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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
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 (I.R.S. Employer Identification No.)
incorporation or organization
4808 N. 22nd Street, Phoenix, Arizona 85016
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (602) 954-0022
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None
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Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of class)
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(Title of class)
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ITEM 1. DESCRIPTION OF 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.
Since its formation, Capital Title Group has had no significant
business operations. On May 23, 1996, the board of directors of Capital Title
Group, (formerly Norvex, Inc.), approved a Share Exchange Agreement with Capital
Title pursuant to which Norvex, Inc. changed its name to Capital Title Group,
Inc. and issued 5.781 shares of Capital Title Group's $.001 par value common
stock (the "Common Stock"), or an aggregate of 6,734,865 shares of Common Stock,
to the existing shareholders of Capital Title for each outstanding share of
Capital Title (the "Acquisition Transaction"). Immediately prior to the
transaction, Capital Title Group had 1,686,164 shares issued and outstanding and
approximately 75 stockholders. Of the 75 shareholders of Capital Title Group
immediately prior to the Acquisition Transaction Irwin Jacobson and Mark
Scharmann held 5% or more of Capital Title Group's outstanding stock immediately
prior to the Acquisition Transaction. 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. 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 four of which were recently opened by the Company in the
Phoenix metropolitan area. The Company plans to expand its operations into
Southern California and Nevada in 1998. 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.
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
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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 21%, 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 1997, Capital Title intends to open six to
eight 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 in Southern California and Nevada in 1998. 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
during 1996, although there can be no assurance in that regard.
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
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,
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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.
(iii) After the relevant historical data on the property is
compiled, the title officer prepares a preliminary report that
documents (a) the current status of title to the property, (b)
any exemptions, exceptions and/or limitations that might be
attached to the policy and (c) specific issues that need to be
addressed and resolved by the parties to the transaction
before the title policy will be issued (such as removal of
prior tax liens and payment of prior loans on the property).
The preliminary report is circulated to all the parties for
satisfaction of any specific issues.
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(iv) After all specific issues identified in the preliminary report
are satisfied, the escrow agent closes the transaction in
accordance with the instructions of the parties and the policy
conditions.
(v) Once the transaction is closed and all monies have been
released, the policy is issued (a) to the owner and the lender
on a resale transaction or (b) to the lender only on a
refinancing transaction.
LOSSES AND RESERVES. The maximum amount of liability under a title
insurance policy is usually the face amount of the policy plus the cost of
defending the 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
escrow. Through its commitment to customer service, the Company seeks to build
lasting relationships with its real estate industry clients.
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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
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 STRENGTH. 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, and Mr. Johns also serves as President of the
Company. 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 planned expansion into the
Southern California and Texas markets. Capital Title also has an experienced
and dedicated group of executive officers to support Mr. Johns in this effort.
See "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. The Company's
philosophy of equity participation by its escrow officers is unique in the title
industry.
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
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
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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
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.
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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.
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.
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EXPANSION PLANS
The Company has initiated its expansion plans in Maricopa County.
Recently, the Company relocated its headquarters to Phoenix, and has opened four
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. The Company plans to open offices in Southern
California and Nevada in 1998.
COMPETITION
The title insurance business is highly competitive. 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
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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
Norvex which was inactive until the Acquisition Transaction.
RESULTS OF OPERATIONS
The following table sets forth the condensed operations of Capital
Title for the periods presented. This table excludes the activity of Capital
Title Group (formerly Norvex) as it was an inactive corporation.
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED YEARS ENDED
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(UNAUDITED) (UNAUDITED)
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JULY 31, 1996 JULY 31, 1995 OCTOBER 31, 1995 OCTOBER 31, 1994
------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue ..................... $ 1,682,752 $ 1,497,542 $ 2,027,263 $ 2,538,558
General and Administrative
Expenses .................. 1,968,175 1,634,287 2,225,484 2,403,590
----------- ----------- ----------- -----------
Income (Loss) from
Operations ................ (285,423) (136,745) (198,221) 134,968
Net Other Income and
(Expenses) ................ (76,385) 40,045 16,060 28,423
----------- ----------- ----------- -----------
Income before Income Taxes .. (361,808) (96,700) (182,161) 163,391
Income Tax (Expense)
Benefit .................... -- -- 65,059 (58,727)
----------- ----------- ----------- -----------
Net Income (Loss) ........... $ (361,808) $ (96,700) $ (117,102) $ 104,664
=========== =========== =========== ===========
</TABLE>
FISCAL YEAR ENDED OCTOBER 31, 1995 COMPARED TO THE FISCAL YEAR ENDED OCTOBER 31,
1994
Revenue
For the fiscal year ended October 31, 1995, revenue decreased by
$511,000, or 20%, to $2.03 million from fiscal year 1994 revenues of $2.54
million. This decrease was a result of a 28% market drop in the number of
recorded real estate transactions in Yavapai County in the fiscal year 1995 as
compared to the fiscal year 1994. In addition, the Company experienced a
shortage of escrow officers in fiscal year 1995, causing the Company to be
unable to realize additional revenues. This dependency on Yavapai County real
estate transactions is primary to the Company's intent to aggressively expand in
other geographical areas.
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General and Administrative Expenses
For the fiscal year ended October 31, 1995, general and administrative
expenses decreased by $178,000, or approximately 7%, to $2.23 million from $2.40
million in fiscal year 1994. This decrease was a result of the response of
management to cut overhead costs in response to the drop in the number of
recorded real estate transactions, and resulting revenue decrease, in Yavapai
County in fiscal year 1995.
Net Other Income and Expenses
For the fiscal year ended October 31, 1995, net other income decreased
by $12,000 primarily due to a decrease in the amount of insurance recoveries.
NINE MONTH PERIOD ENDED JULY 31, 1996 COMPARED TO THE NINE MONTH PERIOD ENDED
JULY 31, 1995
Revenue
For the nine month period ended July 31, 1996, revenue increased by
$185,000, or 12% to $1.68 million from $1.50 million in fiscal period 1995. This
increase was due to the development and institution of a "Market Penetration
Program" in fiscal period 1996, and the expansion into new geographical areas
within Arizona. The Market Penetration Program is designed to more effectively
orchestrate the marketing efforts of the Company and increase the number and
efficiency of escrow officers. In addition, the Company has significantly
improved its customer services through the installation of an extensive,
networked, on-line computer system enabling the escrow officers to rapidly
respond to their customers needs.
General and Administrative Expenses
For the nine month period ended July 31, 1996, general and
administrative expenses have increased by $333,000, or 20% to $1.96 million from
$1.63 million in fiscal period 1995. This increase was due to additional costs
incurred in implementing the Market Penetration Program, expanding into
additional geographical areas, developing the new computerized customer service
system, recruiting new personnel, and training existing and new personnel to use
the enhanced computer system.
Net Other Income and Expenses
For the nine month period ended July 31, 1996, net other income and
expenses resulted in a net expense of $76,000, as compared to a $40,000 net
other income for the nine month period ended July 31, 1995. This decrease was
due primarily to a $10,000 increase in interest expense due to additional
financing, a decrease in the amount of insurance recoveries, a favorable
insurance audit adjustment of $27,000 in 1995 and an acquisition cost
write-down of $69,000 in 1996.
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SEASONALITY
Historically, the Company has experienced little seasonality in its
revenue or operating costs over the past five years. With the Company's
intention of expanding into additional geographical areas, it is contemplated
that any effects of seasonality on revenues or operating costs will be further
reduced.
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 nine month period ended July 31, 1996, the
Company financed its operating and business development activities primarily
through operating revenue, obtaining a $150,000 term loan, and the private
placement of shares of common stock.
During the nine month period ended July 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. Additionally, on December
10, 1996, the Company's Board of Directors authorized the issuance of an
additional 400,000 shares of its Common Stock at $1.00 per share. It is
anticipated that expenses of this offering will be approximately $40,000 which
will generate net proceeds for the Company of approximately $360,000.
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 expansion, acquisition and working capital needs for the next 12 to 24
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 24 month period. There can be no assurance that acceptable financing
for future transactions can be obtained on terms acceptable to the Company.
As of October 31, 1995, the Company has net operating loss
carryforwards of approximately $175,000 that will be available to offset future
state income taxes. The net operating carryforwards will expire October 31,
2000.
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.
ITEM 3. PROPERTIES
The Company leases approximately 10,125 square feet of office space in
Phoenix, Arizona for its headquarters under a lease expiring in July 1999.
Capital Title leases approximately 7,698 square feet of office space for its
principal office serving the Prescott,
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Arizona area, under a lease expiring in December 1997, which has two additional
five-year renewal options. In Yavapai County, Arizona, Capital Title leases two
branch offices in Sedona and one each in Prescott Valley, Cottonwood and Chino
Valley. The Company also leases three branch offices in Maricopa County. The
leases for the Company's branch offices expire at various times from 1998
through 2001, subject to various renewal options. The Company believes that
suitable rental space is and will continue to be available for its current and
planned operations.
ITEM 4. 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 October 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.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name and Address Beneficially Held(1) Ownership
- ---------------- --------------------- ----------
<S> <C> <C>
Donald R. Head(2) 2,827,345(3) 28.1%
Andrew A. Johns 963,502 9.6%
Theo F. Lamb(4) 2,225,205 22.1%
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 603,791 6.0%
and Dorothy Orth Eichbaum Trust Dated
November 19, 1986
John M. Redfield, Jr. and Linda N. Redfield, 600,490 6.0%
as Trustees under a Revocable Declaration of
Trust dated October 29, 1982
Mark A. Scharmann 606,833 6.0%
Irwin Jacobson 520,833 5.2%
Miller Capital Corporation(5) 590,000 5.9%
All directors and executive officers as a group 6,191,052 61.5%
(12 persons)
</TABLE>
- ----------------
(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.
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<PAGE> 14
(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.
ITEM 5. 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 October 31, 1996. 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:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
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
Deborah Campbell 39 Treasurer
Kimberly Sue DeJong 28 Secretary
Jeffrey P. Anderson 46 Director
James R. Evans 50 Director
Theo F. Lamb 54 Director
Robert B. Liverant 67 Director
Stephen A. McConnell 43 Director
</TABLE>
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.
14
<PAGE> 15
DONALD R. HEAD is a co-founder of Capital Title and has served as its
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.
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<PAGE> 16
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.
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.
DEBORAH L. CAMPBELL is a Vice President of Capital Title. In such
capacity, she is responsible for all administrative and accounting functions for
Capital Title's operations. Ms. Campbell has been employed by Capital Title for
more than 13 years and she 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 B.S. degree in Finance and
Management from the University of Southern California and an M.B.A. 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.
THEO F. LAMB is a 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
16
<PAGE> 17
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 B.S. 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 B.A. 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., 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. Mr. McConnell holds a B.A. and M.B.A. from
Harvard University.
ITEM 6. EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's
Chief Executive Officer (the "Named Executive Officer"), for services rendered
in all capacities to Capital Title during the fiscal years ended October 31,
1995, 1994 and 1993.
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 1995 $48,000 $0 $-0- $-0- 0 $-0- $-0-
Chairman of the Board
and Chief Executive 1994 $38,000 $0 $-0- $-0- 0 $-0- $-0-
Officer
1993 $37,850 $0 $-0- $-0- 0 $-0- $-0-
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are entitled to receive
$12,000 annually as a retainer, $1,000 per meeting attended (with a minimum of
four meetings annually), $250 for each telephonic meeting, plus reimbursement of
reasonable expenses. 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
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.
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<PAGE> 19
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.
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
19
<PAGE> 20
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.
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
20
<PAGE> 21
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.
ITEM 7. 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 September 30, 1996 the
balance of the note was $138,133. 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 1994 and 1995, Capital Title Agency paid $53,061 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 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.
The Company receives management and consulting services from Head
Management Group, a Company owned by Donald R. Head. Charges for these services
were $48,000 and $38,000 for the years ended October 31, 1995 and 1994,
respectively, and $36,000 and $22,166, respectively, for the nine month periods
ended July 31, 1996 and 1995.
The Company has a lease with PWCC, Inc. for computer equipment. The
balance owed under this lease as of July 31, 1996 and October 31, 1995 was $0
and $1,582, respectively. During fiscal 1995, the Company paid $38,244 in lease
payments relating to the computer equipment.
ITEM 8. DESCRIPTION OF SECURITIES
The Company's Certificate of Incorporation authorizes the issuance of
50,000,000 shares of Common Stock, par value of $.001 per share. Each share of
Common Stock entitles the holder thereof to one vote in the election of
directors and all other matters submitted to a vote of the Company's
stockholders. Common stockholders do not have cumulative voting rights. Holders
of Common Stock are entitled to share ratably in all dividends declared by the
Board of Directors, if any, and in all assets available for distribution upon
liquidation. No holder of the Company's Common Stock has any preemptive right to
subscribe for or purchase additional shares of the Company's Common Stock.
21
<PAGE> 22
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
No public trading market having the characteristic of depth, liquidity
and orderliness exists for the Company's Common Stock. In the Spring of 1997 the
Company plans to apply for quotation of the Common Stock on the Electronic
Bulletin Board operated by the National Association of Securities Dealers, Inc.
under the symbol CGTI. As of October 31, 1996, the Company had issued and
outstanding 10,286,029 shares of Common Stock. In addition, 1,000,000 shares are
reserved for issuance under the 1996 Plan and 100,000 shares are reserved for
issuance under the Directors Plan. (See "Security Ownership of Certain
Beneficial Owners and Management.") On December 10, 1996, the Company's Board
of Directors authorized the issuance of an additional 400,000 shares of its
Common Stock at $1.00 per share. Of the Company's 10,286,029 shares of issued
and outstanding Common Stock, 1,686,158 shares are eligible for resale under
Rule 144. At December 31, 1996, there were approximately 100 record holders of
the Company's Common Stock.
The Company has never paid a dividend on its Common Stock. The Company
does not anticipate paying any dividends on its Common Stock in the foreseeable
future. Rather, the Company anticipates that its earnings, if any, will be
retained to fund the Company's working capital needs and the planned expansion
of its business. The payment of any dividends will be dependant upon the
discretion of the Board of Directors. Furthermore, under Delaware corporate law,
in the absence of current or retained earnings, the Company may be prohibited
from paying dividends (whether in cash or otherwise).
ITEM 2. LEGAL PROCEEDINGS
Capital Title is a defendant in certain legal actions arising out of
the ordinary course of its title business. The Company believes that none of
these claims are material, either individually or in the aggregate.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
The Company, 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.
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<PAGE> 23
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, is filed as an
Exhibit to this Form 10-SB.
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 filed as Exhibits to this Form
10-SB.
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<PAGE> 24
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On July 9, 1993, the Company sold an aggregate of 100,000 shares of
its Common Stock to Irwin Jacobson and Mark A. Scharmann for $13,000 in cash.
These shares were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 (the "Securities Act").
From time to time prior to December 31, 1994, the Company's officers
had advanced operating funds to the Company in the amount of $48,411. In 1995,
the Company issued 200,000 shares of its common stock in satisfaction of these
loans. These shares were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act.
On March 4, 1996, the Company issued to its President, 150,000 shares
of its common stock in full satisfaction of his loan to the Company, which had a
balance of $29,035. These shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
On May 23, 1996, the Company issued 6,734,865 shares of Common Stock to
the following shareholders of Capital Title in connection with the Acquisition
Transaction:
<TABLE>
<CAPTION>
Name Number of Shares
- ---- ----------------
<S> <C>
The Head Revocable Trust Dated: April 1, 1975 2,225,205
The Lamb Trust Dated: October 11, 1983 2,225,205
Andrew A. Johns 953,865
Dorothy Eichbaum, Trustee of The William and 603,791
Dorothy Orth Eichbaum Trust Dated November 19,
1986
John M. Redfield, Jr. and Linda N. Redfield, as 600,490
Trustees under a Revocable Declaration of Trust dated
October 29, 1982.
Walter Serrano 97,161
Nancy Simmons 29,148
</TABLE>
These shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 and the
investors to whom they were sold were "sophisticated" or "accredited" within
the meaning of Section 4(2) and the regulations thereto.
On May 23, 1996, the Company commenced the Private Placement, pursuant
to which it offered for sale a minimum of 500,000 shares and a maximum of
1,500,000 shares of its Common Stock at a price of $1.00 per share. As of
October 31, 1996, the Company had issued and sold 1,275,000 of the shares to
the following persons at a price of $1.00 per share:
24
<PAGE> 25
<TABLE>
<CAPTION>
Name Number of Shares
- ---- ----------------
<S> <C>
LLoyd and Marilyn G. Boswell ........................... 25,000
Mosier Family Partner Ltd. ............................. 200,000
Robert B. Liverant ..................................... 100,000
Stephen A. McConnell ................................... 50,000
Gary A. and Janette B. Lamb ............................ 25,000
Charles Walden Company, Inc. ........................... 25,000
James R. and Sharon T. Evans ........................... 25,000
Classic Real Estate Corporation ........................ 25,000
Money Purchase Pension Plan
Fred Gallow IRA ........................................ 25,000
John J. Connolly and Jean Ann Connolly ................. 25,000
The Jack D. Vander Woude, Ph.D. Trust .................. 25,000
James J. Sexton ........................................ 50,000
David E. and Madelyn A. Garrison ....................... 200,000
Carl F. Raine .......................................... 25,000
Yavapai Medical Center Profit Sharing Plan ............. 50,000
James P. Keeley ........................................ 25,000
Retirement Accounts, Inc. CUST ......................... 12,500
FBO James A. Van Houten 46994
Retirement Accounts, Inc. CUST ......................... 12,500
FBO Jeanne K. Van Houten 46993
Geraldine M. and John P. Wolfe ......................... 25,000
Patricia K. and Andrew Philippakis ..................... 50,000
Susan J. Giblin ........................................ 25,000
Daniel E. Giblin ....................................... 25,000
Michael S. and Colleen Jean Holland .................... 25,000
Bruce D. Kennand ....................................... 25,000
Charles Walden ......................................... 25,000
Retirement Accounts, Inc. CUST
FBO Robert Catalana 000891 ........................... 25,000
Retirement Accounts, Inc. CUST
FBO Patty Jean Marino ................................ 75,000
Gerald A. Catarelli .................................... 50,000
</TABLE>
On December 10, 1996, the Company commenced a second Private
Placement, pursuant to which the Company's Board of Directors authorized the
sale of 400,000 shares of its Common Stock at a price of $1.00 per share. As of
December 31, 1996, the Company had issued and sold 30,000 of the shares to the
following persons at a price of $1.00 per share:
<TABLE>
<CAPTION>
<S> <C>
Gary Lamb............................................... 30,000
</TABLE>
These shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 and in
reliance of Rule 506 of Regulation D promulgated thereunder.
25
<PAGE> 26
ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Delaware law authorizes a Delaware corporation to eliminate or limit
the personal liability of a director to the corporation and its stockholders for
monetary damages for breaches of certain fiduciary duties as a director. The
Company believes that such a provision is beneficial in attracting and retaining
qualified directors, and accordingly the Company's Certificate of Incorporation
(the "Certificate") includes a provision eliminating liability for monetary
damages for any breach of fiduciary duty as a director, except (i) for any
breach of the duty of loyalty to the Company or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, or (iii) for any transaction for which the director
derived an improper personal benefit or certain other actions. Pursuant to
Delaware law, directors of the Company are not insulated from liability for
breach of their duty of loyalty or for claims arising under the federal
securities laws. The foregoing provisions of the Certificate may reduce the
likelihood of derivative litigation against directors and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breaches of their fiduciary duties, even though such an action, if successful,
might otherwise have benefitted the Company and its stockholders.
Article IX of the Company's Certificate and Article 5 of the Company's
Bylaws require indemnification of directors and officers of the Company to the
fullest extent permitted by Delaware law for claims against them in their
official capacities, including stockholders' derivative actions.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
26
<PAGE> 27
CAPITAL TITLE GROUP, INC.
AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY,
INC. AND SUBSIDIARY)
CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended
October 31, 1995 and 1994
<PAGE> 28
To The Stockholders and Board of Directors of
Capital Title Group, Inc. (Formerly Capital Title Agency, Inc.)
and Subsidiary
We have audited the accompanying consolidated balance sheet of Capital Title
Group, Inc. (formerly Capital Title Agency, Inc.) and Subsidiary as of October
31, 1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended October 31, 1995 and 1994. The
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits of the consolidated financial
statements provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Capital Title Group,
Inc. (formerly Capital Title Agency, Inc.) and Subsidiary as of October 31,
1995, and the results of their operations, changes in stockholders' equity, and
cash flows for the years ended October 31, 1995 and 1994, in conformity with
generally accepted accounting principles.
Certified Public Accountants Semple & Cooper, P.L.C.
Phoenix, Arizona
September 5, 1996
F-1
<PAGE> 29
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
July 31, October 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Notes 1 and 3) $ 115,161 $ 17,354
Accounts receivable, less allowance for
doubtful accounts of $3,716 (Note 1) 25,992 14,095
Income taxes receivable -- 51,575
Prepaid expenses 8,696 1,604
Deferred income taxes (Notes 1 and 6) -- 4,387
----------- ---------
Total Current Assets 149,849 89,015
Property and Equipment, net (Notes 1, 5 and 13) 590,174 193,806
Other Assets:
Investment in title plant (Note 1) 175,000 175,000
Deferred income tax asset (Notes 1 and 6) 16,358 11,971
Deposits 50,725 --
----------- ---------
Total Assets $ 982,106 $ 469,792
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit (Note 9) $ -- $ 33,104
Notes payable - current portion (Note 7) 6,153 3,197
Notes payable to related parties -
current portion (Note 11) 25,583 16,000
Obligation under capitalized lease -
current portion (Notes 1 and 8) 2,365 1,582
Accounts payable 235,744 171,057
Accrued expenses 33,875 26,595
Income taxes payable -- 15,249
----------- ---------
Total Current Liabilities 303,720 266,784
----------- ---------
Long-Term Liabilities:
Notes payable - long-term portion (Note 7) 8,529 5,547
Notes payable to related party - long-term
portion (Note 11) 128,550 --
Obligation under capitalized lease - long-term
portion (Notes 1 and 8) 9,445 --
----------- ---------
Total Long-Term Liabilities 146,524 5,547
----------- ---------
Commitments and Contingencies: (Notes 10 and 12) -- --
Stockholders' Equity: (Note 15)
Common stock, $.001 par value, 50,000,000 shares
authorized; 9,686,029 and 1,000,000 shares
issued and outstanding, respectively 9,686 480,663
Paid-in capital 1,167,186 --
Accumulated deficit (645,010) (283,202)
----------- ---------
Total Stockholders' Equity 531,862 197,461
----------- ---------
Total Liabilities and Stockholders' Equity $ 982,106 $ 469,792
=========== =========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-2
<PAGE> 30
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Month Period Ended July 31, 1996 and 1995 (Unaudited) and
For The Years Ended October 31, 1995 and 1994
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
July 31, July 31, October 31, October 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 1,682,752 $ 1,497,542 $ 2,027,263 $ 2,538,558
General and Adminis-
trative Expenses 1,968,175 1,634,287 2,225,484 2,403,590
----------- ----------- ----------- -----------
Income (Loss) from
Operations (285,423) (136,745) (198,221) 134,968
----------- ----------- ----------- -----------
Other Income (Expense):
Escrow losses
recovered and
lawsuit
settlements 3,064 9,339 10,839 10,230
Gain (loss) on sale
of equipment -- (1,714) 2,800 --
Insurance
recoveries -- 35,732 8,467 23,803
Interest expense (11,724) (3,506) (6,289) (6,786)
Interest income 1,346 194 243 1,176
Acquisition costs -
writedown (69,071) -- -- --
----------- ----------- ----------- -----------
(76,385) 40,045 16,060 28,423
----------- ----------- ----------- -----------
Income (loss) before
provision for
income taxes (361,808) (96,700) (182,161) 163,391
Income tax (expense)
benefit (Notes 1
and 6) -- -- 65,059 (58,727)
----------- ----------- ----------- -----------
Net Income (Loss) $ (361,808) $ (96,700) $ (117,102) $ 104,664
=========== =========== =========== ===========
Proforma Net Loss per
Share (Note 1) $ (.04) $ (.01) $ (.01) $ .01
=========== =========== =========== ===========
Proforma Weighted
Average Shares
Outstanding 9,013,915 8,670,786 8,770,786 8,670,786
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-3
<PAGE> 31
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Nine Month Period Ended July 31, 1996 (Unaudited)
and For The Years Ended October 31, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock
--------------------------- Paid-in Retained
Shares Amount Capital Deficit
------ ------ ------- -------
<S> <C> <C> <C> <C>
Balance, October 31,
1993 (Note 4) 1,000,000 $ 480,663 $ -- $(270,764)
Net income for the year
ended October 31, 1994 -- -- -- 104,664
---------- --------- ---------- ---------
Balance, October 31, 1994 1,000,000 480,663 -- (166,100)
Net loss for the year
ended October 31, 1995 -- -- -- (117,102)
---------- --------- ---------- ---------
Balance, October 31, 1995 1,000,000 480,663 -- (283,202)
Shares issued in first
private placement 165,000 100,000 -- --
Restructure in reverse merger
with Capital Title Group,
Inc 7,846,029 (571,652) 571,652 --
Shares issued in private
placement 675,000 675 595,534 --
Net loss for the nine month
period ended July 31, 1996 -- -- -- (361,808)
---------- --------- ---------- ---------
Balance, July 31, 1996 9,686,029 $ 9,686 $1,167,186 $(645,010)
========== ========= ========== =========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-4
<PAGE> 32
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Month Periods Ended July 31, 1996 and 1995 (Unaudited)
and For The Years Ended October 31, 1995 and 1994
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
July 31, July 31, October 31, October 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(361,808) $(96,700) $(117,102) $ 104,664
--------- -------- --------- ---------
Adjustments to reconcile net
income (loss) to net cash
provided (used) by operating
activities:
(Gain) loss on sale of
vehicle -- 1,714 (2,800) --
Depreciation 50,390 36,547 74,563 60,606
Acquisition costs writedown 69,071 -- -- --
Bad debt expense -- -- 3,716 20,505
Changes in Assets and Liabilities:
Accounts receivable (11,897) 5,932 (38,629) (27,581)
Income taxes receivable 51,575 9,061 -- --
Prepaid expenses (7,092) -- (1,604) --
Refundable deposits (50,725) -- -- --
Deferred income taxes -- (6,187) (13,484) (2,874)
Accounts payable 64,687 11,720 50,692 81,661
Accrued expenses 7,280 1,029 1,362 (4,924)
Income taxes payable (15,249) (446) 258 (44,187)
--------- -------- --------- ---------
158,040 59,370 74,074 83,206
--------- -------- --------- ---------
Net Cash Provided (Used) by
Operating Activities (203,768) (37,330) (43,028) 187,870
--------- -------- --------- ---------
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-5
<PAGE> 33
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Nine Month Periods Ended July 31, 1996 and 1995 (Unaudited) and
For The Years Ended October 31, 1995 and 1994
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
July 31, July 31, October 31, October 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from investing activities:
Purchase of property and equipment $(423,287) $(13,873) $(16,331) $(153,599)
Proceeds from sale of vehicle -- -- 2,800 --
Deferred acquisition costs (69,071) -- -- --
--------- -------- -------- ---------
Net cash used by investing
activities (492,358) (13,873) (13,531) (153,599)
--------- -------- -------- ---------
Cash flows from financing activities:
Proceeds from notes payable to
related parties 150,000 -- 16,000 --
Proceeds from issuance of common
stock, net 696,209 -- -- --
Net change in revolving credit line (33,104) 36,225 33,104 --
Repayment of notes payable (4,565) (2,368) (2,694) (55,272)
Repayment of notes to related party (7,846) -- -- --
Repayment of obligations under
capital lease (2,740) (8,349) (12,519) (12,787)
--------- -------- -------- ---------
Net cash provided (used)
by financing activities 793,933 25,508 33,891 (68,059)
--------- -------- -------- ---------
Net increase (decrease) in cash and
cash equivalents 97,807 (25,695) (22,668) (33,788)
Cash and cash equivalents at
beginning of year 17,354 40,022 40,022 73,810
--------- -------- -------- ---------
Cash and cash equivalents at
end of year $ 115,161 $ 14,327 $ 17,354 $ 40,022
========= ======== ======== =========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-6
<PAGE> 34
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Corporation:
Capital Title Group, Inc. (formerly Norvex, Inc.) was organized on
September 12, 1993 in the State of Utah. In May, 1989, the Company was
redomiciled as a Delaware corporation. The Company was largely inactive
until May 23, 1996, at which time it acquired Capital Title Agency, Inc.
in a reverse merger (See Note 4). The accompanying historical
consolidated financial statements are based only upon the activity of
Capital Title Agency, Inc. through the date of acquisition, May 23,
1996, since that was the only active business at the time of the merger.
The intent of Capital Title Group, Inc. is to act as the parent holding
company of Capital Title Agency, Inc.
Capital Title Agency, Inc. is a Corporation which has been duly formed
and organized under the laws of the State of Arizona, and operates under
the authority of the State Banking Commission. The Corporation was
approved by the State of Arizona on November 1, 1981. The principal
business purpose of the Corporation is to offer title, collection and
escrow services to the general public, primarily in the southwestern
United States.
The Corporation currently operates five (5) offices located throughout
Arizona. In July, 1996, the Company signed lease agreements for five (5)
more offices in Arizona. Operations for the new offices began subsequent
to July 31, 1996.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Capital Title Agency,
Inc. All material intercompany accounts and transactions have been
eliminated in consolidation.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Unaudited Financial Information:
The financial statements for the nine month periods ended July 31, 1996
and 1995 are unaudited. In the opinion of management, the interim
financial statements for the nine month periods ended July 31, 1996 and
1995 reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of the
interim periods. The results of operations for the nine month period
ended July 31, 1996 are not necessarily indicative of the results for
the entire year.
Cash and Cash Equivalents:
Cash and cash equivalents include all highly liquid investments
purchased with an initial maturity of three (3) months or less.
Accounts Receivable:
The Corporation uses the allowance method to account for uncollectible
accounts receivable. The allowance is established based upon a review of
the individual accounts and the Company's prior history. At July 31,
1996, the Company believes the receivables are fully collectible;
accordingly, no allowance has been established.
F-7
<PAGE> 35
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies: (Continued)
Insurance Recoveries:
The Company recognizes income from insurance recoveries when the dispute
is settled, due to the uncertain nature of any potential claim.
Property and Equipment:
Property and equipment are stated at cost and are being depreciated
using the straight-line and double-declining methods of depreciation
over estimated useful lives of five (5) to seven (7) years. Maintenance
and repairs that neither materially add to the value of the property nor
appreciably prolong its life are charged to expense as incurred. For the
nine month periods ended July 31, 1996 and 1995 (unaudited), and for the
years ended October 31, 1996 and 1995, depreciation expense was $50,390,
$36,547, $74,563 and $60,603, respectively.
Capital Lease Obligation:
The Company is the lessee of office equipment under a capital lease
agreement which expires in November, 2000. The asset and liability under
the capital lease are recorded at the lower of the present value of the
minimum lease payments or the fair market value of the asset. The asset
is depreciated over the lower of its related lease term or its estimated
productive life. Depreciation of the asset under the capital lease
agreement is included in depreciation expense noted above.
Title Plant:
The original investment for the purchase of the title plant is carried
at cost and is not being amortized.
Income Taxes:
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax basis, and the utilization of the net operating loss carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Proforma Loss Per Share:
The proforma loss per share amount is based on the weighted average
number of shares outstanding for the periods presented, after giving
retroactive effect to a one for ten (1-10) reverse stock split, and
retroactive effect to the reverse merger (See Note 4). Fully diluted
earnings per share are not shown, as they are anti-dilutive.
2. Cash in Escrow:
The Company is the custodian of cash deposited by customers with
specific instructions as to its disbursement from active escrow, trust
and account servicing. The balances in these accounts have not been
included in these financial statements. As of July 31, 1996 (unaudited)
and October 31, 1995, the accounts contain a reserve balance of
approximately $2,408,000 and $2,046,499 in the escrow accounts, $3,314
and $6,626 in the trust accounts, and $116,651 and $70,054 in the
account servicing accounts, respectively.
F-8
<PAGE> 36
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Concentration of Credit Risk:
The Company maintains cash and cash equivalents with various financial
institutions. Deposits not to exceed $100,000 at each institution are
insured by the Federal Deposit Insurance Corporation. At July 31, 1996
(unaudited) and October 31, 1995, the Company had uninsured cash and
cash equivalents of approximately $2,000,000.
4. Business Combination:
Capital Title Group, Inc. (formerly Norvex, Inc.) was organized on
September 12, 1983, in the State of Utah. On May 8, 1989, Articles of
Merger were filed in the State of Utah, merging Norvex, Inc. into
Pharmaceutics International, Inc., a Delaware corporation. Pharmaceutics
International, Inc. was the survivor corporation. On or about July 9,
1993, the Company amended its Certificate of Incorporation, changing its
name back to Norvex, Inc., a Delaware corporation. On May 23, 1996, the
Company acquired Capital Title Agency, Inc. in a transaction accounted
for as a reverse acquisition. The intent of Capital Title Group, Inc. is
to act as the parent holding company of Capital Title Agency, Inc. As
such, Norvex, Inc. changed its name to Capital Title Group, Inc.
Capital Title Group, Inc. (formerly Norvex, Inc.) is a publicly traded
Company that had 1,686,164 shares issued and outstanding, after a one
for 10 (1-10) reverse stock split, at the acquisition date. Capital
Title Group, Inc. issued 6,734,865 shares of its common stock to the
shareholders of Capital Title Agency, Inc. for one hundred percent
(100%) of the issued and outstanding common stock of Capital Title
Agency, Inc.
As part of the Acquisition Agreement, the Company agreed to sell 590,000
shares of its common stock for the price of $100 to its financial
advisor. The stock was valued at $.01 per share in the accompanying
financial statements, based upon the value of the services rendered in
performing due diligence procedures.
The accompanying financial statements give retroactive effect to this
business combination as if it had occurred prior to October 31, 1993.
5. Property and Equipment:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
July 31, October 31,
1996 1995
---- ----
<S> <C> <C>
Office equipment $ 655,383 $ 303,290
Vehicles 47,990 36,984
Furniture and fixtures 137,163 61,137
Leasehold improvements 105,904 98,272
--------- ---------
946,440 499,683
Less: accumulated depreciation (356,266) (305,877)
--------- ---------
$ 590,174 $ 193,806
========= =========
</TABLE>
F-9
<PAGE> 37
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Income Taxes:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
October 31, October 31,
1995 1994
---- ----
<S> <C> <C>
Current tax benefit (expense) $ 51,575 $(61,601)
Deferred tax benefit 13,484 2,874
-------- --------
$ 65,059 $(58,727)
======== ========
</TABLE>
At July 31, 1996 (unaudited) and October 31, 1995, the tax effects of
temporary differences and carryforwards that give rise to deferred tax
assets consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1996 1995
---- ----
<S> <C> <C>
Accounts receivable $ 1,028 $ 558
Property and equipment 2,086 886
Loss carryforwards 107,000 35,000
--------- --------
110,114 36,444
Less: valuation allowance (93,756) (20,086)
--------- --------
$ 16,358 $ 16,358
========= ========
</TABLE>
A breakdown of current and non-current deferred tax assets as of July
31, 1996 (unaudited) and October 31, 1995, consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1996 1995
---- ----
<S> <C> <C>
Current $ -- $ 4,387
Non-current 16,358 11,971
------- -------
$16,358 $16,358
======= =======
</TABLE>
As of October 31, 1995, the Company has the following net operating
losses available for carryforwards to offset future state taxable
income:
<TABLE>
<CAPTION>
Amount of Loss Expiration Date
-------------- ---------------
<S> <C>
$ 58,000 1998
117,000 2000
----------
$ 175,000
==========
</TABLE>
Changes in operations and changes in majority stockholder control have
adverse effects upon the useability of net operating losses.
F-10
<PAGE> 38
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY,INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Notes Payable:
Notes payable consist of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
July 31, October 31,
1996 1996
---- ----
<S> <C> <C>
8.75% note payable to Primus Automotive,
with monthly installments of $299,
including principal and interest, due
June, 1998; secured by a vehicle $ 6,563 $ 8,744
10.5% note payable to First Interstate
Bank, with monthly installments of $309,
including principal and interest, due
January, 1999; secured by a vehicle 8,119 --
-------- -------
14,682 8,744
Less: current portion (6,153) (3,197)
-------- -------
$ 8,529 $ 5,547
======== =======
</TABLE>
The maturities of long-term notes payable are as follows:
<TABLE>
<CAPTION>
Year Ended (UNAUDITED)
July 31, Amount
-------- ------
<S> <C>
1997 $ 6,153
1998 6,752
1999 1,777
----------
$ 14,682
==========
</TABLE>
8. Capital Lease Obligation:
The Company is the lessee of office equipment with an aggregate cost of
$28,919, under a capital lease agreement which expires in November,
2000. Minimum future lease payments due under the capital lease
agreement for the next five (5) years, are as follows:
<TABLE>
<CAPTION>
Year Ended (UNAUDITED)
July 31, Amount
-------- ------
<S> <C>
1997 $ 3,432
1998 3,432
1999 3,432
2000 3,432
2001 1,430
----------
Net minimum lease payments 15,158
Less: amount representing interest (3,348)
----------
Present value of net minimum lease payments 11,810
Less: current portion (2,365)
----------
Long-term maturities of capital lease obligation $ 9,445
==========
</TABLE>
F-11
<PAGE> 39
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Capital Lease Obligation: (Continued)
The interest rate is imputed based on the lessor's implicit rate of
return at the inception of the lease.
9. Revolving Line of Credit:
Capital Title Group, Inc. had an unsecured revolving line of credit with
Bank One of Arizona for a maximum amount of $50,000. Interest was at
prime plus two and one-half percent (2.5%). At October 31, 1995, the
rate was 11%. Minimum payment due monthly was 4% of the debt balance.
All unpaid principal and interest was due December 1, 1995. The credit
line was paid in full and has not been renewed.
10. Operating Lease Commitments:
The Company leases offices at ten (10) locations. The remaining lease
periods range from twenty-seven (27) months to sixty (60) months with
renewal options up to ten (10) years.
The future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
Year Ended (UNAUDITED)
July 31, Amount
-------- ------
<S> <C>
1997 $ 559,275
1998 478,597
1999 385,760
2000 127,641
2001 71,390
----------
Total lease commitments $1,662,663
==========
</TABLE>
11. Related Party Transactions:
As of May 23, 1996, Capital Title Group, Inc. granted 275,000 options at
$1 per share to related parties under its 1996 Stock Option Plan (See
Note 16).
As of May 23, 1996, Capital Title Group, Inc. granted 15,000 options at
$1 per share to a related party under its Non-Employee Director Stock
Option Plan (See Note 16).
The Company receives management and consulting services from a related
business. Charges for these services were $48,000 and $38,000 for the
years ended October 31, 1995 and 1994, respectively, and $36,000 and
$22,166 (unaudited) for the nine month periods ended July 31, 1996 and
1995.
The Company has a lease with a related corporation for computer
equipment. This is included with the capital leases disclosed in Note 7.
The balance of this lease as of July 31, 1996 and October 31, 1995 was
$0 and $1,582, respectively.
F-12
<PAGE> 40
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Related Party Transactions: (Continued)
Notes Payable to Related Parties:
As of July 31, 1996 (unaudited) and October 31, 1995, notes payable to
related parties consist of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
July 31, October 31,
1996 1995
---- ----
<S> <C> <C>
10% note payable to a related corporation, in monthly
installments of $3,187, including principal and
interest over 60 months; unsecured $ 138,133 $ --
8.5% note payable to a related party, due October 11,
1997; unsecured 8,000 8,000
8.5% note payable to a related party, due October 11,
1997; unsecured 8,000 8,000
--------- --------
154,133 16,000
Less: current portion (25,583) (16,000)
--------- --------
$ 128,550 $ --
========= ========
</TABLE>
The maturities of long-term notes payable to related parties, are as
follows:
<TABLE>
<CAPTION>
Year Ended (UNAUDITED)
July 31, Amount
-------- ------
<S> <C>
1997 $ 25,583
1998 44,262
1999 31,221
2000 34,490
2001 18,577
----------
$ 154,133
==========
</TABLE>
12. Contingencies:
The Company is a defendant in various lawsuits and claims, which it is
vigorously defending. It is management's contention that such matters
arise out of the normal course of its title business. While the results
of litigation cannot be predicted with certainty, management believes,
based on the advice of legal counsel, that the final outcome of such
litigations will not have a material adverse effect either individually,
or in the aggregate, on the Company's financial position, results of
operations, or liquidity.
F-13
<PAGE> 41
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Cash Flow Information:
Cash paid (refunded) for interest and income taxes during the nine month
periods ended July 31, 1996 and 1995 (unaudited), and for the fiscal
years ended October 31, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
July 31, July 31, October 31, October 31,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest $ 26,973 $ 3,506 $6,034 $ 6,516
======== ======= ====== ========
Income taxes $(51,575) $15,694 $ -- $105,868
======== ======= ====== ========
</TABLE>
The Company recognized investing and financing activities that affected
assets and liabilities, but did not result in cash receipts or payments,
as follows:
In July, 1996, the Company financed the purchase of property and
equipment in the amount of $25,471 (unaudited) under capital
lease and financing agreements.
In May, 1996, the Company issued 6,744,628 shares of common
stock to purchase all the issued and outstanding shares of
Capital Title Agency, Inc.
14. Employee Benefit Plans:
Profit Sharing Plan:
The Company maintains a profit sharing plan under Section 401(K) of the
Internal Revenue Code. Under this plan, substantially all full-time
employees may elect to defer up to fifteen percent (15%) of their
salary. The Company contributes $.25 for every $1 the employee
contributes, up to a maximum of one percent (1%) of the employee's
earnings. Vesting of matching contributions is based on certain service
requirements. Employees are fully vested after six (6) years of service.
Employer contributions for the nine month periods ended July 31, 1996
and 1995 and for the years ended October 31, 1996 and 1995, were
approximately $4,030 and $3,400 (unaudited), and $3,700 and $4,600,
respectively.
Cafeteria Plan:
The Company maintains an Internal Revenue Code Section 125 Cafeteria
Plan as a benefit to its employees. The plan provides for employee and
dependent coverage to be paid from before tax compensation. As such,
there is no effect on the financial statements.
15. Private Placement Memorandum:
The Company was offering their common stock through a Private Placement
Memorandum at $1 per share, with an intended maximum offering of
1,500,000 shares. As of July 31, 1996 (unaudited), the Company had sold
675,000 shares. The offering was valid through September 30, 1996.
Subsequent to July 31, 1996, the Company completed the offering with a
total of 1,275,000 shares (unaudited) sold.
F-14
<PAGE> 42
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
(FORMERLY CAPITAL TITLE AGENCY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Stock Option Plans:
1996 Stock Option Plan:
On May 23, 1996, the Company adopted its 1996 Stock Option Plan. Under
the Plan, the Company reserved an aggregate of 1,000,000 shares of
common stock to be granted at the discretion of the Board of Directors.
Options granted under the Plan are not transferrable and expire five (5)
years after the date of grant. The per share exercise price of an
incentive stock option granted under the Plan may not be less than the
fair market value of the common stock on the date of grant.
As of May 23, 1996, the Board of Directors has authorized the grant,
under the 1996 Stock Option Plan, options to purchase 475,000 shares of
common stock, with the exercise prices of all such options being $1 per
share. Of such options, 275,000 were granted to related parties. As of
July 31, 1996, none of the options have been exercised.
Non-Employee Directors Stock Option Plan:
On May 23, 1996, Capital Title Group, Inc. adopted a Non-Employee
Directors Stock Option Plan. Under the Plan, the Company reserved an
aggregate of 100,000 shares of common stock to be granted.
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 of 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.
As of July 31, 1996, 15,000 options have been granted under the
Non-Employee Directors Stock Option Plan at an exercise price of $1 per
share. None of these options have been exercised as of July 31, 1996.
F-15
<PAGE> 43
Part III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION> Method of
Exhibit No. Description Filing
- ----------- ----------- ---------
<S> <C>
2 Share Exchange Agreement between Capital Title **
Agency, Inc. and Norvex, Inc. dated May 23,
1996
3.1 Certificate of Incorporation **
3.2 Amended and Restated Bylaws **
10.1 Underwriting Agreement between Capital Title **
Agency, Inc. and Old Republic National Title
Insurance Company dated March 1, 1996
10.2 Underwriting Agreement between Capital Title **
Agency, Inc. and First American Title Insurance
Company dated August 16, 1996
10.3 Image Service Agreement between Capital Title **
Agency, Inc. and Security Union Title Insurance
Company dated June 5, 1996
10.4 Title Plant Service Agreement between Capital **
Title Agency, Inc. and Diversified Information
Services Corporation dated March 1, 1996
10.5 Office Lease between Capital Title Agency, Inc. **
and 4808 Corporation dated June 7, 1996
10.6 Promissory Note between PWCC, Inc. and Bank **
One Arizona, NA dated January 5, 1996
10.7 Assumption Agreement between Capital Title **
Agency, Inc. and PWCC, Inc. dated January 5,
1996
10.8 Employment Agreement between Capital Title **
Group, Inc. and Donald R. Head dated June 1,
1996.
10.9 Employment Agreement between Capital Title **
Group, Inc. and Andrew A. Johns dated June 1,
1996
10.10 Employment Agreement between Capital Title **
Agency, Inc. and James A. Clifford dated
May 17, 1996
</TABLE>
<PAGE> 44
<TABLE>
<S> <C>
10.11 Employment Agreement between Capital Title **
Agency, Inc. and James P. Stamas dated July 22,
1996.
10.12 Employment Agreement between Capital Title **
Agency, Inc. and Nick Velimirovich dated
May 17, 1996
10.13 Financial Advisor Agreement between Capital *
Title Agency, Inc. and Miller Capital
Corporation dated May 23, 1996
11 Statement re: Computation of Per Share Earnings *
16.1 Letter from Duane V. Midgley dated **
September 23, 1996
16.2 Letter from Schvaneveldt & Company dated **
September 23, 1996
16.3 Letter from John E. Jones dated September 23, 1996 **
21 Subsidiaries **
24 Consent of Semple & Cooper PLC dated January 8, 1996 *
27 Financial Data Schedule *
</TABLE>
- ------------
* Filed Herewith
** Previously Filed
<PAGE> 45
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this Amendment No. 1 to Form 10-SB 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: January 9, 1996
<PAGE> 1
EXHIBIT 10.13
[THE MILLER GROUP LETTERHEAD]
LETTER OF AGREEMENT
This letter will confirm and constitute the agreement ("Agreement") as
of the 23 day of May, 1996 between Capital Title Agency Inc. (hereinafter
"CAPITAL TITLE" or the "COMPANY") and Miller Capital Corporation dba The Miller
Group ("TMG") pursuant to which TMG will furnish to the Company certain
management consulting and financial advisory services.
1. TMG SERVICES.
TMG will perform the following services for the Company: (i) a due
diligence review of the Company's business plan and corporate structure; (ii)
financial consultation with respect to the Company's funding requirements and
projected associated costs to include preparation of reports and valuation
meaningful to a public equity funding; (iii) advice and consultation with
respect to financial structure, markets and placement of any equity offering;
and (iv) investor relations services.
It is expressly acknowledged and agreed by the parties hereto that
TMG's obligations do not insure the successful negotiation of or obtaining of
any type of Financing for the Company and any efforts by TMG for obtaining
Funding for the Company shall be done on a "BEST EFFORTS" basis only. TMG is
not a NASD registered broker/dealer.
It is expressly acknowledged and agreed by the parties hereto that TMG
and employees of TMG are independent contractors and are not employees or
officers of the Company.
2. PROVISION OF INFORMATION BY THE COMPANY.
The Company acknowledges that TMG, in order to perform its services
effectively under this Agreement and to satisfy such obligations, requires
prompt receipt of all material information with respect to the Company, its
operations and prospects. Accordingly, the Company will furnish to TMG copies
of all financial statements, tax returns, reports and agreements executed in
relation to the Company's business. The Company recognizes the necessity of
promptly notifying, and will promptly notify, TMG of all material developments
concerning the Company, its business and prospects and will supply TMG with
information sufficient to enable TMB to make a determination as to its
compliance with its own procedures as well as any legal requirements.
<PAGE> 2
Capital Title Agency, Inc.
May 10, 1996
Page 2
TMG will have access to the Company's legal and accounting
professionals and with prior approval from the Company access to outside legal
counsel and accounting professionals at the Company's expense.
TMG will accept and hold such Information in complete confidence for
their use as contemplated hereby. The confidentiality obligations assumed by
TMG hereunder will not apply to any Information which is presently in or
subsequently becomes part of the public domain or is otherwise generally known
or is obtained from any third party which is in possession of such Information
through no fault of TMG.
3. COMPENSATION TO TMG.
For services rendered under this Agreement, TMG shall receive the following
compensation:
A. As compensation for the Due Diligence Review and Proposed Valuation
Report, TMG waives its standard fee which normally ranges from
$15,000 to $25,000 as a special consideration to Capital Title;
B. As compensation for its Financial Consulting Services, TMG will
receive a fee of $3,000 per month to be accrued by TMG starting
March 1996 and each month thereafter until the Company has completed
their minimum Financing of $500,000 at which time the total accrued
amount will be paid in full;
C. As compensation for Investor Relations Services, TMG will receive a
monthly fee of $5,500 beginning in the month following the
completion of the $500,000 Financing and continuing for a period of
twelve consecutive months;
D. Out-of-pocket expenses incurred by TMG in connection with the
services to be performed by it hereunder will be payable by the
Company upon submission by TMG of monthly invoices delineating such
expense. Any expense over $500 must be approved by the Company in
advance;
E. TMG will receive a success fee ("Success Fee") in the form of a cash
payment in the amount of seven (7%) percent of the gross proceeds of
any Financing, including any form of equity, convertible debt, debt
with warrants, debt with
<PAGE> 3
Capital Title Agency, Inc.
May 10, 1996
Page 3
equity incentives to the lender, or any other form of equity, debt
or guarantees obtained by or invested in Capital Title, payable upon
closing or receipt of funds by Capital Title;
F. Capital Title shall have sole discretion in determining what
constitutes an acceptable Financing as contemplated by this
Agreement. TMG shall earn the Success Fee only upon the closing or
receipt of funds from a Financing as described in 3.D., above, and
not merely for presenting a financing option or prospective investor
which in Capital Title sole discretion is unacceptable; and
G. TMG or its assigns shall be sold Five Hundred Ninety Thousand
(590,000) shares of Capital Title's outstanding common stock
("Common Stock") for the price of $100 only upon the closing of the
public company reverse merger but prior to the private placement
offering.
4. EXCLUSIVITY.
A. From the effective date of this Agreement, the Company and its
officers will not engage any other person or entity to serve as its
agent or representative to provide services similar to those to be
provided by TMG through the term of this Agreement without the prior
written consent of TMG.
B. If for a period of five (5) years after successfully closing a
Financing, as contemplated under this Agreement, Capital Title
desires to commence any Transaction (as hereinafter defined), The
Miller Group shall have the right of first refusal to act as Capital
Title's financial advisors, to arrange for placement agents or
underwriters, as the case may be, with respect to any such
Transaction or Transactions. For purposes of this Agreement, the
term "Transaction" shall include each of the following; the
purchase, sale, merger, consolidation or any other business
combination, in one or a series of transactions, involving Capital
Title, or any sale of securities of Capital Title or a New Entity
effected pursuant to a private sale or an underwritten public
offering. In the event Capital Title sells more than ten (10%)
percent of Capital Title to any party, TMG will be entitled to a
cash payment in the amount of $200,000 (Two Hundred Thousand
Dollars).
<PAGE> 4
Capital Title Agency, Inc.
May 10, 1996
Page 4
C. If Capital Title decides to pursue any such Transaction, and TMG
exercise its right of first refusal provided hereunder, TMG will
receive a fee of $200,000 for a Transaction involving the purchase,
sale, merger, consolidation or any other business combination, in
one or a series of transactions, involving Capital Title; and for a
Transaction involving any sale of securities of Capital Title or a
New Entity effected pursuant to a private sale or an underwritten
public offering, Capital Title and TMG will enter into an agreement
appropriate to the circumstances.
5. COMPANY COVENANT RE TMG EMPLOYEES.
The Company recognizes that client service officers and other employees
of TMG are necessary for the continued servicing by TMG of its several clients.
Accordingly, the Company will not, during the term of this Agreement, and for a
period of two years after its termination, employ any client service officer,
account executive or other employee of TMG in any capacity.
6. ASSIGNMENT.
TMG recognizes the personal nature of the services to be performed by
it and shall not transfer or assign to any other person, firm or corporation
its responsibilities and obligations under this Agreement without prior
approval of the Company. In the event that a merger, sale of assets or change
of control of the Company or TMG shall occur, this Agreement shall be binding
upon the successor and assigns of such party.
7. INTEGRATION.
This writing constitutes the full and complete agreement of the
parties, which Agreement may not be modified by any method other than another
writing signed by the parties.
8. HEADINGS.
The paragraph headings have been inserted for convenience and shall not
be construed in a manner contrary to the text of this Agreement.
<PAGE> 5
Capital Title Agency Inc.
May 10, 1996
Page 5
9. ATTORNEY FEES.
In the event of any action or proceeding to enforce the provisions of
this Agreement, the prevailing party shall be entitled to its reasonable
attorney fees, such fees to be set by a judge and not by a jury and to be
included in any judgment entered in such action or proceeding.
10. INDEMNIFICATION.
Both TMG and the Company agree to indemnify the other company's
respective directors, officers and employees against all losses and claims as
is customary in advisory engagements. The provisions of this section shall
survive any termination of the engagement that is the subject of this letter.
11. EFFECTIVE DATE.
This Agreement shall be effective as of the date and year first set
forth above.
AGREED AND ACCEPTED:
Please confirm that the foregoing correctly sets forth our mutual
understanding by signing and returning the copy of this Agreement provided for
that purpose.
Capital Title Agency Inc. Miller Capital Corporation
Donald R. Head Rudy R. Miller
By: /s/ Donald R. Head By: /s/ Rudy R. Miller
--------------------- ------------------------
Title: Chairman & CEO Title: Chairman and President
--------------------- ------------------------
Date: May 23, 1996 Date: May 23, 1996
--------------------- ------------------------
<PAGE> 1
EXHIBIT 11
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
(Unaudited)
For the Nine Month For the
Periods Ended July 31, Years Ended October 31,
---------------------- -----------------------
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per share(1)
Common stock equivalents
Options granted and
exercised
Assumed buyback of 290,000 -- -- --
options(2) (290,000) -- -- --
--------- --------- --------- ---------
Total weighted average
shares outstanding 9,013,915 8,670,786 8,670,786 8,670,786
--------- --------- --------- ---------
Weighted average shares
outstanding 9,013,915 8,670,786 8,670,786 8,670,786
========= ========= ========= =========
</TABLE>
- ------------------
(1) Earnings per share are based upon the weighted average number of shares
outstanding for each of the respective periods. All weighted average
shares outstanding give retroactive effect to the one for ten (1-10)
reverse stock split in May, 1996.
(2) Buyback of stock options under the treasury stock method is at the assumed
private offering price of $1 per share. Under this method, earnings per
share data is computed as if the options and warrants were exercised at
the beginning of the period (or the time of issuance, if later), and as if
the funds obtained thereby were used to purchase common stock at the
private offering price during the period.
<PAGE> 1
[SEMPLE & COOPER, P.L.C. LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated September 5, 1996, accompanying the
consolidated financial statements of Capital Title Group, Inc. (Formerly
Capital Title Agency, Inc.) for the years ended October 31, 1995 and 1994,
contained in the Form 10-SB Registration Statement. We consent to the use of
the aforementioned report as referenced in the Form 10-SB.
Certified Public Accountants Semple & Cooper, P.L.C.
January 9, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> OCT-31-1995 OCT-31-1996
<PERIOD-START> NOV-01-1994 NOV-01-1995
<PERIOD-END> OCT-31-1995 JUL-31-1996
<CASH> 17,354 115,161
<SECURITIES> 0 0
<RECEIVABLES> 17,811 29,708
<ALLOWANCES> 3,716 3,716
<INVENTORY> 0 0
<CURRENT-ASSETS> 89,015 149,849
<PP&E> 499,683 946,440
<DEPRECIATION> 305,877 356,266
<TOTAL-ASSETS> 469,792 982,106
<CURRENT-LIABILITIES> 266,784 303,720
<BONDS> 0 0
0 0
0 0
<COMMON> 480,663 9,686
<OTHER-SE> 0 1,167,186
<TOTAL-LIABILITY-AND-EQUITY> 469,792 982,106
<SALES> 0 0
<TOTAL-REVENUES> 2,027,263 1,682,752
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 2,225,484 1,968,175
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,289 11,724
<INCOME-PRETAX> (182,161) (361,808)
<INCOME-TAX> 0 65,059
<INCOME-CONTINUING> (182,161) (361,808)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (117,102) (361,808)
<EPS-PRIMARY> (.01) (.04)
<EPS-DILUTED> 0 0
</TABLE>
