Annual Report For Small Business Issuers Subject
to the 1934 Act Reporting Requirements
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB/A
AMENDMENT NO. 1
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended October 31, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-21417
CAPITAL TITLE GROUP, INC.
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(Name of Small Business Issuer in its charter)
Delaware 87-0399785
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4808 N. 22nd Street, Phoenix, Arizona 85016
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (602) 954-0022
-----------------
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of class)
The undersigned registrant hereby amends Part I-Item 1, Part II-Items 6 and 8,
and Part III-Items 9, 10, 11 and 12, of its Annual Report on Form 10-KSB for the
fiscal year ended October 31, 1996, in their entirety to read as follows:
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PART I
ITEM 1. BUSINESS
COMPANY HISTORY AND OVERVIEW
Capital Title Group, Inc., a Delaware corporation (the "Company" or
"Capital Title Group"), through its wholly owned subsidiary, Capital Title
Agency, Inc., an Arizona corporation ("Capital Title"), operates an independent
title agency and escrow business headquartered in Phoenix, Arizona. Capital
Title Group was formed under the laws of Utah in 1983 and redomiciled in
Delaware in 1989. Capital Title was formed as an Arizona corporation in 1981 and
has engaged in business as an independent title agency and escrow company since
that time.
On May 23, 1996, the Board of Directors of Capital Title Group,
(formerly Norvex, Inc.), and the Board of Directors of Capital Title, approved a
Share Exchange Agreement. Per the agreement, Capital Title Group issued 5.781
shares of Capital Title's, $.001 par value, common stock in exchange for each
share held by Capital Title's shareholders. Immediately prior to the Acquisition
Transaction, Capital Title Group had 1,686,164 shares issued and outstanding and
approximately 75 shareholders. Irwin Jacobson and Mark Scharmann each held 5% or
more of Capital Title Group's outstanding stock. In the Acquisition Transaction,
Capital Title Group issued 6,734,865 shares to the existing shareholders of
Capital Title. See Item 11. "Security Ownership of Certain Beneficial Owners and
Management" for the current 5% or greater beneficial owners. The share exchange
ratio was determined by arm's length negotiations between the respective boards
of directors of Capital Title Group and Capital Title, based on a number of
factors, including the business prospects and financial condition of the
respective entities.
Prior to the merger, Capital Title Group had no significant business
operations or holdings. As a result of the Acquisition Transaction, Capital
Title Group now operates Capital Title as a wholly owned subsidiary.
Since 1981, Capital Title has provided continuous title insurance and
escrow services to the real estate industry in Yavapai County, Arizona.
Recently, Capital Title expanded its operations into Phoenix, Arizona and
relocated its corporate headquarters from Prescott, Arizona to Phoenix, Arizona.
The Company has nine branch offices, five of which are located in Yavapai
County, Arizona and five of which were recently opened by the Company in the
Phoenix metropolitan area. The Company plans to continue its growth in Yavapai
and Maricopa Counties and, as conditions merit, expand outside Arizona. The two
areas outside Arizona, which the Company believes it could effectively
penetrate, are Southern California and Nevada. This planned expansion will be
accomplished through acquisition or recruitment of escrow officers with
significant existing revenue production based upon their relationships with real
estate brokers, mortgage lenders and other industry participants. The Company
will attempt to attract these significant producers through employment packages
that include stock options and stock purchase programs as substantial
motivational incentives.
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The principal executive offices of the Company are located at 4808 N.
22nd Street, Phoenix, Arizona 85016 and the Company's telephone number is: (602)
954-0022.
COMPANY OPERATIONS
Capital Title is an independent title agency providing escrow services
and, as an agent for First American Title Insurance Company ("First American")
and Old Republic Insurance Company ("Old Republic"), issuing title insurance
policies to service the real estate industry in Yavapai County and Maricopa
County, Arizona. Capital Title's operations commenced in 1981 in Prescott,
Arizona. By 1987, Capital Title was the largest title company in Yavapai County
based on market share, and by 1994, its market share had reached 24%. In early
1994, Money magazine listed Prescott, Arizona as the number one place in the
United States to retire. During the next ten months, the real estate market in
Yavapai County increased by 38%, but Capital Title's staffing levels were not
increased quickly enough to capitalize on this increase. As a result, by the end
of 1994, Capital Title found that its market share in Yavapai County had fallen
to approximately 16%.
During 1995 and 1996, Capital Title began an expansion program, opening
additional offices in the Yavapai County population centers of Prescott Valley,
Cottonwood and Sedona. Capital Title estimates its current market share is
approximately 23%, second to First American Title which has a market share of
approximately 35%. During 1996, Capital Title opened four branch offices in
Maricopa County, Arizona. In January, 1997 the Company opened another branch in
Maricopa County and as conditions and operating results warrant, plan to open
additional branch offices in Maricopa and Yavapai Counties, Arizona. Phoenix is
currently the 7th largest city in the United States with an estimated population
of 1.08 million, and its projected growth is expected to boost Phoenix to the
6th largest city in the nation by the year 2000. The Company believes the
surrounding metropolitan areas in Maricopa County have the potential to grow at
an even more accelerated pace. Capital Title's expansion plans also call for the
opening of offices outside of Arizona. The Company believes that the Southern
California real estate market is at its lowest recent historical level, and most
predictions are that a recovery will commence in the near future. The Nevada
market has been growing for a number of years.
INDUSTRY OVERVIEW
Title Insurance has become accepted as the most efficient means of
determining title to, and the priority of interests in, real estate in nearly
all parts of the United States. Virtually all real property lenders require
their borrowers to obtain title insurance policies at the time mortgage loans
are made.
TITLE POLICIES. Title insurance policies state the terms and conditions
upon which a title underwriter will insure title to real estate. The
beneficiaries of title insurance policies are generally buyers of real property
or secured lenders.
Title insurance is different from other types of insurance because it
relates to past events that affect title to property at the time of closing and
not unforeseen future events. Prior to issuing policies, underwriters can
eliminate future losses by accurately performing searches and examinations. The
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major expense of a title company is the search and examination function in
preparing preliminary reports, commitments and policies and is not from claim
losses. The premium for title insurance is due in full on the closing date of
the real estate transaction and is based upon the purchase price of the property
insured or the amount of the secured loan. Coverage under the policy generally
terminates upon resale or refinance of the property. The terms of coverage have
become standardized in accordance with forms approved by trade associations such
as American Land Title Association and Land Title Association of Arizona.
Title insurance policies are issued on the basis of a preliminary
report or commitment. These reports are prepared after a search of public
records, maps and other relevant documents to ascertain title ownership and the
existence of easements, restrictions, rights of way, conditions, encumbrances or
other matters affecting the title to, or use of real property. A visual
inspection of the property may also be made prior to the issuance of certain
title insurance policies.
To facilitate the preparation of preliminary reports without the
necessity of manually searching public records, copies of public records, maps
and other relevant historical documents are compiled and indexed in a "title
plant." Each title plant relates to a particular county and is kept current on a
daily or other frequent basis by the addition of copies of recorded documents
that affect rights in real property in the particular county. Title companies
often subscribe to independent title information services to assist in the
updating of their title plants and the maintenance of title records.
DIRECT VS. AGENCY SALES. Preliminary reports and commitments to issue a
policy are prepared by title underwriters (direct sales) or by independent
agents on behalf of the underwriters (agency sales). The terms and conditions
upon which the real property will be insured are determined in accordance with
the standard policies and procedures of the title underwriter. In direct sales,
the title underwriter issues the preliminary report and commitment and retains
the entire title premium paid in connection with the transaction. In agency
sales, the search and examination function is performed by the independent agent
and the majority of the premium collected is retained by the agent, with the
balance remitted to the title underwriter. Independent agents may select among
several title underwriters based upon the amount of the premium "split" offered,
the overall terms and conditions of the agency agreement, including
indemnification obligations of the agent, and the scope of services offered to
the agent by the title underwriter. Agent commissions vary by geographic region.
THE TITLE POLICY PROCESS. A brief description of the process of
issuing a title insurance policy is as follows:
(i) The customer, typically a real estate salesperson or broker,
escrow agent or lender, places an order for a title policy.
(ii) Sales personnel note the specifics of the order and place a
request with the title department for a preliminary report.
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(iii) After the relevant historical data on the property is
compiled, the title officer prepares a preliminary report that
documents (a) the current status of title to the property, (b)
any exemptions, exceptions and/or limitations that might be
attached to the policy and (c) specific issues that need to be
addressed and resolved by the parties to the transaction
before the title policy will be issued (such as removal of
prior tax liens and payment of prior loans on the property).
The preliminary report is circulated to all the parties for
satisfaction of any specific issues.
(iv) After all specific issues identified in the preliminary report
are satisfied, the escrow agent closes the transaction in
accordance with the instructions of the parties and the policy
conditions.
(v) Once the transaction is closed and all monies have been
released, the policy is issued (a) to the owner and the lender
on a resale transaction or (b) to the lender only on a
refinancing transaction.
LOSSES AND RESERVES. The maximum amount of liability under a title
insurance policy is usually the face amount of the policy plus the cost of
defending the 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,
claims loss history, current legal environment, geographic considerations and
type of policy written.
ECONOMIC FACTORS AFFECTING INDUSTRY. Title insurance revenue is closely
related to the level of activity in the real estate market and the average price
of real estate sales. Real estate sales are directly affected by the
availability of money to finance purchases. Other factors affecting real estate
activity include demand, mortgage interest rates, family income levels and
general economic conditions.
It is estimated that title industry revenue for 1995 was approximately
$6 billion, which reflected no significant change in comparison to 1994.
Although recovery from a weak year in 1994 appeared to commence in the second
half of 1995, continued weakness in the California market, which accounts for
25% or more of all mortgage originations nationwide, precluded substantial
growth. The long-term growth rate for the industry approximates nominal gross
domestic product growth, or about 5%.
COMPANY STRATEGY
The Company's strategy is to pursue aggressive growth in the title
insurance industry in the Southwestern United States. Essential elements of the
Company's strategy are as follows:
COMMITMENT TO SERVICE. The Company is built on three basic
entrepreneurial premises: (1) every employee is a salesperson for the Company;
(2) the Company's services are a one-stop, computer-based contact point for
complete real estate transactions; and (3) success is achieved through focus on
an unequaled quality of customer service. Because title insurance policies and
escrow functions are generally standardized, the level of service provided is
the key differentiating factor among competitors in the title industry. One of
the Company's foremost objectives is to issue written title reports in
substantially all its transactions within two working days from the opening of
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escrow. Through its commitment to customer service, the Company seeks to build
lasting relationships with its real estate industry clients.
MARKET FOCUS. The Company's market focus is on real estate brokers and
mortgage lenders, which the Company believes generate approximately 70% of the
transactions involving title and escrow fees. To set itself apart as a service
company, Capital Title has developed industry specific information technology in
Maricopa County that it provides to its clients. The Company trains real estate
agents and their administrative assistants in the use of a customized computer
program which enhances their client presentations. The Company has also
developed "Plain Language Escrow Instructions" in an effort to simplify the
escrow process and minimize the numerous questions that can arise in the
preparation of escrow documents. These simplified instructions have been well
received in the Yavapai County real estate community and have provided the
Company with an opportunity to conduct educational seminars directed at its real
estate agent clients.
MANAGEMENT. The Company recognizes that its aggressive growth plan
calls for executive management with extensive industry operational and expansion
experience. Capital Title appointed Mr. Andrew Johns as President effective
April 16, 1996. Mr. Johns, the former President of Stewart Title for the State
of California, has over 28 years of industry experience, including the expansion
of United Title's Orange County operations throughout the Southern California
market. The Company believes that Mr. Johns has the leadership, experience and
industry contacts required to effect Capital Title's expansion. Capital Title
also has an experienced and dedicated group of executive officers to support Mr.
Johns in this effort. See Item 9 - "Directors, Executive Officers, Promoters and
Control Persons."
EQUITY PARTICIPATION BY ESCROW OFFICERS. Escrow officers are the major
revenue producers for title insurance companies. It is their relationships with
real estate brokers, lenders and other industry participants that are primarily
responsible for the direction of escrow and title business. Capital Title will
seek to attract the most successful escrow officers (and the related revenue)
through employment packages that include stock options and stock purchase
programs in the Company as added motivational incentives. The Company believes
such programs will also promote Company loyalty, which will help to insulate the
Company's escrow officers from competitive recruiting efforts.
EXPANSION. The Company intends to accomplish its planned expansion
through acquisitions of existing title agencies, the opening of new branch
offices and the development of "Home-Based Relationship" ("HBR") arrangements
with escrow officers. The HBR program will allow escrow officers to work in
their own homes doing escrow processing functions through the Company's computer
network, thereby reducing the Company's administrative and office expense.
CAPITAL TITLE OPERATIONS
In the years ended October 31, 1996 and 1995, revenues from the
issuance of title insurance policies represented 56.2% and 53.7%, respectively,
of the Company's consolidated revenues. Escrow fees for the years ended October
31, 1996 and 1995 represented 26.9% and 26.6%, respectively, of the Company's
consolidated revenue.
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MARKETING. The Company believes that the primary source of its business
is from referrals from participants in the real estate industry, such as real
estate brokers, mortgage lenders, developers and attorneys. In addition to the
referral market, Capital Title markets its services directly to larger
brokerages and real property lenders. Marketing activities are performed by the
escrow officers of Capital Title and a marketing representative whose sole
function is the solicitation of business from major real estate brokers and
lenders. Escrow officers, in addition to their escrow service duties, maintain
and further develop relationships established with current clients for on-going
business. The marketing representative holds educational seminars for real
estate brokers, offers the use of "Dataquick" as a service that provides ease in
placing valuations on surrounding property and trains brokers or their
assistants in the use of Capital Title's proprietary industry specific
information technology.
ESCROW SERVICE. Capital Title's escrow department has the fiduciary
responsibility of handling the consummation of real estate sales, exchanges and
a variety of other transactions involving the sale or encumbrance of real
property, refinance of real property, sales of assets of businesses and sales of
promissory notes secured by deeds of trust.
The escrow officer and assistant typically prepare their escrow
documents pursuant to the real estate contract. The escrow instructions provide
guidance to all concerned parties as to the conditions required for the real
estate transaction. Furthermore, the instructions provide authorization for the
escrow agent to request information concerning matters appearing of record, the
receipt of all earnest monies and closing funds, the disbursement of seller
proceeds, payoff of underlying liens, judgments, real property taxes, insurance
and any other disbursement as set forth in the instructions or parties to the
transaction. The instructions also include authorization to prepare and obtain
documents necessary to complete the real estate transaction.
The escrow agent is held accountable by state governmental agencies for
strict compliance with its fiduciary responsibilities outlined by the escrow
instructions. The officer must possess a high degree of skill, professionalism
and confidentiality in the handling, preparation, collecting and recordation of
all escrow matters between the buyer, seller, real estate brokers and their
agents, developers, lenders and investors.
TITLE DEPARTMENT. The primary function of the title department is the
accumulation and analysis of various documents from the many sources that make
up the public record. From this analysis, a preliminary report is written
showing the present condition of title. This report is given to the escrow
officer who, in turn, distributes it to the parties involved in the purchase
agreement. After the preliminary report has been read and approved by all the
parties and the requirements of the report have been fulfilled, the escrow will
proceed to closing and a final title insurance policy will be issued.
Capital Title owns a "title plant," a listing and history of each
parcel of ground in a particular county, for Yavapai County, Arizona. The
Company can use the services of a third party title plant provider or acquire
additional title plants for purposes of conducting its title research as it
expands into additional geographic areas. The cost of obtaining "title plants"
varies with economic and market conditions in the geographic area to which the
title plants relate. The Company believes it will be able to obtain "title
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plants" on terms and conditions that are acceptable to it through the
acquisition of title companies as the Company expands into other markets.
However, there can be no assurance in this regard.
CLAIMS AND UNDERWRITING. Capital Title provides title insurance as an
agent of First American and Old Republic. First American has a Best's Insurance
rating of A. Old Republic has a Standard and Poor's rating of A+. These services
are provided pursuant to Underwriting Agreements with First American and Old
Republic, which state the conditions on which Capital Title is authorized to
issue a title insurance policy on behalf of First American or Old Republic and
prescribe the circumstances under which Capital Title may be liable to First
American or Old Republic if a policy loss is attributable to errors made by
Capital Title. The underwriting agreements with First American and Old Republic
provide that the Company: (1) must fully comply with all requirements relating
to the issuance of title insurance within each of the counties in which the
Company does business and must comply with generally accepted standards of
underwriting; (2) will be liable for any losses payable on a basis of erroneous
reports or in excess of the stated liability on the policy when an insured makes
a successful claim based on negligence; (3) may not write a policy in excess of
the stated contract amount without prior approval from the insurance company;
and (4) will be liable for the first $5,000 of each loss, unless specifically
waived by the insurance company. The Company is not a sole agent for First
American or Old Republic.
Claims against the policy of title insurance normally arise out of
human error. During the process of accumulation and analysis of the public
record, certain inaccuracies and inconsistencies are often encountered that
sometimes result in a situation in which interpretation of these documents could
lead to a claim. Such claims are reviewed by Capital Title's staff and, if
warranted, sent to the insurance carrier for final disposition.
Underwriting is the process of analyzing risk assumption. As each
individual situation arises, the local staff makes a risk analysis. If the local
underwriting staff decides that the risk assumption is outside its underwriting
authority, the insurance carrier is contacted for its underwriting approval.
ACCOUNT SERVICING. The account servicing department handles the receipt
and disbursement of monies for accounts with respect to which Capital Title acts
as servicing agent for a transaction. Its responsibility as trustee includes the
maintenance of all records reflecting receipts and disbursements, calculation of
total interest, principal and any other sums due as required under the
agreement/note between the buyer and the seller. This information is summarized
and reported to the Internal Revenue Service with the appropriate Form 1098
and/or 1099 supplied to the buyer and the seller. Following the payoff of
accounts, the servicing agent prepares and records the appropriate documents
necessary to substantiate accounts as paid in full in the applicable county
records. Typically, transactions serviced by Capital Title include promissory
notes secured by deeds of trust and agreements of sale.
FORECLOSURES. Both promissory notes secured by deeds of trust and
agreements of sale can be foreclosed nonjudicially by the servicing agent. As
trustee of the documents being serviced by Capital Title, the seller and/or
beneficiary can direct the servicing agent, at the time of default, to proceed
with foreclosure of the lien.
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The maintenance of accurate up-to-date accounting and control of all
original documents enable the trustee/servicing agent to expedite the
nonjudicial trustee sale or foreclosure.
ADMINISTRATION. Capital Title's administrative staff handles general
accounting and finance, human resources, purchasing, management information
systems and regulatory compliance.
The Company has initiated its expansion plans in Maricopa County.
Recently, the Company relocated its headquarters to Phoenix, and has opened five
branch office locations in Maricopa County. In addition, the Company has
retained the services of escrow officers with significant production capacity in
the Phoenix metropolitan area.
CUSTOMERS
Capital Title is not dependent upon any single customer or single group
of customers. The loss of any one customer would not have a material adverse
effect on the Company.
SEASONALITY
The title insurance business is closely related to overall levels of
real estate activity. Historically, real estate activity has been generally
slower in the winter months with volumes showing significant improvements in the
spring and summer months. In addition, the title insurance business is cyclical
due to the effect of interest rate fluctuations on the level of real estate
activity. Periods of high interest rates adversely effect real estate activity
and therefore premium revenues.
COMPETITION
The title insurance business is highly competitive. Companies with
significant market share in Arizona include First American Title, Security Title
and Chicago Title. The number and size of competing companies varies in
different geographic areas. In those areas where the Company operates and
intends to operate, the Company will face competition from major national
insurance underwriters and other independent agencies, many of which have
greater financial and other resources than the Company. The Company believes
that quality and timeliness of service are the key competitive factors in the
industry, because parties to a real estate transaction are usually concerned
with time schedules and costs associated with delays in the closing of
transactions. In those states where prices are not established by regulation,
the price of title insurance is also an important competitive factor.
REGULATION
Capital Title conducts its business under licenses granted by the State
Banking and Insurance Departments of the State of Arizona. The title insurance
and escrow businesses generally are subject to extensive regulation under
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applicable state laws. These laws establish supervisory agencies with broad
administrative powers relating to issuing and revoking licenses, regulating
trade practices, licensing agents, approving policy forms and approving rate
schedules. Failure to comply with these regulations or an inability to secure or
maintain any required licenses could materially adversely affect the Company's
business. The Company believes that it is in material compliance with applicable
laws and regulations, and that it will maintain and obtain all licenses required
for the conduct of its business.
EMPLOYEES
As of December 31, 1996, the Company had a total of 112 employees, of
which 59 (including officers of the Company) were in the marketing/escrow
department, 20 were in the title department, eight were in customer service, one
was in trustee sales, six were in account services and eighteen were in
administration. Capital Title believes that its relations with its employees are
good.
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of the operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
statement. Historical results and percentage relationships among accounts are
not necessarily an indication of trends in operating results for any future
period. The discussion of the results of operations and financial condition is
based solely upon the activity of Capital Title and excludes the activity of
Capital Title Group which was inactive until the Acquisition Transaction.
OVERVIEW
During the fiscal year ended October 31, 1996, the Company undertook an
expansion program which doubled the number of branch offices and employees. This
expansion was funded primarily through a private placement of the Company's
common stock which was initiated in July, 1996. Through the private placement,
approximately $1,157,000 was raised, net of offering costs. During 1996, an
additional $325,000 was obtained through the sale of 165,000 shares of common
stock for $100,000 and borrowings of $225,000. Out of the approximately
$1,482,000 raised by the Company through financing activities, the Company spent
approximately $725,000 on fixed assets for the Phoenix corporate headquarters
and four (4) new branches in Maricopa County. Approximately $680,000 was used to
fund operations during the growth period and approximately $72,000 was used to
pay debt obligations.
Subsequent to the Company's fiscal year end, the Company obtained a
loan from Imperial Bank for $350,000 and has initiated another private placement
of the Company's common stock. The Company's Board of Directors authorized
another placement of 500,000 shares of common stock. As of February 5, 1997, the
Company has sold an additional 555,000 shares of common stock for approximately
$538,000, net of offering costs. The approximately $888,000, subsequently
raised, has been used primarily to fund operations open one additional branch in
Maricopa County.
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RESULTS OF OPERATIONS
REVENUE. The following table presents information regarding the
components of the Company's revenue:
For The Years Ended Oct. 31,
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1996 1995
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Title Insurance Premiums $1,451,479 $1,099,666
Escrow Fees 695,995 544,357
Account Servicing 314,939 263,695
Other Fees and Revenue 16,947 43,085
Interest Income 103,295 98,809
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$2,582,655 $2,049,612
========== ==========
Orders Closed by Direct Orders 2,748 2,029
========== ==========
Average Fee Per file from Direct
Operations $ 780 $ 810
========== ==========
Title insurance premium and escrow fees revenue increased approximately
$503,000 or 30% from 1995. Of this increase, approximately $261,000 or 16% is
from Maricopa County operations. Capital Title opened its first branch in
Maricopa County in August, 1996. The following table presents information
regarding the approximate monthly revenue from Maricopa operations:
For The Month Ended Revenue
------------------- -------
August 31, 1996 $ 54,000
September 30, 1996 99,000
October 31, 1996 108,000
November 30, 1996 163,000
December 31, 1996 $215,000
Management expects revenues from its Maricopa operation to continue to
grow as the inventory of orders that has been building over the past five months
begins to close and escrow officers begin to reach their full potential. The
inventory of orders is comprised of escrows opened but not yet closed or
cancelled. There can be no assurance that an escrow will close, but based on
management's experience, 80% of the opened escrows are expected to close.
Management believes it takes between five (5) and six (6) months for a new
branch to reach its expected revenue and profit model.
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The remaining increase in insurance premiums and escrow fees of
approximately $242,000 or 14% is from expansion in Yavapai County, Arizona. The
Company's market share in Yavapai County has increased from a low of 16% in
fiscal year 1995 to 23% in November, 1996. Due to the recruitment of three (3)
escrow officers and the anticipated opening of two (2) new offices, the Company
plans to increase its market share in 1997.
The decrease in the average fee per file from direct operations is due
to a decrease in the average fee earned in Yavapai County which dropped from
$810 for fiscal year 1995 to $750 in fiscal year 1996. The decrease was due to
an increase in refinance business which occurred when interest rates dropped.
For 1997, the Company is refocusing on resale business which typically charges
higher fees than fees from refinancing transactions. Fees for Maricopa County
for the period end October 31, 1996 averaged approximately $1,240. Orders closed
by direct operations in Yavapai County increased from 2,029 in 1995 to 2,538 in
1996 or approximately 25%. Orders closed by direct operations from Maricopa
County were 210 in 1996.
EXPENSES. The following table presents the components of the Company's
expenses.
For The Years Ended Oct. 31,
----------------------------
1996 1995
---- ----
Personnel Cost $1,958,292 $1,161,622
Other Operating Expense 1,526,312 1,059,846
Agent Commissions 24,768 4,016
Acquisition Cost Write Down 103,441 --
Interest Expense 17,835 6,289
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$3,630,648 $2,231,773
========== ==========
Personnel costs are the most significant operating expense incurred by
the Company. Personnel costs increased in 1996 compared to 1995 by approximately
$797,000, or 68.5%. Personnel costs increased approximately $402,000, or 34.6%
due to employees being hired for the Maricopa County operations and
approximately $395,000, or 33.9% for increased staff in Yavapai County and
additional administrative and executive personnel. Personnel costs, as a
percentage of total revenue, have increased to 75.8% in 1996 from 56.6% in 1995.
This increase is due primarily to expansion into Maricopa County. Personnel
costs, as a percentage of total revenue, was 152.5% in 1996 for Maricopa County
operations and 63.1% for Yavapai County operations respectively. Personnel costs
fluctuate as the level of direct orders opened and closed fluctuate. As the
Company's current inventory of orders begins closing and branches reach full
potential, the Company believes Maricopa County's personnel costs as a
percentage of total revenue will decrease. The increase from 56.6% in 1995 to
63.1% in 1996 for Yavapai County is due to the Company's hiring additional
employees. The increase resulted in a substantial increase in the Company's
market share; however, the extra payroll expense prior to the increased orders
closed resulted in an increase in payroll expense compared to total revenue.
Other operating expenses increased in 1996 compared to 1995 by
approximately $466,000 or 44%. A majority of the increase, approximately
$368,000 or 34.6%, was due to the expansion into Maricopa County.
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Acquisition cost write down relates to costs incurred when the Company
initiated its expansion program. The Company initially anticipated expanding
into the California and Texas markets by December, 1996. Management has
postponed expansion outside of Arizona until 1998, if conditions warrant, and is
now considering the Nevada market instead of Texas. Accordingly, the acquisition
costs the Company was capitalizing have been expensed for the fiscal year ended
October 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Capital Title Group requires capital to expand its geographical base,
make acquisitions, further implement its market penetration program, recruit and
train new personnel, and purchase additional property and equipment to implement
its expansion program. During the year ended October 31, 1996, the Company
financed its operating and business development activities primarily through
operating revenue, obtaining a $150,000 term loan, a $75,000 short term loan,
and the private placement of shares of common stock, resulting in net proceeds
to the Company of $1,156,999.
During the year ended October 31, 1996, Capital Title Group commenced a
private placement of common stock intending to sell a minimum of 500,000 shares,
and a maximum of 1,500,000 shares at $1 per share. As of October 31, 1996, a
total of 1,275,000 shares had been sold in the offering. The expenses of this
offering were approximately $118,100 which generated net proceeds for the
Company of approximately $1,156,900. Subsequent to the fiscal year end, the
Company's Board of Directors authorized the issuance of an additional 550,000
shares of its Common Stock at $1.00 per share. As of February 5, 1997, the
Company has sold 550,000 shares for proceeds, net of expenses, of approximately
$538,000.
The Company believes that the net proceeds of this offering, together
with its existing cash resources and financing, will be sufficient to meet the
Company's working capital needs for the next 12 months. The Company, however,
may raise capital through the issuance of long-term or short-term debt or the
issuance of securities in private or public transactions to fund future
expansion of its business either before or after the end of the 12 month period.
There can be no assurance that acceptable financing for future transactions can
be obtained on terms acceptable to the Company.
As of December 31, 1996, the Company had net operating loss
carryforwards of approximately $1,187,000 that will be available to offset
future state income taxes and approximately $756,000 that will be available to
offset future federal income taxes. The state net operating carryforwards will
expire October 31, 2001. The federal net operating carryforwards will expire
October 31, 2011.
13
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
During October, 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", which
establishes a fair value-based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies that elect not to
adopt the new method of accounting. The Company will continue to account for
employee purchase rights and stock options under APB Opinion No.25, "Accounting
for Stock Issued to Employees." SFAS 123 disclosures will be effective for
fiscal years beginning after December 31, 1995.
RECENT DEVELOPMENTS
On December 10, 1996, the Company's Board of Directors elected to
change to corporate year end from October 31 to December 31. The fiscal year end
was changed to December 31 to be consistent with year end closings of most major
title companies. A current report on Form 8-K has been filed announcing this
change.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Capital Title Group, which, until the Acquisition Transaction on
May 23, 1996, had no substantial business operations, has nevertheless
been audited in each of the last two fiscal years. For the fiscal year
ended 1994, the Company's financial statements were audited by Duane
V. Midgley ("Midgley"). In 1995, with the approval of the Company's
Board of Directors, the Company engaged Schvaneveldt & Company
("Schvaneveldt") as its independent auditors for the fiscal year ended
December 31, 1995 to replace Midgley.
The reports of Midgley on the Company's financial statements for the
fiscal year ended December 31, 1994 contained an adverse opinion in
that they expressed substantial doubt about the Company's ability to
continue as a going concern.
In connection with the audit of the Company's financial statements for
the year ended December 31, 1994, there were no disagreements with
Midgley on any matters of accounting principle or practices, financial
statement disclosure, or auditing scope and procedures, which if not
resolved to the satisfaction of Midgley, would have caused Midgley to
make reference to the matter in his report.
The Company authorized Midgley to respond fully to any inquires from
Schvaneveldt & Company.
The Company requested Midgley to furnish it a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the
above statements. A copy of that letter, dated September 23, 1996,
incorporated by reference in this Form 10-KSB.
14
<PAGE>
The financial statements of Capital Title, the Company's operating
subsidiary, for the fiscal years ending October 31, 1994 and 1995 were
audited by John E. Jones, CPA ("Jones"). After completion of the
Acquisition Transaction in 1996 and with the approval of the Company's
Board of Directors, the Company engaged Semple & Cooper, CPA, PLC
("Semple") as its independent auditors for the fiscal year ended
October 31, 1996 to replace Schvaneveldt and Jones.
The report of Schvaneveldt on the Company's financial statements for
the fiscal year ended December 31, 1995 and the reports of Jones on
Capital Title's financial statements for the fiscal years ended
October 31, 1994 and 1995 did not contain an adverse opinion, or a
disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.
In connection with the audit of the Company's financial statements for
the year ended December 31, 1995 and in connection with the audits of
Capital Title's financial statements for the fiscal years ended
October 31, 1994 and 1995, there were no disagreements with
Schvaneveldt or Jones on any matters of accounting principle or
practices, financial statement disclosure, or auditing scope and
procedures, which if not resolved to the satisfaction of Schvaneveldt
or Jones, would have caused either of them to make reference to the
matter in their respective reports.
The Company and Capital Title have authorized Schvaneveldt and Jones
to respond fully to any inquires from Semple.
The Company and Capital Title have requested Schvaneveldt and Jones to
furnish them with letters addressed to the Securities and Exchange
Commission stating whether they agree with the above statements.
Copies of those letters, each of which is dated September 23, 1996,
are incorporated by reference in this Form 10-KSB.
15
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names, ages and positions of
directors and executive officers of the Company as of January 15, 1997. A
summary of the background and experience of each of these individuals is set
forth after the table.
The directors and executive officers of the Company are:
Name Age Position
- ---- --- --------
Donald R. Head 58 Chairman of the Board; Chief Executive
Officer
Andrew A. Johns 59 President; Director
James Clifford 36 Vice President
James P. Stamas 36 Vice President
Nick Velimirovich 46 Vice President
Michael J. Benjamin 35 Vice President, Controller
Deborah Campbell 39 Treasurer
Kimberly Sue DeJong 28 Secretary
Jeffrey P. Anderson 46 Director
James R. Evans 49 Director
Theo F. Lamb 54 Director
Robert B. Liverant 67 Director
Stephen A McConnell 44 Director
Directors hold office until the next annual meeting of stockholders or
until their successors have been duly elected and qualified. Officers are chosen
by and serve at the discretion of the Board of Directors.
16
<PAGE>
DONALD R. HEAD is co-founder of Capital Title Agency and has served as
Chairman of the Board since its inception. Mr. Head is also the Chairman of the
Board and Chief Executive Officer of Capital Title Group. Mr. Head has engaged
in a number of entrepreneurial activities within the real estate industry. He
was a co-founder of the Prescott Mining Company Restaurant and developed the
Prescott Air Park, a 35,000 square foot industrial and office park, the Plaza
West Commerce Centre, a five acre office park, and a 112 unit townhouse complex,
all in Prescott, Arizona. Since 1988, Mr. Head has lived in Scottsdale, Arizona
where he has continued his real estate development. He co-founded Centurian
Development and Investments, Inc., which is a custom designer and builder of
residential homes for some of the most prestigious residential communities in
the exclusive North Scottsdale area. Mr. Head is also a partner in America West
Capital One LC, which acquired 677 acres of land currently under development as
a residential community in Verde Valley in Yavapai County, Arizona. Mr. Head has
served as a board member on both U.S. and Canadian public companies. He is a
graduate of Arizona State University with a BA in Business and holds a law
degree from the University of Arizona.
ANDREW A. JOHNS joined Capital Title in April 1996 as Vice President in
charge of Special Projects and shortly thereafter was named President. Mr. Johns
has also been a Director of Capital Title since March 1996 and a Director of the
Company since the Acquisition Transaction in May 1996. Mr. Johns is also the
President of the Company. Mr. Johns has more than 28 years of experience in the
title insurance industry. Prior to joining the Company, Mr. Johns served in a
senior management position with United Title Company for 12 years, expanding its
operational presence from Orange County, California to encompass the entire
Southern California market. United Title purchased TRW Title, Inc. changing its
name to Nations Title, Inc. When Nations Title, Inc. expanded into Arizona in
1994 through Nations Title of Arizona, Mr. Johns was selected to establish and
implement its operations. Nations Title of Arizona was merged into Network
Escrow Title Agency, which later changed its name to Nations Title Insurance of
Arizona, Inc., and operated under Mr. Johns as Executive Vice President. In
January 1996, Nations Title Insurance of Arizona, Inc., and its operating
entities were acquired by Fidelity National Title Company, one of the top ten
title companies in the nation, for in excess of $30 million. Prior to United
Title Company, Mr. Johns was employed by Stewart Title of California for nine
years holding several executive positions including President. He was directly
responsible for developing fourteen profitable branches for Stewart Title. He
began his career with First American Title Insurance Company in California. Mr.
Johns is a graduate of Compton College.
JIM CLIFFORD joined Capital Title in July 1996 as a Vice President and
was named Vice President of the Company in June 1996. Mr. Clifford also serves
as the President of Capital Title's Maricopa County operations. Prior to joining
the Company, Mr. Clifford was employed by United Title Agency, Inc. for more
than 17 years, where he most recently served as the Chief Operating Officer.
JAMES P. STAMAS joined the Company in July 1996 as Vice President and
also serves as the Executive Vice President-Legal of Capital Title. Prior to
joining Capital Title Agency, Mr. Stamas was Senior Vice President/General
Counsel for United Title Agency of Arizona, Inc. Mr. Stamas has over nine years
of experience in the industry. He is also an active member of the Land Title
Association of Arizona, its Legislative Committee and California Trustee's
Association.
17
<PAGE>
NICK VELIMIROVICH joined Capital Title in July 1996 as a Vice
President and was named Vice President of the Company in June 1996. Mr.
Velimirovich also serves as the Chief Executive Officer of Capital Title's
Maricopa County, Arizona operations. Prior to joining the Company, Mr.
Velimirovich was employed by United Title Agency, Inc. for more than 23 years,
where he most recently served as the Arizona District Manager.
MICHAEL J. BENJAMIN joined the Company in November, 1996 as a Vice
President and serves as the Corporate Controller responsible for all financial
functions for Capital Title's operations. Prior to joining the Company, Mr.
Benjamin was employed by Semple & Cooper, PLC as an Audit Manager. He is a
graduate of Florida Atlantic University with a BA in Accounting and is a
Certified Public Accountant.
DEBORAH L. CAMPBELL is a Vice President of Capital Title. In such
capacity, she is responsible for all administrative functions for Capital
Title's operations. Ms. Campbell has been employed by Capital Title for more
than 13 years and has held various positions, including serving as a trust
officer and overseeing all compliance regulations. Ms. Campbell is also the
Company's Treasurer. Ms. Campbell is an active member of the Arizona Trustee
Association and Land Title Association of Arizona.
KIMBERLY SUE DEJONG is the Secretary of the Company and is responsible
for the accounting services, including escrow services accounting, of Capital
Title. Ms. DeJong has been with Capital Title since 1992. Prior to joining the
Company in 1992, Ms. DeJong was employed by Lifeline Ambulance.
JEFFREY P. ANDERSON has been a Director of Capital Title Group since
September 1996. From 1992 until 1996, Mr. Anderson was Executive Vice President,
Southwest Region, for First Interstate Bank in Phoenix, Arizona. He also served
concurrently as Chairman of the Board of First Interstate Bank of Colorado. From
1986 until 1992, Mr. Anderson was employed by Security Pacific Corporation
serving at various periods as Senior Vice President or Managing Director in the
Energy/Utilities Group, Corporate Finance and Banking Department and Special
Industries Department. Mr. Anderson holds a BS degree in Finance and Management
from the University of Southern California and an MBA from California State
University, Long Beach.
JAMES R. EVANS has been a Director of Capital Title Group since
September 1996. Since 1980, Mr. Evans has been the Chairman and President of
Sunrise Preschools, Inc. Sunrise Preschools is a public company that operates
and provides management contracts for child care centers offering comprehensive
child care services primarily for children ages six weeks to twelve years. From
1960 to 1980, Mr. Evans was an executive with Smitty's, a major grocery and
general merchandise retailer in Phoenix, Arizona. While employed by Smitty's,
Mr. Evans was responsible for opening a number of new facilities and
participated in the sale of the corporation in 1981.
18
<PAGE>
THEO F. LAMB is co-founder of Capital Title and has served as a
Director since its inception. Mr. Lamb has been a Director of the Company since
the Acquisition Transaction in May 1996. He is the owner of Lamb Chevrolet, Inc.
in Prescott, Arizona, a retail car dealership for Cadillac, Oldsmobile,
Chevrolet, Subaru and Nissan automobiles. He has served as a member of the
Chevrolet and Subaru National Dealer Counsels and was elected to the Regional
Dealer Counsels for Oldsmobile and Cadillac. He was the managing partner in
several successful land and commercial property developments in the Prescott
area. Mr. Lamb is a graduate of Southern Methodist University holding a BS
degree in Business.
ROBERT B. LIVERANT is a retired Chartered Accountant who was a Senior
Partner in the Firm of Liverant Yip and Co. in British Columbia for 20 years,
specializing in audits of public companies. Mr. Liverant was also a partner in
the firm of Smythe Ratcliffe and Associates and a member of the firm of Pannell
Kerr Forester, an international accounting firm. Mr. Liverant has several real
estate investments including significant holdings in Saturna Beach Estates LTD,
an 80-acre recreation and vineyard development in British Columbia, for which he
also serves as a director. He has served as a director of more than 15 Canadian
public companies. Mr. Liverant holds a BA degree with an economics major from
the University of British Columbia. He now resides in Cave Creek, Arizona.
STEPHEN A MCCONNELL has been a Director of Capital Title Group since
September 1996. He is the President of Solano Ventures, a firm involved in
private capital investments. He has served since 1991 as Chairman of the Board
and majority shareholder in Mallco Lumber & Building Materials, Inc., a
wholesale distributor of construction lumber and doors. From 1991 to 1995, Mr.
McConnell was President of Belt Perry Associates, Inc., a property tax appeal
firm. He was President and Chief Executive Officer of N-W Group, Inc., a
publicly held corporation, from 1985 through 1991. Mr. McConnell presently
serves on the board of a number of public companies.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who beneficially own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors and greater than 10% shareholders
are required by Exchange Act regulations to furnish the Company with copies of
all Section 16(a) forms they file.
The Company filed a Form 10-SB with the Securities Exchange Commission
on September 24, 1996, which became effective under the Securities Exchange Act
of 1934 on November 25, 1996. The Company's officers, directors and persons who
beneficially own 10% or more of the Company's common stock were required to file
Form 3's with the Securities and Exchange Commission on or before the effective
date of the Form 10-SB. Such persons failed to timely file their respective Form
3's.
19
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's
Executive Officers (the "Named Executive Officer"), for services rendered in all
capacities to Capital Title during the fiscal years ended October 31, 1996, 1995
and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
------------------------
Annual Compensation Awards Payouts
------------------------------ ---------------------- -------
Restricted Securities
Name and Fiscal Other Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Award(s) Option(s) Payouts Compensation
- ------------------ ---- ------ ----- ------------ -------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald R. Head 1996 $64,000 $0 $-0- $-0- 0 $-0- $-0-
Chairman of the
Board and Chief
Executive Officer
1995 $48,000 $0 $-0- $-0- 0 $-0- $-0-
1994 $38,000 $0 $-0- $-0- 0 $-0- $-0-
</TABLE>
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are not currently
receiving compensation for their services other than reimbursement of reasonable
expenses if any. Directors who are employees of the Company do not receive
compensation for such services. Directors who are not employees of the Company
also participate in the Company's Non-Employee Directors Stock Option Plan.
EMPLOYMENT CONTRACTS
DONALD R. HEAD:
On June 1, 1996, Donald R. Head entered into an Employment Agreement
with the Company, which provides for his services as Chairman of the Board and
Chief Executive Officer (the "Head Agreement"). The initial term of the Head
Agreement expires on May 31, 2001. The Head Agreement is subject to automatic
renewal for additional ten-year terms on the initial expiration date and on each
renewal date thereafter unless notice of termination is provided to Mr. Head
sixty days prior to the expiration date or if Mr. Head provides written notice
of resignation to the Board sixty days prior to the expiration date. The Head
Agreement may be terminated by the Company for cause including upon (i)
conviction of a willful or intentional crime, (ii) absence from work for more
than 180 consecutive days and (iii) the material failure by Mr. Head to perform
his duties.
The Head Agreement provides for an initial salary of $96,000 for the
first year and an annual salary of $150,000 for the second and each succeeding
year, plus an annual bonus equal to 6% of the Company's pretax net profits on
all Company operations, calculated according to generally accepted accounting
principles applicable to title insurance agencies consistently applied. Such
bonus shall be prorated in the first year of employment for the period remaining
20
<PAGE>
in the Company's fiscal year if less than twelve months. Such bonus shall be
determined and paid within three months following the end of each fiscal year.
Beginning with the second year of employment, estimated compensation can be paid
with appropriate adjustments spread over twelve months in the event of any under
or over estimated payments. In addition, the Head Agreement provides for a car
allowance of $800 per month.
The Head Agreement provides that if Mr. Head resigns or if the Head
Agreement is terminated by the Company for any reason during a sixty-month
period following a Change-in-Control (as defined in the Head Agreement) of the
Company, the Company shall continue to pay to Mr. Head all compensation which he
is entitled to under the Head Agreement for its remaining term.
ANDREW A. JOHNS:
On June 1, 1996, Andrew A. Johns entered into an Employment Agreement
with the Company, which provides for his services as President (the "Johns
Agreement"). The initial term of the Johns Agreement expires on May 31, 2001.
The Johns Agreement is subject to automatic renewal for additional ten-year
terms on the initial expiration date and on each renewal date thereafter unless
notice of termination is provided to Mr. Johns sixty days prior to the
expiration date. The Johns Agreement may be terminated by the Company for cause
including upon (i) conviction of a willful or intentional crime, (ii) absence
from work for more than 180 consecutive days and (iii) the material failure by
Mr. Johns to perform his duties.
The Johns Agreement provides for an initial salary of $72,000 for the
first year and an annual salary of $114,000 for the second and each succeeding
year, plus an annual bonus equal to 4% of the Company's pretax net profits on
all Company operations, calculated according to generally accepted accounting
principles applicable to title insurance agencies consistently applied. Such
bonus shall be prorated in the first year of employment for the period remaining
in the Company's fiscal year if less than twelve months. Such bonus shall be
determined and paid within three months following the end of each fiscal year.
Beginning with the second year of employment, estimated compensation can be paid
with appropriate adjustments spread over twelve months in the event of any under
or over estimated payments. In addition, the Johns Agreement provides for a car
allowance of $800 per month.
The Johns Agreement provides that if Mr. Johns resigns or if the Johns
Agreement is terminated by the Company for any reason during a sixty-month
period following a Change-in-Control (as defined in the Agreement) of the
Company, the Company shall continue to pay to Mr. Johns all compensation which
he is entitled to under the Johns Agreement for its remaining term.
JAMES A. CLIFFORD:
On May 17, 1996, James A. Clifford entered into an Employment Agreement
(the "Clifford Agreement") with the Company. The Clifford Agreement was based on
certain conditions which were met on July 1, 1996, the effective date of the
Clifford Agreement, which provides for his services as President of Capital
Title Agency's Maricopa County operations. The term of the Clifford Agreement is
for a period of three (3) years. Compensation under the Clifford Agreement is
$120,000 per year plus additional compensation equal to five percent (5%) of the
Company's pre-tax net profit on operations in Maricopa County.
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<PAGE>
JAMES P. STAMAS:
On July 22, 1996, James P. Stamas entered into an Employment Agreement
(the "Stamas Agreement") with the Company, which provides for his services as
Executive Vice President/General Counsel for general business operations for
Maricopa County. The term of the Stamas Agreement is for a period of three (3)
years. Compensation under the Stamas Agreement is $75,000 per year.
NICK VELIMIROVICH:
On May 17, 1996, Nick Velimirovich entered into an Employment Agreement
(the "Velimirovich Agreement") with the Company. The Velimirovich Agreement was
based on certain conditions which were met on July 1, 1996, the effective date
of the Velimirovich Agreement, which provides for his services as Chief
Executive Officer of Capital Title Agency's Maricopa County operations. The term
of the Velimirovich Agreement is for a period of three (3) years. Compensation
under the Velimirovich Agreement is $120,000 per year plus additional
compensation equal to five percent (5%) of the Company's pre-tax net profit on
operations in Maricopa County.
STOCK OPTION PLANS
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (the "1996 Plan") authorizes the
Board to grant options to employees of the Company to purchase up to an
aggregate of 1,000,000 shares of Common Stock. Officers and other employees of
the Company who, in the opinion of the Board of Directors, are responsible for
the continued growth and development and the financial success of the Company
are eligible to be granted options under the 1996 Plan. Options may be
non-qualified options, incentive stock options, or any combination of the
foregoing. In general, options granted under the 1996 Plan are not transferable
and expire five years after the date of grant. The per share exercise price of
an incentive stock option granted under the 1996 Plan may not be less than the
fair market value of the Common Stock on the date of grant. Incentive stock
options granted to persons who have voting control over 10% or more of the
Company's capital stock are granted at 110% of the fair market value of the
underlying shares on the date of grant. No option may be granted after December
31, 2006.
The 1996 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder will become exercisable. Unless
otherwise provided, 50% of the options granted may be exercised after two years
from the date of grant and the remaining 50% of the options may be exercised
after three years from the date of grant at any time prior to expiration, so
long as the optionee remains employed by the Company. No option granted under
the 1996 Plan is transferable by the optionee other than by will or the laws of
descent and distribution, and each option is exercisable during the lifetime of
the optionee only by the optionee.
22
<PAGE>
As of December 31, 1996, the Board has authorized the grant under the
1996 Plan of options to purchase 937,600 shares of Common Stock, with the
exercise prices of all such options being $1.00 per share. Of such options,
60,000 were granted to Mr. Head, 40,000 were granted to Mr. Johns and an
aggregate of 470,000 were granted to the other executive officers of the
Company.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The Company also has a Non-Employee Directors Stock Option Plan (the
"Directors Plan"), under which only non-employee directors are eligible to
receive options. Options to purchase up to 100,000 shares are authorized for
issuance under the Directors Plan. As of December 31, 1996, 75,000 options have
been granted under the Directors Plan at an exercise price of $1.00 per share.
All options granted under the Directors Plan will be subject to the same vesting
schedule applicable to options granted under the 1996 Plan. All options granted
or to be granted under the Directors Plan are non-qualified stock options.
Each non-employee director who joins the Board of Directors will
receive an option to acquire 15,000 shares of the Company's Common Stock. In
addition to the foregoing option grants, each year, every non-employee director
automatically receives an option to acquire 10,000 shares of the Company's
Common Stock on the third business day following the date the Company publicly
announces its annual financial results; provided that such director has attended
at least 75% of the meetings of the Board of Directors and of the Board
Committees of which such non-employee director is a member in the preceding
fiscal year. The exercise price of all options granted under the Directors Plan
is the fair market value of the Company's Common Stock on the date of grant.
No option granted under the Directors Plan is transferable by the
optionee other than by will or the laws of descent and distribution, and each
option is exercisable during the lifetime of the optionee only by the optionee.
23
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of shares of
Common Stock of the Company as of December 31, 1996 by each director and
executive officer, by all directors and executive officers as a group and by all
persons known by the Company to be the beneficial owners of more than 5% of the
Company's Common Stock.
Number of Shares Percent of
Name and Address Beneficially Held(1) Ownership
- ---------------- -------------------- ---------
Donald R. Head(2) 2,627,345(3) 24.7%
Andrew A. Johns 963,502 9.3%
Theo F. Lamb(4) 2,225,205 21.6%
Robert B. Liverant 100,000 1.0%
Stephen A McConnell 50,000 .5%
James R. Evans 25,000 .2%
Dorothy Eichbaum, Trustee of The
William and Dorothy Orth Eichbaum
Trust Dated November 19, 1986 603,791 5.9%
John M. Redfield, Jr. And Linda N
Redfield, as Trustees under a Revocable
Declaration of Trust dated October 29, 1982 600,490 5.9%
Mark A. Scharmann 606,833 5.9%
Irwin Jacobson 520,833 5.0%
Miller Capital Corporation(5) 590,000 5.7%
All directors and executive officers as
a group (12 persons) 6,191,052 60.0%
- ----------
(1) Does not include options to purchase shares of the Company's Common Stock,
none of which are currently vested. See "Executive Compensation."
(2) Shares beneficially held in The Head Revocable Trust Dated April 1, 1975.
(3) Includes 301,895 and 300,245 shares of Common Stock which Mr. Head has
options to purchase from The William and Dorothy Eichbaum Trust dated
November 19, 1986 and from John N. Redfield, Jr. and Linda N. Redfield,
respectively, anytime during the period ending May 23, 1999 for $.52 per
share.
(4) Shares beneficially held in The Lamb Trust Dated October 11, 1983.
(5) Capital Title has entered into a financial advisory agreement with Miller
Capital Corporation dba The Miller Group ("TMG") pursuant to which TMG
provides certain financial advisory, valuation business planning,
consulting and other services. Under the financial advisory agreement, TMG
purchased 590,000 shares of the Company's Common Stock for a total of $100
upon completion of the Acquisition Transaction. In connection with a
private placement by the Company of a maximum of 1,500,000 shares at a
price of $1.00 per share (the "Private Placement"), TMG is entitled to
receive an amount equal to 7% of the gross proceeds of the Private
Placement.
24
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1996, Capital Title assumed a 10% note from PWCC, Inc. to
Bank One Arizona, NA in the amount of $150,000. At October 31, 1996, the balance
of the note was $131,974. The terms of the note require Capital Title to make
sixty equal monthly installment payments to Bank One Arizona, NA in the amount
of $3,187.05. In consideration of such assumption, PWCC contributed $150,000 to
Capital Title. PWCC, Inc. is a corporation wholly owned equally by Mr. Head and
Mr. Lamb.
During fiscal 1996 and 1995, Capital Title Agency paid $43,319 and
$86,546, respectively, to Dale A. Head for legal services rendered to Capital
Title Agency. Dale A. Head is Donald R. Head's brother. In September, 1996, the
Company granted an option to Dale A. Head to acquire 20,000 shares of Common
Stock of the Company at an exercise price of $1.00 per share.
Theo F. Lamb has advanced the Company $8,000 for operating purposes
pursuant to a Note Agreement. The eight and a half percent (8.5%) note is due
October 31, 1997 and is unsecured.
Donald R. Head advanced the Company $8,000 for operating purposes
pursuant to a Note Agreement. The eight and a half percent (8.5%) note was due
October 31, 1997 and was unsecured. The note was paid in November, 1996.
The Company received management and consulting services from Head
Management Group, a Company owned by Donald R. Head. Charges for these services
were $28,800 and $48,000 for the years ended October 31, 1996 and 1995. The
agreement was terminated May, 1996.
The Company had a lease with Lamb Chevrolet Profit Sharing Trust, Inc.
for computer equipment. The balance owed under this lease as of October 31, 1996
and 1995 was $0 and $1,582, respectively. During fiscal 1995, the Company paid
$38,244 in lease payments relating to the computer equipment.
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this amended report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CAPITAL TITLE GROUP, INC.
By /s/ Donald R. Head
---------------------------
Donald R. Head
Chief Executive Officer
Date: March 7, 1997
In accordance with the requirements of the Securites Exchange Act of
1934, this amended report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Donald R. Head Chairman of the Board
- ------------------------- and
Donald R. Head Chief Executive Officer March 7, 1997
/s/ Andrew A. Johns
- -------------------------
Andrew A. Johns President, Director March 7, 1997
/s/ Michael J. Benjamin Vice President, Controller
- ------------------------- (Principal Financial and
Michael J. Benjamin Accounting Officer) March 7, 1997
/s/ Jeffrey P. Anderson
- -------------------------
Jeffrey P. Anderson Director March 7, 1997
/s/ James R. Evans
- -------------------------
James R. Evans Director March 7, 1997
/s/ Theo F. Lamb
- -------------------------
Theo F. Lamb Director March 7, 1997
/s/ Robert B. Liverant
- -------------------------
Robert B. Liverant Director March 7, 1997
/s/ Stephen A.McConnell
- -------------------------
Stephen A McConnell Director March 7, 1997
26
