(g)(iv) and 3(i)
hereof. If there is no Second Measuring Period then this paragraph shall
have no effect.
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(iii)For clarification purposes the formula set out in the foregoing Sections
3(g)(i) and 3(g)(ii) may alternatively be expressed as follows:
(A) If ACI is equal to 1.0 million:
{ API - $600,000 } OVER 2 ~ = ~ Number ~ of ~ Shares ~ Released
(B) If ACI is greater than $1.0 million:
{ API - $600,000 - (.10 * (ACI - $1,000,000)) } OVER 2 ~ = ~ Number ~ of ~
Shares ~ Released
For further clarification an example of the
application of the second formula is set out
below:
API = $1.2 million
ACI = $3.0 million
{ $1,200,000 - $600,000 - (.10 * (3,000,000 - 1,000,000)) }
OVER 2 ~ = ~ 200,000 ~ Shares ~ Released
(iv) All Escrowed Shares required to be released under
this Section 3(g) shall be released immediately
following such time as the Release Calculation has
been determined to be in effect. Any Escrow Shares
not required to be released following the Second
Measuring Period shall be delivered to Celtic.
h. Determination of API and ACI. No later than 45 days after
the last day of each of the First Measuring Period and the Second
Measuring Period SLM shall provide to the Shareholders a statement (the
"Preliminary Release Calculation") signed by its Chief Executive Officer
or another person designated by the Board of Directors of Celtic setting
out in detail the calculation of API, ACI and the number of Escrow Shares
to be released. The Preliminary Release Calculation shall be based on
financial information calculated in accordance with GAAP consistently
applied and shall, unless otherwise agreed by the Shareholders and Celtic,
be based on audited financial information.
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Upon receipt of a Preliminary Release Calculation the
Shareholders and their accountants shall have the right during the
succeeding 30-day period to examine the Preliminary Release Calculation
and all books and records used to prepare such Preliminary Release
Calculation. In connection with the Shareholders' examination of the
Preliminary Release Calculation Celtic shall (and shall cause its
subsidiaries to) provide full cooperation to the Shareholders and their
accountants. Without limiting the generality of the foregoing, Celtic
shall permit, and shall cause each of its subsidiaries to permit, the
Shareholders and their accountants to have access during normal business
hours to the books and records of Celtic and its subsidiaries, including
without limitation work papers of its accountants.
The Shareholders shall notify Celtic in writing (the "Notice
of Objection"), on or before the last day of such 30-day period, of any
objections to the calculation of the Preliminary Release Calculation,
setting forth a reasonably specific and detailed description of the
Shareholders' objections and the dollar amount of each objection. If the
Shareholders do not deliver the Notice of Objection within such 30-day
period, the Preliminary Release Calculation shall be deemed to have been
accepted by the Shareholders.
If the Shareholders object to the Preliminary Release
Calculation, Celtic and the Shareholders shall attempt to resolve any such
objections within 15-days of the receipt of the Notice of Objection. Any
such resolution shall be conclusive and binding on Celtic and the
Shareholders. If Celtic and the Shareholders are unable to resolve the
matter within such 15-day period, they shall jointly appoint a mutually
acceptable firm of independent accountants of national reputation (or, if
they cannot agree on a mutually acceptable firm, they shall cause their
respective accounting firms to select such firm) within five days of the
end of such 15-day period. Celtic shall (and shall cause its subsidiaries
to) provide full cooperation to such firm. Such firm shall be instructed
to reach its conclusion regarding the dispute within 30-days. Such firms'
resolution of the dispute shall be conclusive and binding on Celtic and
the Shareholders. The Preliminary Release Calculation, after the
acceptance thereof by the Shareholders or the resolution of all disputes
in connection therewith, is referred to herein as the "Release
Calculation."
Each of Celtic and the Shareholders shall pay one-half of all
fees and expenses of any independent public accountants appointed under
this paragraph.
i. Allocation Among Shareholders. One-half of any Escrow
Shares released pursuant to this Escrow Agreement shall be delivered to
Howell and the other half shall be delivered to Davis unless otherwise
agreed pursuant to Section 4(i) or 4(ii) hereof by Howell or Davis or
resulting from an award pursuant to Section 4(iii) hereof.
Section 4. Timing of Release.It is understood and agreed that should any
dispute arise with respect to the payment and/or ownership or right of
possession of the Escrow Shares, the Escrow Agent is authorized and directed to
retain in its possession the Escrow Shares until either (i) the relevant
Shareholder delivers instructions directing the application of the Escrow Shares
(which refers to this Escrow Agreement) to each of the Escrow Agent, Celtic and
the other Shareholder; provided, however, that if Celtic shall deliver to the
Escrow Agent and the other Shareholder contrary instructions within
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ten (10) calendar days, then such original instructions shall be void; (ii) the
relevant Shareholder and Celtic direct the application of such Shareholder's
Escrow Shares by delivering a joint writing referring to this Escrow Agreement
to that effect to the Escrow Agent; or (iii) the Escrow Agent shall receive a
certified copy of an arbitrators award with respect to a claim on the relevant
Escrow Shares. Upon receipt of such written direction from Celtic and the
relevant Shareholder or not later than five days after receipt of such certified
copy of an arbitrators award, the Escrow Agent shall take action with respect to
the Escrow Shares as required by such direction or such award, as the case may
be.
Section 5. Interpleader Provision. Nothing contained in this Escrow
Agreement shall preclude the right of the Escrow Agent to seek an adjudication
in a court of competent jurisdiction as to the rights of the parties under this
agreement, and the Escrow Agent shall not be liable for any delay occasioned
because of such resort to court; provided, however, that any dispute concerning
the application, interpretation or any other matter concerning Section 3 shall,
in accordance with Section 16 hereof, be submitted to binding arbitration
pursuant to the procedures set out in Section 10.8 of the Merger Agreement.
Section 6. Termination. This Escrow Agreement shall terminate upon the
distribution of the last of the Escrow Shares held by the Escrow Agent pursuant
to this Escrow Agreement.
Section 7. Compensation of Escrow Agent. The Escrow Agent shall be
entitled to a fee for its escrow services in an amount calculated at a rate of
$100.00 per annum, to be paid annually in arrears by Celtic. The Escrow Agent
will be reimbursed for expenses, including counsel fees, in connection with the
performance of the Escrow Agent's duties under this Agreement.
Section 8. Escrow Agent.
a. The Escrow Agent is hereby authorized and directed to hold
the Escrow Shares as agent for Celtic and the Shareholders and to deliver
the same in accordance with the provisions of this Agreement.
b. The Escrow Agent may resign and be discharged from its
duties hereunder at any time by giving notice of such resignation to
Celtic and the Shareholders, which shall specify a date (not less than 30
days following the date of such notice) when such resignation shall take
effect. Upon such notice, a successor escrow agent shall be selected by
Celtic and the Shareholders, such successor escrow agent to become the
Escrow Agent hereunder upon the resignation date specified in such notice.
If Celtic and the Shareholders are unable to agree upon a successor escrow
agent within 30 days after the date of such notice, the Escrow Agent shall
be entitled to appoint its successor. The Escrow Agent shall continue to
serve hereunder until its successor accepts the escrow and acknowledges
receipt of the Escrow Shares. Celtic and the Shareholders may at any time
substitute a new Escrow Agent by jointly giving notice thereof to the
existing Escrow Agent, provided that any such new Escrow Agent agrees to
serve as Escrow Agent in accordance with the terms and provisions of an
escrow agreement substantially identical to this Escrow Agreement (except
as to the name of the Escrow Agent).
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c. Celtic and the Shareholders agree to release and hold the
Escrow Agent harmless and indemnify it from any loss or claim whatsoever
in conjunction with the performance of the duties of the Escrow Agent
(including attorney's fees) as long as the Escrow Agent has complied with
the provisions of this Escrow Agreement. Said indemnification shall be
borne 50% by Celtic, 25% by Howell and 25% by Davis (unless otherwise
determined pursuant to an arbitrator's award) and survive the termination
of this Escrow Agreement.
Section 9. Notices. Any notices or other communications required or
permitted hereunder shall be given in writing and shall be delivered by hand or
air courier or sent by certified or registered mail, postage prepaid, addressed
as follows:
If to Celtic, to:
Celtic Investment, Inc.
515 Red Cypress Drive
Cary, IL 60013
Attention: Douglas P. Morris.
With a copy to:
A.O. Headman, Jr.
Cohne, Rappaport & Segal
525 East 100 South, Fifth Floor
Salt Lake City, UT 84102
or:
If to the Escrow Agent, to:
Security Title Insurance Agency of Utah, Inc.
376 East 400 South
Suite 306
Salt Lake City, UT 84111
Attention: Reese Howell, Sr.
or:
If to the Shareholders, to:
Reese Howell, Jr.
c/o Salt Lake Mortgage Corp.
102 West 500 South
Suite 300
Salt Lake City, UT 84101
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with a copy to:
Parsons Behle & Latimer
201 South Main Street, Suite 1800
Salt Lake City, Utah 84145-0898
Attn: George M. Flint III
and to:
Roger Davis
c/o Salt Lake Mortgage Corp.
102 West 500 South
Suite 300
Salt Lake City, UT 84101
or to such other address as shall be furnished in writing by such party, and any
such notice or communication shall be effective and be deemed to have been given
as of the date delivered if by hand, the day after delivery to the air courier
service if sent by overnight mail, and five days following the date of mailing
if mailed.
Section 10. Entire Agreement. This Escrow Agreement is the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements, written or oral, with respect thereto.
Section 11. Amendments; Waiver. This Escrow Agreement may be amended,
modified, superseded, cancelled, renewed or extended, and the terms and
conditions hereof may be waived only by written instrument signed by the parties
hereto or, in the case of a waiver, the party waiving compliance.
Section 12. Assignment. No assignment of any rights or delegations of any
obligations provided for herein may be made by any party without the express
written consent of all the other parties hereto.
Section 13. Counterparts. This Escrow Agreement may be executed in two more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
Section 14. Governing Law. This Escrow Agreement shall be construed in
accordance with
the governed by the internal laws of the State of Utah.
Section 15. Benefit. This Escrow Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns. Nothing contained in this Escrow
Agreement, express or implied, is intended to confer upon any person other than
the parties hereto and their respective heirs, personal representative, and
successors and assigns as aforesaid, any rights or remedies under or by reason
of this Agreement.
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Section 16. Arbitration. All disputes at law or equity arising under, or
as a result of, or in any way in connection with any provision of this Agreement
shall, except as provided in Section 3(h) hereof, be resolved only in accordance
with the provisions of Section 10.8 of the Merger Agreement.
Section 17. Certain Disclosures. Davis and Celtic acknowledge that they
understand that a substantial shareholder of the Escrow Agent is Reese Howell,
Sr., who is Howell's father. The Escrow Agent acknowledges that it has relied on
its own separate counsel in connection with the preparation, negotiation, and
execution and delivery of this Agreement and not on counsel to Howell, Davis or
Celtic.
IN WITNESS WHEREOF, the parties hereto have affixed their signatures to
this Escrow Agreement upon the date first set forth above.
CELTIC INVESTMENT, INC.
By: /s/ Douglas P. Morris
/s/ Reese Howell, Jr.
REESE HOWELL JR.
/s/ Roger Davis
ROGER DAVIS
SECURITY TITLE INSURANCE AGENCY
OF UTAH, INC.
as Escrow Agent
By: /s/ Reese Howell, Jr.