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Annual Report For Small Business Issuers Subject
to the 1934 Act Reporting Requirements
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-21417
CAPITAL TITLE GROUP, INC.
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(Name of Small Business Issuer in its charter)
Delaware 87-0399785
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
14555 North Scottsdale Rd. Suite 320, Scottsdale, Arizona 85254
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (602) 483-8868
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Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB, or any amendment to
this Form 10-KSB. [ ]
On March 15, 1998, the aggregate market value of the voting stock held by
non-affiliates of the issuer was $27,375,000. This figure was estimated based on
March 13, 1998 close of the Company's common stock. The number of shares of
Common Stock outstanding on March 15, 1998 was 11,231,029. As of March 20, 1998
the Company had received subscriptions for 433,500 units in a private placement
offering. Each unit is comprised of two shares of Common Stock and one Common
Stock Warrant. The shares and warrants issued in conjunction with the private
placement were not considered issued and outstanding as of March 15, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
The information in Part II Item 7 Financial Statements and Supplementary Data is
incorporated herein by reference to Form 10-KSB
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PART I
ITEM 1. BUSINESS
COMPANY HISTORY AND OVERVIEW
Capital Title Group, Inc., a Delaware corporation (the "Company" or
"Capital Title Group"), through its wholly owned subsidiary, Capital Title
Agency, Inc., an Arizona corporation ("Capital Title"), operates an independent
title agency and escrow business with headquarters in Phoenix, Arizona. Capital
Title Group was formed under the laws of Utah in 1983 and redomiciled in
Delaware in 1989. Capital Title was formed as an Arizona corporation in 1981 and
has engaged in business as an independent title agency and escrow company since
that time.
On May 23, 1996, the Board of Directors of Capital Title Group, (formerly
Norvex, Inc.), and the Board of Directors of Capital Title, approved a share
exchange transaction between Capital Title and Capital Title Group ("the
Acquisition Transaction"), pursuant to which Capital Title Group issued 5.781
shares of Capital Title's, $.001 par value, common stock in exchange for each
share held by Capital Title's shareholders. Immediately prior to the Acquisition
Transaction, Capital Title Group had 1,686,164 shares issued and outstanding and
approximately 75 shareholders. In the Acquisition Transaction, Capital Title
Group issued 6,734,865 shares to the existing shareholders of Capital Title. The
share exchange ratio was determined by arm's length negotiations between the
respective boards of directors of Capital Title Group and Capital Title, based
on a number of factors, including the business prospects and financial condition
of the respective entities.
Prior to the merger, Capital Title Group had no significant business
operations or holdings. As a result of the Acquisition Transaction, Capital
Title Group now operates Capital Title as a wholly owned subsidiary.
Since 1981, Capital Title has provided continuous title insurance and
escrow services to the real estate industry in Yavapai County, Arizona. In July
1996, Capital Title expanded its operations into the metropolitan area of
Phoenix, Arizona located in Maricopa County. As of March 15, 1998, the Company
has seventeen branch offices, seven are located in Yavapai County, Arizona and
ten are in the Phoenix metropolitan area. The Company plans to continue its
growth in Yavapai and Maricopa Counties and, as conditions merit, expand outside
Arizona. The Company intends to accomplish this planned expansion 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 14555 N.
Scottsdale Road, Suite 320, Scottsdale, Arizona 85254 and the Company's
telephone number is: (602) 483-8868.
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COMPANY OPERATIONS
Capital Title is an independent title agency providing escrow services and,
as an agent for First American Title Insurance Company ("First American"),
United General Insurance Company ("United General") 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. 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. During 1996
and 1997, Capital Title opened seven branch offices in Maricopa County, Arizona.
As conditions and operating results warrant, the Company plans to open
additional branch offices in Maricopa and Yavapai Counties in addition to other
counties throughout Arizona.
According to the BANK ONE ECONOMIC OUTLOOK CENTER, Arizona ranked among the
top five states in the nation in the rate of new job creation, population
growth, and gains in personal income for 1997. Additionally, Phoenix was one of
the top five single family housing markets in the nation and the leading single
family market in all the Western States. Phoenix is currently the 7th largest
city in the United States with an estimated population of 1.08 million. The BANK
ONE ECONOMIC OUTLOOK CENTER has projected the Phoenix population growth to
continue through the year 2000, adding more than 600,000 new residents and
making Phoenix the 6th largest city in the nation. The Company believes the
surrounding metropolitan areas in Maricopa County have the potential to grow at
an even more accelerated pace. Yavapai County has a current estimated population
of 139,000 which is expected to increase to approximately 154,000 by the year
2000 according to the NORTHERN ARIZONA ECONOMIC MONITOR.
Capital Title's expansion plans also call for the opening of offices
outside of Arizona. California has the distinction of creating more jobs than
any other state in nation in 1997 and was the only Western state to record gains
in single family housing construction permits in 1997. Nevada's construction
employment was up nine percent (9%) and non-farm jobs increased seven percent
(7%) in 1997. Nevada has the distinction of being the number one growth state
for jobs in 1997 compared to 1996. Management believes these trends will
continue and expects the Western states to lead the nation in population growth,
job growth, and housing activity in 1998.
The most recent market-share reports from December 1997 show Capital Title
as one of the top two title insurers in Yavapai County with a market share of
approximately 32%. As of December 31, 1997, Capital Title ranked tenth in
Maricopa County market share, having moved up from twentieth in the last
eighteen months. Since expanding into Maricopa County, the Company has more than
doubled its number of employees and branch offices.
INDUSTRY OVERVIEW
Title Insurance has become accepted as the most efficient means of
determining title to, and the priority of interests in, real estate in nearly
all parts of the United States. Virtually all real property lenders require
their borrowers to obtain title insurance policies at the time mortgage loans
are made.
The title insurance industry has undergone some changes in the past few
years associated with revenues fluctuating based on changes in interest rates.
Companies have focused on advancing technology in order to reduce costs, improve
accuracy, and respond to the continuing pressures within the real estate
industry for faster and more cost effective processing of transactions. The
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major expense of a title agency company is the search and examination function
in preparing preliminary title reports, commitments, and title policies, and not
from claim losses associated with said policies. Technology has improved the
accuracy and consistency of information, and allowed companies to maintain or
increase their number of closings with the same number of or fewer employees.
Capital Title implemented its advanced proprietary technology in its
expansion into Maricopa County and has competitively positioned itself by
possessing technology that successfully combines title information available
from multiple sources via electronic data exchange. Further, as Capital Title
continues to establish new operations, it is not hindered by existing
operational limitations, but rather is free to begin expansion operations
utilizing its advanced system that to date appears to outperform the technology
of major title companies that possess greater resources than those of Capital
Title.
In the past twenty years, several large, national companies have captured a
little over fifty percent of the market by securing the capital required to meet
the regulatory requirements of an insurance company combining with the retention
of independent agency operations. Larger companies, like Chicago Title and Trust
Company, First American Financial Corporation, and Fidelity National Financial,
Inc., began on the local level, operating in a single city or county. From this
small starting point, these companies grew to regional leaders and finally into
national leaders in the industry.
TITLE POLICIES. Title insurance policies state the terms and conditions
upon which a title underwriter will insure title to real estate. The
beneficiaries of title insurance policies are generally buyers of real property
or secured lenders.
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, 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
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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
policies are prepared by title underwriters (direct sales) or by independent
agents on behalf of the underwriters (agency sales). The terms and conditions
upon which the real property will be insured are determined in accordance with
the standard policies and procedures of the title underwriter. In direct sales,
the title underwriter issues the preliminary report and commitment and retains
the entire title premium paid in connection with the transaction. In agency
sales, the search and examination function is performed by the independent agent
and the majority of the premium collected is retained by the agent, with the
balance remitted to the title underwriter. Independent agents may select among
several title underwriters based upon the amount of the premium "split" offered,
the overall terms and conditions of the agency agreement, including
indemnification obligations of the agent, and the scope of services offered to
the agent by the title underwriter. Agent commissions vary by geographic region.
THE TITLE POLICY PROCESS. A brief description of the process of issuing a
title insurance policy is as follows:
(i) The customer, typically a real estate salesperson or broker, escrow
agent or lender, places an order for a title policy.
(ii) Sales personnel note the specifics of the order and place a request
with the title department for a preliminary report.
(iii) After the relevant historical data on the property is compiled, the
title officer prepares a preliminary report that documents (a) the
current status of title to the property, (b) any exemptions,
exceptions and/or limitations that might be attached to the policy
and (c) specific issues that need to be addressed and resolved by the
parties to the transaction before the title policy will be issued
(such as removal of prior tax liens and payment of prior loans on the
property). The preliminary report is circulated to all the parties
for satisfaction of any specific issues.
(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 moneys have been released, the
policy is issued (a) to the owner and the lender on a resale
transaction or (b) to the lender only on a refinancing transaction.
LOSSES AND RESERVES. The maximum amount of liability under a title
insurance policy is usually the face amount of the policy plus the cost of
defending the insurer's title against an adverse claim. The reserve for claim
losses is based upon known claims as well as losses the insurer expects to incur
based on historical experience and other factors, including industry averages,
claims loss history, current legal environment, geographic considerations and
type of policy written.
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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 1996 was approximately $5.6
billion, which is slightly less than 1995 estimated industry revenue of $6.0
billion. Sales of single-family dwellings in 1997 increased approximately 5.4%
from 1996, to an estimated 4.32 million units.
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.
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. The Company recognizes that its aggressive growth plan calls
for executive management with extensive industry operational and expansion
experience. Capital Title was co-founded by Donald R. Head, the Chairman of the
Board and Chief Executive Officer since Capital Title's inception in 1981. Mr.
Head has extensive experience as a developer and entrepreneur within the real
estate industry. Additionally, he served as a board member on several U.S. and
Canadian public companies and ran a successful attorney practice in Prescott,
Arizona. Mr. Head holds a Bachelor's Degree in Business Administration from
Arizona State University and is a graduate of the University of Arizona law
school.
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Capital Title appointed Mr. Andrew Johns as President effective April 16,
1996. Mr. Johns, the former President of Stewart Title for the State of
California, has over 28 years of industry experience, including the expansion of
United Title's Orange County operations throughout the Southern California
market. The Company believes that Mr. Johns has the leadership, experience and
industry contacts required to effect Capital Title's expansion into the
California Market.
In February, 1998, the Company appointed Milton Ferrantelli, Senior Vice
President of Capital Title Group and President of Capital Title Agency Inc.'s
Arizona operations. Mr. Ferrantelli purchased United Title Insurance Agency in
1986 with two active partners and served as its President and Chief Executive
Officer, prior to its acquisition by Norwest Financial in 1994. United Title
held the number one market share for title and escrow services in Maricopa
County from 1984 through 1994. Mr. Ferrantelli has over twenty-five years of
experience in the title and escrow industry in the Arizona marketplace.
James A. Clifford and Nick Velimirovich, two experienced executives who
combined have almost 35 years of experience in escrow and title operation,
together run the Maricopa County, Arizona operations. Prior to joining the
Capital Title team, Clifford and Velimirovich, were key executives at United
Title Insurance Agency.
Cynthia Schleicher, who has 14 years of experience in escrow and title
operations, runs the Yavapai County, Arizona operations. The Company employs
several additional experienced and dedicated executive officers to support the
above mentioned executives. See Item 9 - "Directors, Executive Officers,
Promoters and Control Persons."
EQUITY PARTICIPATION BY ESCROW OFFICERS. Escrow officers are the major
revenue producers for title insurance companies. It is their relationships with
real estate brokers, lenders and other industry participants that are primarily
responsible for the direction of escrow and title business. Capital Title will
seek to attract the most successful escrow officers (and the related revenue)
through employment packages that include stock options and stock purchase
programs in the Company as added motivational incentives. The Company believes
such programs will also promote Company loyalty, which will help to insulate the
Company's escrow officers from competitive recruiting efforts.
EXPANSION. The Company intends to accomplish its planned expansion through
acquisitions of existing title agencies and opening operations in California,
Nevada, and other states throughout the southwest. These expanded operations are
expected to be enhanced by utilizing the Company's recruiting ability that has
proven extremely successful in Arizona.
The Company is also evaluating a strategy for the integration of related
real estate services to enhance the services it already offers to its customers
and the formation of a property and casualty insurance agency operation that
would benefit from the built-in client bases established by title insurance
activity.
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COMPANY OPERATIONS
The Company reported record revenues for each quarter in 1997 with revenue
up 223% for the year ended December 31, 1997 compared to the fiscal year ended
October 31, 1996. Revenue was $8.35 million for the year ended December 31, 1997
compared to $2.58 million for the fiscal year ended October 31, 1996. The
Company changed its October fiscal year end to a December fiscal year end to be
consistent with the year ends of most major companies in the title industry. The
Company set a record for monthly revenue in December of 1997 with revenue for
the month of $1.05 million.
For the fiscal years ended December 31, 1997 and October 31, 1996, revenues
from the issuance of title insurance policies represented 64% and 56%,
respectively, of the Company's consolidated revenues. Escrow fees for the years
ended December 31, 1997 and October 31, 1996 represented 26% and 27%,
respectively, of the Company's consolidated revenue. The Company's other
principal revenue source is derived from account servicing. The Company reported
revenue from account servicing during the years ended December 31, 1997 and
October 31, 1996 of approximately $341,000 and $315,000, respectively.
MARKETING. The Company believes that the primary source of its business is
from referrals from participants in the real estate industry, such as real
estate brokers, mortgage lenders, developers and attorneys. In addition to the
referral market, Capital Title markets its services directly to larger
brokerages and real property lenders. Marketing activities are performed by the
escrow officers of Capital Title and a marketing representative whose sole
function is the solicitation of business from major real estate brokers and
lenders. Escrow officers, in addition to their escrow service duties, maintain
and further develop relationships established with current clients for on-going
business. The marketing representative holds educational seminars for real
estate brokers, offers the use of "Dataquick" as a service that provides ease in
placing valuations on surrounding property and trains brokers or their
assistants in the use of Capital Title's proprietary industry specific
information technology.
ESCROW SERVICE. Capital Title's escrow department is responsible for
handling the consummation of real estate sales, exchanges and a variety of other
transactions involving the sale or encumbrance of real property, refinance of
real property, sales of assets of businesses and sales of promissory notes
secured by deeds of trust.
The escrow officer and assistant typically prepare escrow documents
pursuant to the real estate contract. The escrow instructions provide guidance
to all concerned parties as to the conditions required for the real estate
transaction. Furthermore, the instructions provide authorization for the escrow
agent to request information concerning matters appearing of record, the receipt
of all earnest moneys and closing funds, the disbursement of seller proceeds,
payoff of underlying liens, judgments, real property taxes, insurance and any
other disbursement as set forth in the instructions or by the parties to the
transaction. The instructions also include authorization to prepare and obtain
documents necessary to complete the real estate transaction.
The escrow agent is held accountable by state governmental agencies for
strict compliance with its fiduciary responsibilities outlined by the escrow
instructions. The officer must possess a high degree of skill, professionalism
and confidentiality in the handling, preparation, collecting and recordation of
all escrow matters between the buyer, seller, real estate brokers and their
agents, developers, lenders and investors.
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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. In 1996, Capital
Title entered into a five (5) year service agreement for a "title plant" in
Maricopa 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.
CLAIMS AND UNDERWRITING. Capital Title provides title insurance as an agent
of First American, United General Insurance Company, and Old Republic. These
services are provided pursuant to Underwriting Agreements with First American,
United General and Old Republic, which state the conditions on which Capital
Title is authorized to issue a title insurance policy on behalf of First
American, United General or Old Republic and prescribe the circumstances under
which Capital Title may be liable to First American, United General, or Old
Republic if a policy loss is attributable to errors made by Capital Title. The
underwriting agreements with First American, United General, 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, United General 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 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.
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ACCOUNT SERVICING. The account servicing department handles the receipt and
disbursement of moneys 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 non-judicially 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
non-judicial trustee sale or foreclosure.
ADMINISTRATION. Capital Title's administrative staff handles general
accounting and finance, human resources, purchasing, management information
systems and regulatory compliance.
CUSTOMERS
Capital Title is not dependent upon any single customer or single group of
customers. The loss of any one customer would not have a material adverse effect
on the Company.
SEASONALITY
The title insurance business is closely related to overall levels of real
estate activity. Historically, real estate activity slows down in the winter
months with volumes showing significant improvements in the spring and summer
months. In addition, the title insurance business is cyclical due to the effect
of interest rate fluctuations on the level of real estate activity. Periods of
high interest rates adversely effect real estate activity and therefore premium
and escrow revenues.
COMPETITION
The title insurance business is highly competitive. Companies with
significant market share in Arizona include First American Title, Security
Title, ATI Title Agency, Fidelity Title, Lawyers Title, and Chicago Title. The
number and size of competing companies varies in different geographic areas. In
those areas where the Company operates and intends to operate, the Company will
face competition from major national insurance underwriters and other
independent agencies, many of which have greater financial and other resources
than the Company. The Company believes that quality and timeliness of service
are the key competitive factors in the industry, because parties to a real
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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, 1997, the Company had a total of 175 employees, of which
101 (including officers of the Company) were in the marketing/escrow department,
34 were in the title department, 8 were in customer service, 2 was in trustee
sales, 6 were in account services and 24 were in administration. The Company
believes that its relations with its employees are excellent.
ITEM 2. PROPERTIES
The Company conducts its business operations in leased office space. As of
December 31, 1997, the Company leases approximately 16,640 square feet in
Yavapai County and approximately 29,825 square feet in Maricopa County. The
Company currently leases offices at seventeen locations with remaining lease
periods ranging from one to sixty months. The Company's monthly rental payments
at the foregoing locations are approximately $65,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal actions which arise in the normal
course of its title business. The Company believes that none of these claims are
material, either individually or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On May 15, 1997, Capital Title Group, as a fully reporting company with the
Securities and Exchange Commission, received approval to publicly trade its
common stock on the NASDAQ Over-The -Counter Electronic Bulletin Board market,
utilizing the symbol "CTGI." Capital Title Group became a public company for two
reasons: to gain access to additional growth capital available in the financial
markets and to motivate its employees with a public stock ownership program.
The following table sets forth high and low bid price quotations for each
quarter since the Company began trading on May 15, 1997:
Date High/Bid Low/Bid Shares Traded
---- -------- ------- -------------
May 15 through June 30, 1997 $ 3.00 $ 2.5 30,500
July 1 through September 30, 1997 2.375 1.5 133,900
October 1 through December 31, 1997 1.8125 1.5 114,600
January 1 through March 15, 1998 2.4375 1.5625 145,700
The quotations set forth above reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual transactions.
As of December 31, 1997, the Company had issued and outstanding 11,231,029
shares of common stock. In addition, 1,300,000 shares are reserved for issuance
under the Company's 1996 Stock Option Plan and 200,000 shares are reserved for
issuance under the Company's Directors Non-Employee Plan. (See Item 11 "Security
Ownership of Certain Beneficial Owners and Management.") Of the Company's
11,231,029 shares of common stock issued and outstanding on December 31, 1997,
1,211,197 shares are eligible for resale under Rule 144. At December 31, 1997,
there were approximately 169 record holders of the Company's Common Stock.
Between September 26, 1997 and December 31, 1997, the Company issued
$250,000 in convertible notes for the purpose of obtaining capital to open two
new branches in Maricopa County, Arizona. The convertible notes require payment
of interest only for eighteen (18) months at an interest rate equal to the prime
rate (in effect) plus 2 1/2%. At any time within the eighteen (18) months, the
note holders will have the option of converting the obligation into common stock
of the Company at $1.00 per share. The convertible notes are secured by
furniture and equipment in the respective branches.
On March 11, 1997, the Company's Board of Directors authorized the sale of
up to 2,500,000 shares of the Company's common stock to accredited investors at
$1.00 per share. Beginning in June 1, 1996 and continuing through December 31,
1997, the Company sold an aggregate of 2,220,000 shares common stock through
private placements to accredited investors.
In December 1997, the Company's Board of Directors authorized the private
placement sale of units (consisting of common stock and warrants) to accredited
investors at $3.00 per unit. A unit is comprised of two (2) shares of the
12
<PAGE>
company's common stock and one warrant to purchase an additional share at $2.50.
The warrants must be exercised within two years following the closing of the
offering. The Company began marketing the private placement in February 1998.
Accordingly as of December 31, 1997, the Company had not sold any shares in
accordance with the new private placement.
In December 1997, the Company's Board of Directors authorized the sale of
an additional $125,000 in convertible notes for the purpose of obtaining capital
to open one additional branch in Maricopa County, Arizona. The convertible notes
require payment of interest only for eighteen (18) months at an interest rate
equal to the prime rate (in effect) plus 2 1/2%. At any time within the eighteen
(18) months, the note holders will have the option of converting the obligation
into common stock of the Company at $2.00 per share. The convertible notes are
secured by furniture and equipment in the respective branch.
The Company has never paid a dividend on its Common Stock. The Company does
not anticipate paying any dividends on its Common Stock in the foreseeable
future. Rather, the Company anticipates that its earnings, if any, will be
retained to fund the Company's working capital needs and the planned expansion
of its business. The payment of any dividends will be dependent upon the
discretion of the Board of Directors. Furthermore, under Delaware corporate law,
in the absence of current or retained earnings, the Company may be prohibited
from paying dividends (whether in cash or otherwise).
13
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of the operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
report. Historical results and percentage relationships among accounts are not
necessarily an indication of trends in operating results for any future period.
The discussion of the results of operations and financial condition for the year
ended October 31, 1996 excludes the activity of Capital Title Group prior to May
23, 1996, the Acquisition Transaction date. Additionally, these discussions
compare the year beginning November 1, 1995 through October 31, 1996 to the year
beginning January 1, 1997 through December 31, 1997. The Company changed its
October fiscal year end to a December fiscal year end to be consistent with the
year end closing of most major companies in the title industry. Where relevant
these discussions will include results of the two (2) month transitional period
November 1, 1996 through December 31, 1996.
OVERVIEW
Capital Title's primary business is providing title and escrow services in
Maricopa and Yavapai County, Arizona. The Company experienced a 223% increase in
revenue for the fiscal year ended December 31, 1997 compared to the fiscal year
ended October 31, 1996. This increase is largely due to the Company's expansion
into Maricopa County, Arizona. Other factors which have attributed to the
Company's explosive growth in 1997 include the increased market share the
Company has been able to achieve in Yavapai County, Arizona, and the favorable
overall real estate market in Maricopa and Yavapai Counties, Arizona.
In June 1996, the Company began the first phase of its aggressive growth
plan which is expected to take several more years to complete. In August 1996,
the Company moved its corporate headquarters to Phoenix and opened three (3)
branches in Maricopa County. By the end of the first quarter of 1997, Capital
Title had opened two (2) additional branches in Maricopa County and, according
to the SYKES REPORT, the Company was ranked thirteenth (13) in overall market
share in Maricopa County, Arizona. By the end of 1997, the Company opened two
(2) more branch offices in Maricopa County, relocated its corporate headquarters
to Scottsdale, Arizona, and moved into the number ten (10) market share position
in Maricopa County. The Company expects to open four (4) more branches in
Maricopa County during the next twelve (12) months. The Company currently has
ten (10) branches in Maricopa County.
The Company has been operation in Yavapai County since 1981. Coinciding
with the Maricopa expansion, Capital Title expanded its operations in Yavapai
County in 1996 and 1997 by opening a branch in Chino Valley and opening an
additional branch in the city of Prescott. From 1996 to 1997, the Company
increased its Yavapai market share moving into the number one (1) market
position with approximately 31% of the overall market. Capital Title currently
has seven (7) branches in Yavapai County, Arizona.
The successful growth into Maricopa County, Arizona and the further
expansion and market share increase in Yavapai County, Arizona was possible
because of a recruitment program which allows each employee of Capital Title to
14
<PAGE>
become an owner of the company through the Company's employee stock option plan
and a management philosophy which allows each branch manager to operate their
branch as if it was their own company. The Company will continue to use this
philosophy as it expands throughout Arizona and the Southwest.
RESULTS OF OPERATIONS
CHANGE IN YEAR END. In December 1996, the Company elected to change its
year end from October to December. The Company filed a 10-QSB Transitional
Report for the two (2) month period ended December 31, 1996. These discussions
compare the fiscal year ended October 31, 1996 to the calendar year ended
December 31, 1997.
REVENUE. The Company's revenues increased by $5,765,849 or 223% for the
fiscal year ended December 31, 1997 as compared to the fiscal year ended October
31, 1996. The following table presents information regarding the components of
the Company's revenue:
For The Years Ended,
------------------------
December 31, October 31,
1997 1996
----------- ----------
Title Insurance Premiums $5,359,001 $1,451,479
Escrow Fees 2,190,641 695,995
Account Servicing 341,292 314,939
Other Fees and Revenue 186,151 16,947
Interest Income 271,419 103,295
---------- ----------
$8,348,504 $2,582,655
========== ==========
Orders Closed 8,298 2,748
========== ==========
Average Fee Per file $ 910 $ 780
========== ==========
Title insurance premium and escrow fees revenue increased approximately
$5,402,168 or 252% from 1996. The revenue increase is attributable to the
Company's expansion into and increased market share in Maricopa County, Arizona,
increased market share in Yavapai County, Arizona, a favorable real estate
market, and favorable interest rates.
The Company's revenue from title insurance premiums and escrow fees is
primarily from three sources. The largest revenue source is from residential
resells. Residential resells made up approximately 65% of the Company's title
and escrow revenue during 1997 compared to approximately 55% in 1996. The
current residential resell marketing projections for Maricopa and Yavapai
Counties predict that the resell market should continue improving as new house
prices continue to climb and mortgage interest rates remain at their current
historical low levels. The Company's marketing plan for Maricopa and Yavapai
Counties, is for approximately 80% of the Company's title and escrow revenue to
15
<PAGE>
be derived from the resell business. Historically, the resell business has been
the most consistent and does not fluctuate as much as commercial, new homes
sells, or refinancing segments of the market. The commercial, new home sells,
and refinancing markets tend to be more influenced by interest rates and other
economic conditions.
Refinancing made up approximately 30% of the Company's title and escrow
revenue during 1997 compared to approximately 40% in 1996. The December market
share reports showed the Company ranked eighth in Maricopa County, and second in
Yavapai County for refinancing transactions. Management believes the Company has
such a large percentage of the refinance market due to our technological title
search advantage and the outstanding reputation and customer service provided by
our title department. The current refinance marketing projections indicate that
refinancing transactions should reach an all time high as the United States
experiences the lowest mortgage interest rates in current history. The Company
is in an ideal position, due to our technological and service reputation, to
take advantage of the current refinance market.
Commercial transactions made up approximately 5% of the Company's title and
escrow revenue during both 1997 and 1996. The Company has a separate commercial
escrow unit in Maricopa County which accounts for a majority of Capital Title's
commercial business. The commercial business forecast is optimistic for 1998 due
to the expectations that interest and unemployment rates will remain at their
current levels through the second quarter of 1998.
EXPENSES. The following table presents the components of the Company's
expenses.
For The Years Ended
-------------------------
December 31, October 31,
1997 1996
------------ ----------
Personnel Cost $4,650,618 $1,958,292
General and administrative 2,206,402 1,059,321
Acquisition costs -- 103,441
Title remittance fees 494,776 170,933
Escrow commissions 519,670 24,768
Rent 692,732 296,058
Interest Expense 71,458 17,835
---------- ----------
$8,635,656 $3,630,648
========== ==========
Personnel costs, including commissions, are the most significant component
of the Company's operating expenses. Due to the growth the Company has been
experiencing since initiating its growth plan, personnel costs have increased
137% for the fiscal year ended December 31, 1997 compared to the fiscal year
ended October 31, 1996. The number of people employed by the Company increased
from 112 on December 31, 1996 to 175 on December 31, 1997. For the fiscal year
ended December 31, 1997, personnel costs equaled $4,650,618 or 55.7% of total
revenue compared to $1,958,292 or 75.8% of total revenue for the year ended
October 31, 1996. Management believes that as the Company implements its
expansion plan, personnel costs should be approximately fifty percent (50%) of
16
<PAGE>
total revenue. Personnel costs are greater during the growth phase of the
Company since title revenues are not recognized until the escrow transaction
closes. Therefore, revenues usually lag 45 to 90 days behind the expenses
incurred to generate the revenue.
The significant components of other operating expenses include, supplies,
utilities, insurance, depreciation, title plant maintenance and access, and
postage and delivery charges. General and administrative expenses increased from
$1,059,321 or 41% of total revenue to $2,206,402 or 26.4% of total for the
fiscal year ended December 31, 1997 compared to the fiscal year ended October
31, 1996. Other operating expenses increased due to the increase in escrow
orders, and the fixed costs associated with opening additional branches in 1997.
Acquisition cost write down relates to costs incurred when the Company
initiated its expansion program. The Company initially anticipated expanding
into the California and Texas markets by December, 1996. Management has
postponed expansion outside of Arizona until 1998, if conditions warrant, and is
now considering the California and Nevada markets.
The Company previously implemented and remains committed to aggressive cost
control programs intended to strictly monitor its level of operating expenses
while preserving the Company's high level of service and a budgeting program for
capital expenditures that is calculated to support the Company's plans for
continued expansion.
OPEN ESCROW ORDER INVENTORY. In accordance with generally accepted
accounting principles, revenue from title and escrow services is not recorded
until the transaction is completed. The receipt of cash for the title and escrow
services occurs simultaneous with the completion of the transaction. Expenses,
on the other hand, are expensed as incurred. Title and escrow revenues are
therefore recorded on the cash basis, whereas the related title and escrow
expenses are recorded on the accrual basis. During an expansion program, such as
the one the Company is currently undertaking, expenses as a percentage of
revenue will be greater then normal until the inventory of open escrow orders
reaches its normal equilibrium point. Based on the Company's history in the
title industry, the normal equilibrium point is where approximately seventy to
seventy-five percent of all opened escrow orders are subsequently closed. As of
December 31, 1997, the Company had an inventory of opened escrow orders of
approximately $2,300,000.
LIQUIDITY AND CAPITAL RESOURCES
Capital Title Group requires capital to expand its geographical base, make
acquisitions, further implement its market penetration program, recruit and
train new personnel, and purchase additional property and equipment to implement
its expansion program. During the year ended December 31, 1997, the Company
financed it operating and business development activities primarily through
operating revenue, borrowing approximately $150,000 against a credit line, sold
convertible debentures of $250,000, and through the private placement of shares
of common stock which resulted in net proceeds to the Company of approximately
$897,000. During the year ended October 31, 1996, the Company financed its
operating and business development activities primarily through operating
revenue, obtaining a $150,000 term loan, a $75,000 short term loan, and the
private placement of shares of common stock, resulting in net proceeds to the
Company of $1,257,000.
17
<PAGE>
On March 11, 1997, Capital Title Group's Board of Directors authorized the
sale of up to 2,500,000 shares of the Company's common stock to accredited
investors. The Company sold an aggregate of 2,220,000 shares of common stock
through the private placement resulting in net proceeds to the Company of
$2,084,299.
On January 12, 1998, Capital Title Group's Board of Directors voted to
commence a second private placement of common stock intending to sell a minimum
of 400,000 shares, and a maximum of 3,500,000 shares. Two (2) common shares and
a warrant to purchase one share of common stock at a per share price of $2.50
within two (2) years make up each unit. The Company will sell each unit for
$3.00. The Company will use the proceeds from the second private placement to
purchase new computer equipment for its Yavapai County operations, fund the
expansion in Maricopa County and throughout Arizona, and fund its planned
expansion into California. (See Recent Developments).
The Company believes that the net proceeds of this offering, together with
its existing cash resources and financing, will be sufficient to meet the
Company's working capital needs for the next 12 months. The Company, however,
may raise capital through the issuance of long-term or short-term debt or the
issuance of securities in private or public transactions to fund future
expansion of its business either before or after the end of the 12 month period.
There can be no assurance that financing for future transactions can be obtained
on terms acceptable to the Company.
As of December 31, 1997, the Company had net operating loss carryforwards
of approximately $1,350,000 that will be available to offset future federal and
state income taxes. The state net operating carryforwards will expire October
31, 2001. The federal net operating carryforwards will expire October 31, 2011.
The federal net operating carryforwards maybe further restricted due to code
section 382 of the IRS Regulations which restrict the amount of carryforwards
which can be utilized in any single year if the Company has a fifty percent
(50%) or greater ownership change.
IMPACT OF NEW ACCOUNTING STANDARDS
In October, 1995, the Financial Accounting Standards Board ("FASB") 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.
In 1997, FASB issued Statement No. 128, "Earnings per Share." Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earning per share, basic
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements.
18
<PAGE>
Additionally, in June 1997, FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (FAS 130) and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information (FAS 131). FAS 130 and FAS 131 are effective
for fiscal periods beginning after December 15, 1997. Management believes there
will be no material effect an the consolidated financial statements from the
adoption of either of these statements.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. The Company has examined its operating systems and should be year 2000
compliant by the end of 1998 with no material adverse effect on the Company's
financial position, results of operation, or liquidity. The Company has
initiated formal communications with all of its significant suppliers, larger
customers, and other parties of which the Company electronically interacts to
determine the extent to which the Company's interface systems are vulnerable to
those third parties' failure to remediate their own year 2000 issues. The
Company's total year 2000 project costs and estimates to complete include the
estimated costs and time associated with the impact of third party year 2000
issues based on presently available information. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems.
RECENT DEVELOPMENTS
On January 12, 1998, Capital Title Group's Board of Directors voted to
commence a second private placement of common stock intending to sell a minimum
of 400,000 shares, and a maximum of 3,500,000 shares. Two (2) common shares and
a warrant to purchase one share of common stock at a per share price of $2.50
within two (2) years make up each unit. The Company will sell each unit for
$3.00. The Company will use the proceeds from the second private placement to
purchase new computer equipment for Yavapai County, fund the expansion in
Maricopa County and throughout Arizona, and fund its planned expansion into
California. As of March 20, 1998, the Company sold 433,500 units which provides
proceeds to the Company, net of offering costs, of approximately $1.2 million.
On January 19, 1998, Capital Title Group filed Articles of Incorporation
for New Century Insurance Services, Inc. ("NCIS") a wholly owned subsidiary of
Capital Title Group, Inc. NCIS will take advantage of the extensive customer
base of Capital Title Agency to sell property and casualty insurance. NCIS will
be an independent agency which will allow them to solicit various insurance
agencies and provide their customers competitive insurance rates. NCIS plans to
begin operations in the second quarter of 1998. The Company expects to incur
various costs and expenses in the start-up of NCIS and in the conduct of its
initial business operations. Management currently estimates that the amount of
these costs and expenses will exceed NCIS's revenues during the initial six (6)
months of operations, and this will have an adverse effect on the Company's net
income and cash flow. There can be no assurance that NCIS will generate
sufficient operating profit to fund its start-up costs and future operating
expenses.
19
<PAGE>
On February 2, 1998, the Company issued $125,000 in convertible notes for
the purpose of obtaining capital to open a new branch in Maricopa County,
Arizona. The Convertible note requires payment of interest only for eighteen
(18) months at an interest rate equal to the prime rate (in effect) plus 2 1/2%.
At any time within the eighteen months, the note holders will have the option of
converting the obligation into common stock of the Company at $1.00 per share.
The convertible notes are secured by furniture and equipment in the respective
branch.
ITEM 7. FINANCIAL STATEMENTS
20
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
Capital Title Group, Inc.
We have audited the accompanying consolidated balance sheet of Capital Title
Group, Inc. and Subsidiary (Company) as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended, and for the two month period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The consolidated financial statements
of the Company for the year ended October 31, 1996, were audited by other
auditors whose report dated December 30, 1996, expressed an unqualified opinion
on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 1997, and the consolidated results of their operations
and their cash flows for the year then ended and the two month period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
- ---------------------
February 26, 1998
21
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Current Assets:
Cash $ 198,903
Accounts receivable less allowance for doubtful accounts
of $13,752 109,906
Interest receivable 36,287
Prepaid expenses 16,554
-----------
Total Current Assets 361,650
Property and Equipment, net 1,560,655
Other Assets:
Investment in title plant 175,000
Deposits 90,823
Property held for sale 65,696
-----------
Total Assets $ 2,253,824
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and obligations under
capital leases - current portion $ 553,119
Accounts payable 317,003
Accrued expenses 150,647
-----------
Total Current Liabilities 1,020,769
Long-Term Liabilities:
Notes payable and obligations under
capital leases - long-term portion 415,362
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000 shares
authorized, 11,231,029 shares issued
and outstanding 11,231
Additional paid-in capital 2,653,731
Accumulated deficit (1,847,269)
-----------
Total Stockholders' Equity 817,693
Total Liabilities and Stockholders' Equity $ 2,253,824
===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
22
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Two
Year Ended Year Ended Months Ended
December 31, October 31, December 31,
1997 1996 1996
------------- ------------ ------------
REVENUE:
Title insurance premiums $ 5,359,001 $ 1,451,479 $ 485,840
Escrow fees 2,190,641 695,995 204,776
Account servicing 341,292 314,939 49,710
Other fees 186,151 16,947 4,400
Interest income 271,419 103,295 24,790
------------ ----------- ------------
8,348,504 2,582,655 769,516
------------ ----------- ------------
EXPENSES:
Personnel costs 4,650,618 1,958,292 585,501
General and administrative 2,206,402 1,059,321 270,457
Acquisition costs -- 103,441 --
Title remittance fees 494,776 170,933 59,045
Escrow commissions 519,670 24,768 27,086
Rent 692,732 296,058 97,408
Interest expense 71,458 17,835 10,813
------------ ----------- ------------
8,635,656 3,630,648 1,050,310
------------ ----------- ------------
Loss before income tax benefit (287,152) (1,047,993) (280,794)
Income tax benefit 42,434 -- 9,438
------------ ----------- ------------
Net loss $ (244,718) $(1,047,993) $ (271,356)
============ =========== ============
Net loss per common share
basic and diluted $ (0.02) $ (0.11) $ (0.03)
============ =========== ============
Weighted average shares
outstanding 11,088,029 9,281,440 10,311,029
============ =========== ============
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
23
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-in Accumulated
Shares Amount Capital Deficit
------ ------ ------- -------
<S> <C> <C> <C> <C>
Balance at October 31, 1995 1,000,000 $ 480,663 $ -- $ (283,202)
Shares issued to officer 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,
net of costs of $118,001 1,275,000 1,275 1,155,724 --
Net loss -- -- -- (1,047,993)
---------- --------- ---------- -----------
Balance at October 31, 1996 10,286,029 10,286 1,727,376 (1,331,195)
Shares issued in private placement,
no issuance cost incurred 30,000 30 29,970 --
Net loss -- -- -- (271,356)
---------- --------- ---------- -----------
Balance at December 31, 1996 10,316,029 10,316 1,757,346 (1,602,551)
Shares issued in private placement,
net of costs of $17,700 915,000 915 896,385 --
Net loss -- -- -- (244,718)
---------- --------- ---------- -----------
Balance at December 31, 1997 11,231,029 $ 11,231 $2,653,731 $(1,847,269)
========== ========= ========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
24
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the year For the year For the Two
Ended Ended Months
December 31, October 31, December 31,
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (244,718) $(1,047,993) $(271,356)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amotization 293,212 110,746 32,560
Changes in Assets and Liabilities:
Accounts receivable (91,197) (10,628) 6,014
Income taxes receivable 25,796 35,217 (9,438)
Interest receivable 36,287 -- --
Prepaid expenses (32,635) (16,055) (38,834)
Refundable deposits (32,124) (58,699) --
Deferred income tax asset -- 16,358 --
Accounts payable (232,563) 264,673 113,836
Accrued expenses 79,437 43,305 1,309
Income taxes payable -- (15,249) --
---------- ---------- ---------
Net cash used by operating activities (198,505) (678,325) (165,909)
---------- ---------- ---------
Cash flows from investing activities:
Purchase of property and equipment (746,922) (724,436) (55,332)
Property held for sale (21,500) -- --
---------- ---------- ---------
Net cash used by investing activities (768,422) (724,436) (55,332)
---------- ---------- ---------
Cash flows from financing activities:
Proceeds from notes to related party -- 225,000 --
Borrowings 401,126 -- 350,000
Debt service payments (174,292) (66,876) (27,868)
Proceeds from the issuance of stock, net 897,300 1,256,999 30,000
Repayment of notes to related party (34,667) (5,052) (79,192)
---------- ---------- ---------
Net cash provided by financing activities 1,089,467 1,410,071 272,940
---------- ---------- ---------
Net increase in cash and cash equivalents 122,540 7,310 51,699
Cash at the beginning of the period 76,363 17,354 24,664
---------- ---------- ---------
Cash at the end of the period $ 198,903 $ 24,664 $ 76,363
========== ========== =========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
25
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Corporation:
Capital Title Group, Inc. (the "Company" formerly known as Norvex, Inc.)
was organized on September 12, 1983 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 solely on 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. ("Capital Title") 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. Capital Title
was approved by the State of Arizona on November 1, 1981. Capital Title is
an independent title agency providing escrow services and, as an agent for
two title insurance companies, issuing title insurance policies to serve
the real estate industry in Maricopa and Yavapai Counties in Arizona. As of
February 26, 1998 Capital Title operated sixteen (16) offices located
throughout Maricopa and Yavapai Counties in Arizona.
Basis of Presentation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Capital Title Agency, Inc. All
material inter-company accounts and transactions have been eliminated in
consolidation.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and the accompanying notes. Actual
results could differ from those estimates.
Cash and Cash Equivalents:
Cash and cash equivalents include all highly liquid investments purchased
with an initial maturity of three (3) months or less.
26
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies: (Continued)
Accounts Receivable:
The Company uses the allowance method to account for non-collectible
accounts receivable. The allowance is established based upon a review of
the individual accounts and the Company's prior collection history.
Income Recognition:
Title insurance premiums and escrow fees are recognized as revenue at the
time of closing of the related real estate transaction. Income from
accounts servicing and other fees is recognized when the service is
performed. Income from insurance recoveries is recognized when the dispute
is settled and the money is received.
Property and Equipment:
Property and equipment are stated at cost and are being depreciated 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.
Betterments or renewals are capitalized as they are incurred. For the years
ended December 31, 1997 and October 31, 1996, depreciation expense was
$293,212 and $110,746, respectively. For the two month period ended
December 31, 1996, depreciation expense was $32,560.
Capital Lease Obligation:
The Company is the lessee of office equipment under capital lease
agreements which expire throughout the year 2000. The asset and liability
under the capital lease are recorded at the lower of the present value of
the minimum lease payments or the fair market value of the asset. The asset
is amortized over the lower of its related lease term or its estimated
productive life. Amortization of the asset under the capital lease
agreement is included in depreciation expense noted above.
Title Plant:
Title plants are recorded at the cost incurred to construct and organize
historical title information to the point it can be used to perform title
searches. Cost incurred to maintain, update and operate title plants are
expensed as incurred. Title plants are not amortized as they are considered
to have an indefinite life if maintained.
27
<PAGE>
1. Summary of Significant Accounting Policies: (Continued)
Income Taxes:
The Company and its subsidiary file consolidated federal and state income
tax returns. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards Statement No. 109 ACCOUNTING
FOR INCOME TAXES. The standard provides that deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis, and the utilization
of the net operating loss 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.
Loss Per Share:
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have
been presented, and where appropriate, restated to conform to the Statement
128 requirements. The loss per share for the year ended October 31, 1996,
is presented after giving retroactive effect to the reverse merger (see
Note 4).
Fair Value of Financial Instruments:
The Company discloses fair value information about financial instruments
where it is practicable to estimate their value in accordance with
Statement No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS.
The Company estimates that the carrying value of its Financial Instruments,
consisting of cash and notes payable and obligations under capital lease
agreements, approximate their fair values at December 31, 1997.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME, which establishes standards for reporting and displaying
comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general purpose financial statements. Statement
No. 130 also requires all items that are required to be recognized under
accounting standards as components of comprehensive income, be reported in
financial statements and be displayed with equal prominence as other
general-purpose financial statements.
28
<PAGE>
1. Summary of Significant Accounting Policies: (Continued)
This Statement is effective for periods beginning after December 13, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
Also in June 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. This Statement also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Statement No. 131 is effective for
periods beginning after December 31, 1997. Comparative information provided
for earlier periods is required to be restated.
Management believes there will be no material effect on the consolidated
financial statements form the adoption of either Statements Nos. 130 or
131.
Reclassifications:
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
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 December 31, 1997, the accounts contain a
reserve balance of approximately $18,136,876 in the escrow accounts,
$10,046 in the trust accounts, and $695,871 in the account servicing
accounts, respectively.
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 December 31, 1997,
the Company had uninsured cash and cash equivalents of approximately
$51,412.
29
<PAGE>
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. The Company was largely
inactive from that time until May, 1996. On May 23, 1996, the Company
acquired Capital Title Agency, Inc. in a transaction accounted for as a
reverse acquisition, wherein the stockholders of Capital Title Agency, Inc.
obtained control of the consolidated entity. 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.) 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 total price of $100 to its financial
advisor. The stock was valued at $.01 per share in the accompanying
financial statements.
5. Property and Equipment:
Property and equipment consist of the following:
December 31,
1997
----
Office equipment $1,683,472
Leasehold improvements 285,113
Furniture and fixtures 273,048
Vehicles 61,418
----------
2,303,051
Less: accumulated depreciation and (742,396)
amortization ----------
$1,560,655
==========
30
<PAGE>
6. Income Taxes:
The income tax benefit consists of the following:
Two Months
Year Ended Year Ended Ended
December 31, December 31, December 31,
1997 1996 1996
---- ---- ----
Current tax benefit $42,434 $ -- $9,438
Deferred tax benefit -- -- --
------- ------ ------
$42,434 $ -- $9,438
The income tax benefit for the year ended December 31, 1997 and the two
month period ended December 31, 1996, relate to income tax refunds received
from the IRS due to NOL carrybacks the Company utilized.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. For
financial reporting purposes, a valuation allowance of $283,117 has been
recognized to offset the Company's deferred tax assets. The valuation
allowance was increased by $61,972 during the year ended December 31, 1997.
Significant components of the Company's deferred tax assets as of December
31, 1997 are as follows:
December 31,
1997
----
Accounts receivable $ 3,160
Property and equipment (32,183)
Loss carryforwards 312,140
---------
283,117
Less: valuation allowance (283,117)
---------
$ --
=========
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $1,350,000 for federal and state income tax purposes that
expire in years 1999 through 2012. Based on the number of common stock
shares the Company anticipates selling in its 1998 private placement, (see
note 15), the Company will exceed the limits allowable under the Tax Reform
Act of 1986 related to changes in ownership percentage governing future
utilization of net operating loss carryforwards. The effect of this
occurrence will limit the annual utilization of the net operating loss
carryforwards.
31
<PAGE>
7. Notes Payable and Obligations Under Capital Leases:
Notes payable are summarized as follows:
December 31,
1997
------------
8.75% note payable to Primus Automotive, with
monthly installments of $299, including principal
and interest, due June, 1998; secured by a vehicle. $ 1,749
8.2% note payable to Imperial Bank of Arizona,
with monthly installments of $11,000, including
principal and interest, due November, 1999;
secured by furniture and equipment. 223,980
8.5% credit line to Imperial Bank of Arizona,
with monthly installments of accrued interest,
credit line matures November 1999; secured by
furniture and equipment. The maximum credit
line limit is $250,000. 151,126
9.9% note payable to Norwest Bank, with monthly
installments of $384, including principal
and interest, due May, 2000; secured by an auto. 9,876
8% note payable to an individual, with monthly
installments of $435, including principal and
interest, due October, 2011; secured by land. 42,972
10.5% note payable to Wells Fargo, with monthly
installments of $309, including principal and
interest, due January, 1999; secured by a vehicle. 3,780
----------
433,483
Less: current portion (270,257)
----------
$ 163,226
==========
32
<PAGE>
7. Notes Payable and Obligations Under Capital Leases: (Continued)
The maturities of long-term notes payable are as follows:
Year Ended
October 31 Amount
---------- ------
1998 $270,257
1999 122,342
2000 3,592
2001 2,259
2001 2,446
Subsequent 32,587
--------
$433,483
========
Capital Lease Obligations:
The Company is the lessee of office equipment with an aggregate cost of
$255,246 under capital lease agreements which expire throughout the year
2000. Minimum future lease payments due under the capital lease agreement
for the next five (5) years, are as follows:
Year Ended
October 31 Amount
---------- ------
1998 $ 96,371
1999 85,172
2000 29,888
2001 --
2002 --
---------
Net minimum lease payments 211,431
Less: amount representing interest (27,548)
---------
Present value of net minimum lease
payments 183,883
Less: current portion (78,403)
---------
Long-term maturities of capital
lease obligation $ 105,480
=========
33
<PAGE>
7. Notes Payable and Obligations Under Capital Leases: (Continued)
The interest rate is imputed based on the lessor's implicit rate of return
at the inception of the lease.
Convertible Notes:
During the year ended December 31, 1997, the Company issued convertible
notes for the purpose of obtaining capital to open two new escrow branches.
As of December 31, 1997, convertible notes payable was $250,000. The
convertible notes require payment of interest only for eighteen (18) months
at an interest rate equal to the prime rate (in effect) plus 2 1/2%. At any
time within the eighteen (18) months, the note holders will have the option
of converting the obligation into common stock of the Company at $1.00 per
share. The convertible notes are secured by furniture and equipment in the
respective branches.
The maturities of convertible notes payable, are as follows:
Year Ended
December 31, Amount
------------ ------
1998 $175,000
1999 75,000
--------
$250,000
========
Notes Payable to Related Parties:
The Company has a 10% note payable to a related corporation with an
outstanding balance as of December 31, 1997 of $101,115. The Company pays
monthly installments of principal and interest of $3,187 over 60 months.
The note is due in the year 2001 and is unsecured.
The maturities of long-term note payable to related parties, are as
follows:
Year Ended
December 31, Amount
------------ ------
1998 $ 29,459
1999 32,544
2000 35,951
2001 3,161
--------
$101,115
========
34
<PAGE>
8. Operating Lease Commitments:
The Company leases offices at fifteen (15) locations. The remaining lease
periods range from twenty-seven (27) months to sixty (60) months with
renewal options up to ten (10) years. For the years ended December 31,
1997, and October 31, 1996, and the two month period ended December 31,
1996, rental expense was $692,732, $296,058, and $97,408, respectively.
The future minimum lease commitments during the next five years are as
follows:
Year Ended
December 31, Amount
------------ ------
1998 $ 795,147
1999 626,297
2000 415,423
2001 320,947
2002 226,124
----------
$2,383,938
==========
9. Related Party Transactions:
The Company received management and consulting services from a related
business. Charges for these services were $0 for the fiscal year ended
December 31, 1997 and $48,000 for the fiscal year ended October 31, 1996.
In April, 1996, a corporate officer purchased 165,000 shares for $100,000.
During the year ended December 31, 1997, the year ended October 31, 1996,
and the two month period ended December 31, 1996 Capital Title Agency paid
$41,260, $43,319, and $7,249, 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.
35
<PAGE>
10. Contingencies and Uncertainties:
The Company is a defendant in various lawsuits and claims, which it is
vigorously defending. It is management's contention that such matters arise
out of the normal course of business, primarily related to title and escrow
disputes. While the results of litigation cannot be predicted with
certainty, management believes, based on the advice of legal counsel, that
the final outcome of such lawsuits and claims will not have a material
adverse effect on the Company's financial position, results of operations,
or liquidity. As of December 31, 1997, the Company had accrued $37,200 for
possible title and escrow losses.
11. Cash Flow Information:
Cash paid (refunded) for interest and income taxes for the fiscal years
ended December 31, 1997, October 31, 1996 and the two months ended December
31, 1996, is as follows:
Two Months
Year Ended Year Ended Ended
December 31, October 31, December 31,
1997 1996 1996
---- ---- ----
Interest $ 71,458 $ 17,835 $10,813
======== ======== =======
Income taxes $(68,230) $(36,326) $ --
======== ======== =======
The Company's investing and financing activities that affected assets and
liabilities, but did not result in cash receipts or payments, as follows:
During the years ended December 31, 1997, and October 31, 1996, and
the two month period ended December 31, 1996, the Company financed the
purchase of property and equipment in the amount of $141,612,
$107,136, and $15,999 under capital lease and financing agreements,
respectively.
In May 1996, the Company issued 6,734,865 shares of common stock to
purchase all the issued and outstanding shares of Capital Title
Agency, Inc.
During 1997, the Company settled an escrow claim in which the Company
acquired land in exchange for a note on the land in the amount of
$44,196.
During 1997, the Company financed the purchase of an automobile in the
amount of $11,930.
36
<PAGE>
12. 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 years ended December 31, 1997, October 31,
1996 and the two month period ended December 31, 1996, were approximately
$6,200, $4,500, and $1,750, 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.
13. Private Placement Memorandum:
In May 1996, the Company's Board of Directors ("The Board") authorized the
sale of common stock through a Private Placement Memorandum at $1 per
share, with an intended maximum offering of 1,500,000 shares. Through
October 31, 1996, 1,275,000 common shares were sold in the offering. The
net proceeds received from the offering as of October 31, 1996 was
$1,156,699. In the two month period ended December 31, 1996, an additional
30,000 shares were sold resulting in net proceeds of $30,000. On March 11,
1997, the Board authorized the Private Placement to be increased to
2,500,000 shares of common stock. During the year ended December 31, 1997,
the Company sold an additional 915,000 share of common stock which, after
deducting commissions and other offering expenses, resulted in net proceeds
to the Company of $897,300.
In December 1997, the Board authorized another sale of common stock through
a Private Placement Memorandum. As of December 31, 1997, no shares had been
sold in the second private placement. See note 17.
37
<PAGE>
14. Stock Option Plans:
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
Interpretations in accounting for its 1996 Stock Option Plan and the
Company's Non-Employee Directors Stock Option Plan because, as discussed
below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use
of options valuation models that were not developed for use in valuing
stock options. Under APB 25, because the exercise price of the Company's
stock options equals the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
The Company's 1996 Stock Option Plan ("The Plan") has authorized the grant
of common stock options to all the Company's employees. As of December 31,
1997, approximately 1,620,000 shares have been granted under the the Plan.
All options granted have 5 year terms. Fifty percent (50%) of the options
can be exercised after two (2) years, the remaining shares can be exercised
after three (3) years provided the optionee remains employed with the
Company at such vesting date. Options granted under the Plan are not
transferable and the per share exercise price of an incentive stock option
granted under the Plan may not be less than the fair market value of the
common stock on the date of grant. At the Company's 1997 annual meeting,
the shareholders approved the reservation of 1,300,000 shares of Common
Stock for issuance pursuant to the Plan. The Company intends to seek
shareholder approval at its 1998 annual meeting to increase the number of
shares reserved for issuance pursuant to the Plan to 2,000,000 shares.
The Company's Non-Employee Directors Stock Option Plan has authorized the
grant of options to non-employee members of the Board of Directors of up to
200,000 shares of the Company's common stock. All options granted have 5
year terms. Fifty percent (50%) of the options can be exercised after two
(2) years, the remaining shares can be exercised after three (3) years
provided the optionee remains an eligible director at such vesting date.
Upon election to the Board of Directors each board member is granted the
option to purchase 15,000 shares of common stock. In addition to the
foregoing option grants, each year every non-employee director
automatically receives an option to acquire 10,000 shares of the Company's
common stock on the third business day following the date the Company
publicly announces its annual financial results; provided that such
director has attended at least 75% of the meetings of the Board of
Directors and the Board of Committees of which such non-employee director
is a member in the preceding fiscal year.
38
<PAGE>
14. Stock Option Plans: (Continued)
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1997; risk-free interest rate of
5.25%; dividend yields of 0%; volatility factors of the expected market
price of the Company's common stock of .30; and a weighted-average expected
life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, options valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock options. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
Two Months
Year Ended Year Ended Ended
December 31, October 31, December 31,
1997 1996 1996
---- ---- ----
Pro forma loss $(457,335) $(1,103,362) $ (299,487)
Pro forma loss per share: $ (0.04) $ (0.12) $ (0.03)
A summary of the Company's stock option activity for the 1996 Stock Option
Plan, and related information for the years ended December 31, 1997 and
October 31, 1996, and the two month period ended December 31, 1996 is as
follows:
39
<PAGE>
14. Stock Option Plans: (Continued)
<TABLE>
<CAPTION>
For the two month
For the year ended For the year ended period ended
December 31,1997 October 31, 1996 December 31, 1996
------------------------- ------------------------- ------------------------
Weighted-average Weighted-average Weighted-average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of
year 1,140,100 -- 1,107,700
Granted 552,850 $ 1.33 1,107,700 $ 1.00 42,800 $ 1.00
Exercised -- $ -- -- $ -- -- $ --
Forfeited 72,800 $ 1.35 -- $ 1.00 10,400 $ 1.00
Outstanding-end of year 1,620,150 $ 1.10 1,107,700 $ 1.00 1,140,100 $ 1.00
Exercisable at end of year -- -- --
Weighted-average fair value
of options granted during
the year $ 0.35 $ 0.36 $ 0.36
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 was $1.00
and $2.00. The weighted average remaining contractual life of those options
is 4 years.
40
<PAGE>
14. Stock Option Plans: (Continued)
A summary of the Company's stock option activity for the Non-Employee
Directors Stock Option Plan, and related information for the years ended
December 31 follows:
<TABLE>
<CAPTION>
For the two month
For the year ended For the year ended period ended
December 31,1997 October 31, 1996 December 31, 1996
------------------------- ------------------------ ------------------------
Weighted-average Weighted-average Weighted-average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of
year 75,000 -- 75,000
Granted 65,000 $ 1.00 75,000 $ 1.00 -- $ --
Exercised -- $ -- -- $ -- -- $ --
Forfeited -- $ -- -- $ -- -- $ --
Outstanding-end of year 140,000 $ 1.00 75,000 $ 1.00 75,000 $ 1.00
Exercisable at end of year -- -- --
Weighted-average fair value
of options granted during
the year $ 0.35 $ 0.36 $ 0.36
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 was $1.00.
The weighted average remaining contractual life of those options is 4
years.
15. Subsequent Events:
On January 12, 1998, Capital Title Group's Board of Directors voted to
commence a second private placement of common stock intending to sell a
minimum of 400,000 shares, and a maximum of 3,500,000 shares. Two (2)
common shares and a warrant to purchase one share of common stock at a per
share price of $2.50 within two (2) years make up each unit. The Company
will sell each unit for $3.00.
41
<PAGE>
15. Subsequent Events: (Continued)
The Company will use the proceeds from the second private placement to
purchase new computer equipment for Yavapai County, fund the expansion in
Maricopa County and throughout Arizona, and fund its planned expansion into
California. As of March 20, 1998, the Company sold 433,500 units which
provides proceeds to the Company, net of offering costs, of approximately
$1.2 million.
On January 19, 1998, Capital Title Group filed Articles of Incorporation
for New Century Insurance Services, Inc. ("NCIS") a wholly owned subsidiary
of Capital Title Group, Inc. NCIS will take advantage of the extensive
customer base of Capital Title Agency to sell property and casualty
insurance. NCIS will be an independent agency which will allow them to shop
various insurance agencies and provide their customers competitive
insurance rates. NCIS will begin operations in the second quarter of 1998.
On February 2, 1998, the Company issued $125,000 in convertible notes for
the purpose of obtaining capital to open a new branch in Maricopa County,
Arizona. The Convertible note requires payment of interest only for
eighteen (18) months at an interest rate equal to the prime rate (in
effect) plus 2 1/2%. At any time within the eighteen months, the note
holders will have the option of converting the obligation into common stock
of the Company at $1.00 per share. The convertible notes are secured by
furniture and equipment in the respective branch.
42
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 31, 1997, the Company filed a Form 8-K reporting the decision of
Semple & Cooper PLC, ("Semple") to resign as the Company's principal
accountants. The Company appointed the accounting firm Ernst & Young LLP ("E &
Y") as the Company's principal accountants.
In connection with the audit of the Company's financial statements for the
year ended October 31, 1996 there were no disagreements with Semple on any
matters of accounting principle or practices, financial statement disclosure, or
auditing scope and procedures, which if not resolved to the satisfaction of
Semple, would have caused them to make reference to the matter in their
respective reports
The Company has authorized Semple to respond fully to any inquires from
E & Y.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the names, ages and positions of directors
and executive officers of the Company as of January 15, 1998. A summary of the
background and experience of each of these individuals is set forth after the
table.
The directors and executive officers of the Company are:
Name Age Position
- ---- --- --------
Donald R. Head 59 Chairman of the Board; Chief
Executive Officer
Andrew A. Johns 60 President; Director
Milton Ferrantelli 49 Senior Vice President
Nick Velimirovich 47 Vice President
James Clifford 37 Vice President
James P. Stamas 37 Vice President
Michael J. Benjamin 36 Vice President, Controller
43
<PAGE>
Name Age Position
- ---- --- --------
Deborah Campbell 40 Treasurer
Kimberly Sue DeJong 29 Secretary
Jeffrey P. Anderson 47 Director
David Dewar 35 Director
Theo F. Lamb 55 Director
Robert B. Liverant 68 Director
Stephen A McConnell 45 Director
Directors hold office until the next annual meeting of stockholders or
until their successors have been duly elected and qualified. Officers are chosen
by and serve at the discretion of the Board of Directors.
DONALD R. HEAD is co-founder of Capital Title Agency and has served as
Chairman of the Board since its inception. Mr. Head is also the Chairman of the
Board and Chief Executive Officer of Capital Title Group. Mr. Head has engaged
in a number of entrepreneurial activities within the real estate industry. He
was a co-founder of the Prescott Mining Company Restaurant and developed the
Prescott Air Park, a 35,000 square foot industrial and office park, the Plaza
West Commerce Centre, a five acre office park, and a 112 unit townhouse complex,
all in Prescott, Arizona. Since 1988, Mr. Head has lived in Scottsdale, Arizona
where he has continued his real estate development. He co-founded Centurian
Development and Investments, Inc., which is a custom designer and builder of
residential homes for some of the most prestigious residential communities in
the exclusive North Scottsdale area. Mr. Head is also a partner in America West
Capital One LC, which acquired 677 acres of land currently under development as
a residential community in Verde Valley in Yavapai County, Arizona. Mr. Head has
served as a board member on both U.S. and Canadian public companies. He is a
graduate of Arizona State University with a BA in Business and holds a law
degree from the University of Arizona.
ANDREW A. JOHNS joined Capital Title in April 1996 as Vice President in
charge of Special Projects and shortly thereafter was named President. Mr. Johns
has also been a Director of Capital Title since March 1996 and a Director of the
Company since the Acquisition Transaction in May 1996. Mr. Johns is also the
President of the Company. Mr. Johns has more than 28 years of experience in the
title insurance industry. Prior to joining the Company, Mr. Johns served in a
senior management position with United Title Company for 12 years, expanding its
operational presence from Orange County, California to encompass the entire
Southern California market. United Title purchased TRW Title, Inc. changing its
name to Nations Title, Inc. When Nations Title, Inc. expanded into Arizona in
1994 through Nations Title of Arizona, Mr. Johns was selected to establish and
44
<PAGE>
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.
MILTON FERRANTELLI joined Capital Title in November, 1997 as Vice President
and as Assistant to the Chairman of Capital Title's Maricopa County, Arizona
operations. Prior to joining the Company, Mr. Ferrantelli purchased United Title
Insurance Agency in 1986 with two active partners and served as its President
and Chief Executive Officer until its acquisition by Norwest Financial in 1994.
Mr. Ferrantelli has over twenty years of experience in the title and escrow
industry in the Arizona marketplace. He holds a Bachelor of Arts degree form
Arizona State University and has completed post-graduate work.
NICK VELIMIROVICH joined Capital Title in July 1996 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.
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 worked for United Title Agency for nine years.
Mr. Stamas served as United Title's Senior Vice President/General Counsel for
over a year prior to joining Capital Title. 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.
MICHAEL J. BENJAMIN joined the Company in November, 1996 as a Vice
President and serves as the Corporate Controller and is the principal financial
and accounting officer for Capital Title's operations. Prior to joining the
Company, Mr. Benjamin was employed by Semple & Cooper, PLC. Mr. Benjamin was an
Audit Manager with Semple & Cooper from 1995 to 1996. He is a graduate of
Florida Atlantic University with a BA in Accounting and is a Certified Public
Accountant.
45
<PAGE>
DEBORAH L. CAMPBELL is a Vice President of Capital Title. Ms. Campbell has
been employed by Capital Title for more than 13 years and has held various
positions, including serving as a trust officer and overseeing all compliance
regulations. Ms. Campbell is also the Company's Treasurer. Ms. Campbell is an
active member of the Arizona Trustee Association and Land Title Association of
Arizona.
KIMBERLY SUE DEJONG is the Secretary and Accounting Manager of the Company
responsible for the accounting services, including escrow 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
December 1997. Mr. Anderson originally joined the Board of Directors in
September 1996. In June of 1997 Mr. Anderson resigned from the board due to
other commitments. He subsequently rejoined the Board in December 1997. In From
1992 until 1996, Mr. Anderson was Executive Vice President, Southwest Region,
for First Interstate Bank in Phoenix, Arizona. He also served concurrently as
Chairman of the Board of First Interstate Bank of Colorado. From 1986 until
1992, Mr. Anderson was employed by Security Pacific Corporation serving at
various periods as Senior Vice President or Managing Director in the
Energy/Utilities Group, Corporate Finance and Banking Department and Special
Industries Department. Mr. Anderson holds a BS degree in Finance and Management
from the University of Southern California and an MBA from California State
University, Long Beach.
DAVID DEWAR has been a Director of Capital Title Group since August 1,
1997. Mr. Dewar is the President and Chief Executive Officer of Magellan
Corporations, a fully integrated real estate organization that provides
comprehensive investment management services. Mr. Dewar is a graduate of Ryerson
University, in Toronto, Canada, where he received a Bachelor of Technology
Degree in Architecture and Project Management and a diploma in Economics.
THEO F. LAMB is co-founder of Capital Title and has served as a Director
since its inception. Mr. Lamb has been a Director of the Company since the
Acquisition Transaction in May 1996. He is the owner of Lamb Chevrolet, Inc. in
Prescott, Arizona, a retail car dealership for Cadillac, Oldsmobile, Chevrolet,
Subaru and Nissan automobiles. He has served as a member of the Chevrolet and
Subaru National Dealer Counsels and was elected to the Regional Dealer Counsels
for Oldsmobile and Cadillac. He was the managing partner in several successful
land and commercial property developments in the Prescott area. Mr. Lamb is a
graduate of Southern Methodist University holding a BS degree in Business.
ROBERT B. LIVERANT has been a Director of Capital Title Group since May 23,
1996. Mr. Liverant is a retired Chartered Accountant who was a Senior Partner in
the Firm of Liverant Yip and Co. in British Columbia for 20 years, specializing
in audits of public companies. Mr. Liverant was also a partner in the firm of
Smythe Ratcliffe and Associates and a member of the firm of Pannell Kerr
Forester, an international accounting firm. Mr. Liverant has several real estate
investments including significant holdings in Saturna Beach Estates LTD, an
80-acre recreation and vineyard development in British Columbia, for which he
also serves as a director. He has served as a director of more than 15 Canadian
public companies. Mr. Liverant holds a BA degree with an economics major from
the University of British Columbia. He now resides in Cave Creek, Arizona.
46
<PAGE>
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 between 1991 and 1997 as Chairman of
the Board and majority shareholder in Mallco Lumber & Building Materials, Inc.,
a wholesale distributor of construction lumber and doors. From 1991 to 1995, Mr.
McConnell was President of Belt Perry Associates, Inc., a property tax appeal
firm. He was President and Chief Executive Officer of N-W Group, Inc., a
publicly held corporation, from 1985 through 1991. Mr. McConnell presently
serves on the board of directors for Pilgrim America Group, Vodavi Technologies,
and Unitech Industries.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who beneficially own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors and greater than 10% shareholders
are required by Exchange Act regulations to furnish the Company with copies of
all Section 16(a) forms they file. Based solely upon its review of Forms 3, 4,
and 5 and any amendments thereto furnished to the Company in compliance with
Section 16 of the Securities Exchange Act of 1934, as amended, or written
representations from the applicable reporting persons that filings were not
required, the Company believes that all such reports were filed on a timely
basis by the Company's reporting persons during 1997.
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and four other most highly compensated officers whose annual
salary and bonus exceeds $100,000 (the "Named Executive Officer"), for services
rendered in all capacities to the Company during the years ended December 31,
1997, 1996, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------
Annual Compensation Awards Payouts
---------------------------- ----------------------- -------
Restricted Securities
Name And 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
Chairman of the 1997 $121,240 $0 $-0- $-0- 0 $-0- $-0-
Board and Chief 1996 $ 64,000 $0 $-0- $-0- 0 $-0- $-0-
Executive Officer 1995 $ 48,000 $0 $-0- $-0- 0 $-0- $-0-
Andrew A. Johns 1997 $ 92,026 $0 $-0- $-0- 0 $-0- $-0-
Nick Velimirovich 1997 $120,000 $0 $-0- $-0- 0 $-0- $-0-
Jim Clifford 1997 $120,000 $0 $-0- $-0- 0 $-0- $-0-
</TABLE>
47
<PAGE>
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are not currently receiving
cash compensation for their services other than reimbursement of reasonable
expenses if any. Directors who are not employees of the Company also participate
in the Company's Non-Employee Directors Stock Option Plan. Directors who are
employees of the Company do not receive compensation for such services.
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
48
<PAGE>
terms on the initial expiration date and on each renewal date thereafter unless
notice of termination is provided to Mr. Johns sixty days prior to the
expiration date. The Johns Agreement may be terminated by the Company for cause
including upon (i) conviction of a willful or intentional crime, (ii) absence
from work for more than 180 consecutive days and (iii) the material failure by
Mr. Johns to perform his duties.
The Johns Agreement provides for an initial salary of $72,000 for the first
year and an annual salary of $114,000 for the second and each succeeding year,
plus an annual bonus equal to 4% of the Company's pretax net profits on all
Company operations, calculated according to generally accepted accounting
principles applicable to title insurance agencies consistently applied. Such
bonus shall be prorated in the first year of employment for the period remaining
in the Company's fiscal year if less than twelve months. Such bonus shall be
determined and paid within three months following the end of each fiscal year.
Beginning with the second year of employment, estimated compensation can be paid
with appropriate adjustments spread over twelve months in the event of any under
or over estimated payments. In addition, the Johns Agreement provides for a car
allowance of $800 per month.
The Johns Agreement provides that if Mr. Johns resigns or if the Johns
Agreement is terminated by the Company for any reason during a sixty-month
period following a Change-in-Control (as defined in the Agreement) of the
Company, the Company shall continue to pay to Mr. Johns all compensation which
he is entitled to under the Johns Agreement for its remaining term.
MILTON FERRANTELLI:
On June 17, 1997, Milton Ferrantelli entered into an Employment Agreement
(the "Ferrantelli Agreement") with the Company. The Ferrantelli Agreement was
based on certain conditions which were met on November 10, 1997, the effective
date of the Ferrantelli Agreement, which provides for his services as Assistant
to the Chairman of Capital Title Agency's Maricopa County operations. The term
of the Ferrantelli Agreement is for a period of three (3) years. Compensation
under the Ferrantelli Agreement is $120,000 per year plus additional
compensation equal to three and one-third percent (3 1/3%) of the Company's
pre-tax net profit on operations in Maricopa County. On February 3, 1998, the
Ferrantelli Agreement was modified to increase Mr. Ferrantelli's salary to
$132,000 per year plus five percent (5%) of pretax income on all other Arizona
title agency operations.
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. On June 17, 1997, the Velimirovich Agreement was
modified to reduce the additional compensation to three and one-third percent (3
1/3%) of the Company's pre-tax income on operations in Maricopa County.
49
<PAGE>
JAMES A. CLIFFORD:
On May 17, 1996, James A. Clifford entered into an Employment Agreement
(the "Clifford Agreement") with the Company which provides for his services as
President of Capital Title Agency's Maricopa County operations. The Clifford
Agreement was based on certain conditions which were met on July 1, 1996, the
effective date of the Clifford Agreement. 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. On June 17, 1997,
the Clifford Agreement was modified to reduce the additional compensation to
three and one-third percent (3 1/3%) of the Company's pre-tax income 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.
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
1,300,000 shares of Common Stock. Officers and other employees of the Company
who, in the opinion of the Board of Directors, are responsible for the continued
growth and development and the financial success of the Company are eligible to
be granted options under the 1996 Plan. Options may be non-qualified options,
incentive stock options, or any combination of the foregoing. In general,
options granted under the 1996 Plan are not transferable and expire five years
after the date of grant. The per share exercise price of an incentive stock
option granted under the 1996 Plan may not be less than the fair market value of
the Common Stock on the date of grant. Incentive stock options granted to
persons who have voting control over 10% or more of the Company's capital stock
are granted at 110% of the fair market value of the underlying shares on the
date of grant. No option may be granted after May 23, 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
50
<PAGE>
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, 1997, the Board has authorized the grant under the 1996
Plan of options to purchase 1,620,150 shares of Common Stock, with the exercise
prices of all such options being either $1.00 or $2.00 per share. Of such
options, 150,000 were granted to Mr. Head, 125,000 were granted to Mr. Johns,
200,000 were granted to Nick Velimirovich, and 200,000 were granted to Jim
Clifford. An aggregate of 200,000 common stock options 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 200,000 shares are authorized for
issuance under the Directors Plan. As of December 31, 1997, 140,000 options have
been granted under the Directors Plan at an exercise price of $1.00 per share.
All options granted under the Directors Plan will be subject to the same vesting
schedule applicable to options granted under the 1996 Plan. All options granted
or to be granted under the Directors Plan are non-qualified stock options.
Each non-employee director who joins the Board of Directors will receive an
option to acquire 15,000 shares of the Company's Common Stock. In addition to
the foregoing option grants, each year, every non-employee director
automatically receives an option to acquire 10,000 shares of the Company's
Common Stock on the third business day following the date the Company publicly
announces its annual financial results; provided that such director has attended
at least 75% of the meetings of the Board of Directors and of the Board
Committees of which such non-employee director is a member in the preceding
fiscal year. The exercise price of all options granted under the Directors Plan
is the fair market value of the Company's Common Stock on the date of grant.
No option granted under the Directors Plan is transferable by the optionee
other than by will or the laws of descent and distribution, and each option is
exercisable during the lifetime of the optionee only by the optionee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of shares of Common
Stock of the Company as of December 31, 1997 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.
51
<PAGE>
Number of Shares Percent of
Name and Address(6) Beneficially Held(1) Ownership
- ------------------- -------------------- ----------
Donald R. Head(2) 2,417,345(3) 21.5%
Andrew A. Johns 890,865 7.9%
Theo F. Lamb(4) 2,225,205 19.8%
Robert B. Liverant 100,000 .9%
Jeffrey P. Anderson -- 0.0%
Stephen A McConnell 50,000 .4%
Dorothy Eichbaum, Trustee of
William and Dorothy Orth Eichbaum 603,791 5.4%
Trust Dated November 19, 1986
David Dewar(7) 60,000 .5%
John M. Redfield, Jr. and Linda N 600,490 5.3%
Redfield, as Trustees under a Revocable
Declaration of Trust dated October 29, 1982
Mark A. Scharmann 751,334 6.7%
Rudy Miller(5) 684,000 6.1%
All directors and executive officers as a
group (5 persons) 5,743,415 51.1%
- ----------
(1) Does not include options to purchase shares of the Company's Common Stock,
none of which are currently vested. See "Executive Compensation."
(2) Shares beneficially held in The Head Revocable Trust Dated April 1, 1975.
(3) Includes 301,895 and 300,245 shares of Common Stock which Mr. Head has
options to purchase from The William and Dorothy Eichbaum Trust dated
November 19, 1986 and from John N. Redfield, Jr. and Linda N. Redfield,
respectively, anytime during the period ending May 23, 1999 for $.52 per
share.
(4) Shares beneficially held in The Lamb Trust Dated October 11, 1983.
(5) Includes 510,000 shares of Common Stock which are beneficially held by
Miller Capital Corporation.
(6) 14555 North Scottsdale Road, Suite 320, Phoenix, Arizona 85254, C/O Capital
Title Group, Inc.
(7) Includes 25,000 and 25,000 shares of Common Stock which Mr. Dewar has
options to purchase from Mr. Head and Mr. Lamb, respectively, anytime
during the period ended June 30, 1998.
52
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1996, Capital Title assumed a 10% note from PWCC, Inc. to Bank
One Arizona, NA in the amount of $150,000. At December 31, 1997, the balance of
the note was $101,115. 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 1997 and 1996, Capital Title Agency paid $41,260 and $43,319,
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. The options
granted to Mr. Head will be subject to the same vesting schedule applicable to
options granted under the 1996 Employee Stock Option Plan and are non-qualified
stock options.
Theo F. Lamb has advanced the Company $8,000 for operating purposes
pursuant to a Note Agreement. The eight and one half percent (8.5%) note was due
October 31, 1997 and has been paid.
Donald R. Head advanced the Company $8,000 for operating purposes pursuant
to a Note Agreement. The eight and a half percent (8.5%) note was due October
31, 1997 and has been paid.
The Company received management and consulting services from Head
Management Group, a Company owned by Donald R. Head. Charges for these services
were $28,800 for the year ended October 31, 1996. The agreement was terminated
May, 1996.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Exhibit Method of
No. Description Filing
- ------ ----------- ---------
2 Share Exchange Agreement between Capital Title Agency, **
Inc. and Norvex, Inc. dated May 23, 1996
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
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<PAGE>
Exhibit Method of
No. Description Filing
- ------ ----------- ---------
10.5 Office Lease between Capital Title Agency, Inc.and 4808 **
Corporation dated June 7, 1996
10.6 Promissory Note between PWCC, Inc. and BankOne 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
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 June 17, 1997.
10.14 Employment Agreement between Capital Title Agency, Inc. and *
Milt Ferrantelli dated June 17, 1997
10.15 Underwriting Agreement between Capital Title Agency, Inc. and *
United General Insurance Company dated January 21, 1998.
10.16 Promissory Note between Capital Title Group, Inc. and *
Imperial Bank, dated November 15, 1996
10.17 CreditLine Agreement between Capital Title Group, Inc. *
and Imperial Bank, dated November 17, 1997
10.18 Acquisition Consulting Agreement between Capital Title Group, *
Inc. and Miller Capital Corporation, dated January 28, 1997.
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 **
54
<PAGE>
Exhibit Method of
No. Description Filing
- ------ ----------- ---------
21 Subsidiaries **
27 Financial Data Schedule *
- ----------
* Filed herewith
** Incorporated by reference to Form 10-SB filed with the Securities and
Exchange Commission on September 20, 1996.
*** Incorporated by reference to Amendment No. 1 to Form 10-SB filed with the
Securities and Exchange Commission on January 9, 1997.
(b) Reports on Form 8-K
The Company did not file any 8-K reports during the quarter ended December
31, 1997.
55
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAPITAL TITLE GROUP, INC.
By /s/ Donald R. Head
-------------------------------
Donald R. Head
Chief Executive Officer
Date: March 24, 1998
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Donald R. Head Chairman of the Board
- ------------------------- and March 24, 1998
Donald R. Head Chief Executive Officer
/s/ Andrew A. Johns President, Director March 24, 1998
- -------------------------
Andrew A. Johns
/s/ Michael J. Benjamin Vice President, Controller
- ------------------------- (Principal Financial and March 24, 1998
Michael J. Benjamin Accounting Officer)
/s/ Jeffrey P. Anderson Director March 24, 1998
- -------------------------
Jeffrey P. Anderson
/s/ David Dewar Director March 24, 1998
- -------------------------
David Dewar
/s/ Theo F. Lamb Director March 24, 1998
- -------------------------
Theo F. Lamb
/s/ Robert B. Liverant Director March 24, 1998
- -------------------------
Robert B. Liverant
/s/ Stephen A McConnell Director March 24, 1998
- -------------------------
Stephen A McConnell
56
EXHIBIT 10.13
[LETTERHEAD OF THE MILLER GROUP]
LETTER OF AGREEMENT
This letter will confirm and constitute the agreement ("Agreement") as of
the 17th day of June, 1997 between Capital Title Agency Inc. (hereinafter
"CAPITAL TITLE" or the "COMPANY") and Miller Capital Corporation ("MCC")
pursuant to which MCC will furnish to the Company certain management consulting,
financial advisory and investor relations services.
1. MCC SERVICES.
MCC will perform the following services for the Company: (i) prepare a due
diligence report 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 private placement or 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 MCC's
obligations do not insure the successful negotiation of or obtaining of any type
of Financing for the Company and any efforts by MCC for obtaining Funding for
the Company shall be done on a "BEST EFFORTS" basis only. MCC is not a NASD
registered broker/dealer.
It is expressly acknowledged and agreed by the parties hereto that MCC and
employees of MCC are independent contractors and are not employees or officers
of the Company.
2. PROVISION OF INFORMATION BY THE COMPANY.
The Company acknowledges that MCC, in order to perform its services
effectively under this Agreement and to satisfy such obligations, requires
prompt receipt of all material information with respect to the Company, its
operations and prospects. Accordingly, the Company will furnish to MCC copies of
all financial statements, tax returns, reports and agreements executed in
relation to the Company's business. The Company recognizes the necessity of
promptly notifying, and will promptly notify, MCC of all material developments
concerning the Company, its business and prospects and will supply MCC with
information sufficient to enable MCC to make a determination as to its
compliance with its own procedures as well as any legal requirements.
<PAGE>
Capital Title Agency Inc.
June 16, 1997
Page 2
MCC will have access to the Company's legal and accounting professionals
and with prior approval from the Company access to outside legal counsel and
accounting professionals at the Company's expense.
MCC will accept and hold such Information in complete confidence for their
use as contemplated hereby. The confidentiality obligations assumed by MCC
hereunder will not apply to any Information which is presently in or
subsequently becomes part of the public domain or is otherwise generally known
or is obtained from any third party which is in possession of such Information
through no fault of MCC.
3. COMPENSATION TO MCC.
For services rendered under this Agreement, MCC shall receive the following
compensation:
A. MCC will receive $25,000 as compensation for a Due Diligence Report
with payment due in full once funding from any private or public
offering reaches a gross amount of $500,000 or within twelve (12)
months of the date of this Agreement, whichever occurs first;
B. The Company will pay to MCC a monthly fee of $5,500 as compensation
for Investor Relations Services starting with the execution of this
Agreement and continuing thereafter on a monthly basis for a period of
twelve (12) consecutive months;
C. Out-of-pocket expenses incurred by MCC in connection with the services
to be performed by it hereunder will be payable by the Company upon
submission by MCC of monthly invoices delineating such expense. Any
expense over $500 must be approved by the Company in advance;
D. MCC will receive a Success Fee in the form of a cash payment of the
gross proceeds of any private or public Financing including any form
of equity, convertible debt, debt with warrants, debt with equity
incentives to the lender, or any other form of equity, debt or
guarantees. Success Fee percentages are based on the type of Financing
transaction completed on behalf of Capital Title with private
placement fees being five (5%) percent of the gross proceeds for any
<PAGE>
Capital Title Agency Inc.
June 16, 1997
Page 3
Private Placement Funding; and secondary public offering fees being
three (3%) percent of the gross proceeds for completing a Secondary
Public Offering Funding; and
E. Capital Title shall have sole discretion in determining what
constitutes an acceptable Financing as contemplated by this Agreement.
MCC shall earn the Success Fee only upon the closing or receipt of
funds from a Financing as described in 3.D., above, and not merely for
presenting a financing option or prospective investor which in Capital
Title sole discretion is unacceptable.
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 MCC through the term of this Agreement without the prior
written consent of MCC.
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), Miller Capital
Corporation 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. If Capital Title
decides to pursue any such Transaction, and MCC exercise its right of
first refusal provided hereunder, Capital Title and MCC will enter
into an agreement appropriate to the circumstances, or, under any
condition, MCC will receive a minimum fee of $200,000 for such
Transaction or Transactions.
5. COMPANY COVENANT RE MCC EMPLOYEES.
The Company recognizes that client service officers and other employees of
MCC are necessary for the continued servicing by MCC of its several clients.
<PAGE>
Capital Title Agency Inc.
June 16, 1997
Page 4
Accordingly, the Company will not, during the term of this Agreement, and for a
period of two years after its termination, employ any client service officer,
account executive or other employee of MCC in any capacity.
6. ASSIGNMENT.
MCC recognizes the personal nature of the services to be performed by it
and shall not transfer or assign to any other person, firm or corporation its
responsibilities and obligations under this Agreement without prior approval of
the Company. In the event that a merger, sale of assets or change of control of
the Company or MCC shall occur, this Agreement shall be binding upon the
successor and assigns of such party.
7. INTEGRATION.
This writing constitutes the full and complete agreement of the parties,
which Agreement may not be modified by any method other than another writing
signed by the parties.
8. HEADINGS.
The paragraph headings have been inserted for convenience and shall not be
construed in a manner contrary to the text of this Agreement.
9. ATTORNEY FEES.
In the event of any action or proceeding to enforce the provisions of this
Agreement, the prevailing party shall be entitled to its reasonable attorney
fees, such fees to be set by a judge and not by a jury and to be included in any
judgment entered in such action or proceeding.
10. INDEMNIFICATION.
Both MCC and the Company agree to indemnify the other company's respective
directors, officers and employees against all losses and claims as is customary
in advisory engagements. The provisions of this section shall survive any
termination of the engagement that is the subject of this letter.
<PAGE>
Capital Title Agency Inc.
June 16, 1997
Page 5
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: Date: 6-17-97
------------------------ ---------------------------
<PAGE>
[LETTERHEAD OF THE MILLER GROUP]
March 18, 1998
Mr. Donald R. Head
Chairman and Chief Executive Officer
CAPITAL TITLE GROUP, INC.
14555 North Scottsdale Road, Suite 320
Scottsdale, Arizona 85254
RE: Amendments to the June 17, 1997, Letter of Agreement Between Capital
Title Group, Inc. and Miller Capital Corporation
Dear Don:
Per our recent conversation, I have agreed to the following amendments (the
"Amendments") to the Letter of Agreement between Capital Title Group; Inc. (the
"Company") and Miller Capital Corporation ("MCC") dated June 17, 1997.
MCC agrees to the following Amendments in Section 3, Compensation to MCC.
Item 3.D., page 2 and 3 is amended to:
a. Exclude the five (5%) percent Success Fee due MCC regarding bank
debt negotiated directly by the Company;
b. In the event MCC is asked to negotiate with any bank on behalf of
the Company, a mutually agreed upon Success Fee will be
negotiated in good faith at the time of the transaction; and
c. The Amendment further includes, the reduction of the three (3%)
percent Success Fee of gross proceeds of a public offering to the
following Success Fee schedule.
Gross Proceeds Success Fee Percent
-------------- -------------------
$1 up to 10,000,000 million 2.75 percent
$1 up to 20,000,000 million 2.25 percent
$1. up to 30,000,000 million 1.75 percent
$1 to in excess of 30,000,000 million 1.25 percent
<PAGE>
Mr. Donald R. Head
Capital Title Group, Inc.
March 18, 1998
Page 2
AMENDMENTS AGREE TO AND ACCEPTED:
Please confirm that the foregoing correctly sets forth our mutual understanding
by signing and returning the copy of this Amendment to the Letter of Agreement
dated June 17, 1997 provided for that purpose.
Capital Title Group, Inc. Miller Capital Corporation
Donald R. Head Rudy R. Miller
By: /s/ Donald R. Head By: /s/ Rudy R. Miller
------------------------- -------------------------
Title: Chairman and CEO Title: Chairman and CEO
---------------------- ----------------------
Date: 3-18-98 Date: March 18, 1998
----------------------- -----------------------
cc: Ben Morris, President and Chief Executive Officer
Sanders Morris Mundy
EXHIBIT 10.14
CAPITAL TITLE AGENCY, INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of this 17th day of June, 1997, by and between
CAPITAL TITLE AGENCY, INC., an Arizona corporation ("Company"), and MILTON M.
FERRANTELLI, ("Employee").
WITNESSETH:
WHEREAS, Employee has broad-based experience in the title insurance agency
industry, and Company desires to employ him and to assure itself of continued
availability of his services for the Company's benefit, and Employee is willing
to accept such employment and to perform such services, all in accordance with
the terms herein contained.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, and intending to be legally bound hereby, the parties agree as
follows:
1. EMPLOYMENT. The Company agrees to employ the Employee and the Employee
agrees to be hired by the Company with primary job responsibility in employee
recruitment, marketing and expansion of Company operations at strategic
locations throughout Maricopa County. Employee shall report to and be supervised
by Donald R. Head, Chief Executive Officer, or such other supervisor as the
Board of Directors may hereafter designate from time to time. In the performance
of his duties, Employee shall support the recruitment and marketing
responsibilities of James A. Clifford and Nick Velimirovich. Additionally,
Employee shall serve with those two and the CEO on an executive team, the
purpose of which shall be to promote the Company's expansion strategy, to
improve the quality and delivery of Company services, and to improve the
efficiency and profitability of the Company's operations on an on-going basis.
2. EXTENT OF SERVICES. During the employment period, except for illness and
for reasonable vacations, Employee shall devote his full-time attention, skill
and efforts to the duties under this "Agreement."
3. TERM. The employment period shall be for a term commencing on November
10, 1997, and ending June 30, in the year 2000.
4. COMPENSATION. For performing the services required to be performed by
this Agreement during the employment period, Employee shall be compensated by
the Company as follows:
A. A fixed salary at the rate of One Hundred Twenty Thousand Dollars
($120,000) per year, payable twice monthly in accordance with
normal Company policy.
<PAGE>
B. Additional compensation equal to 3.333% of the Company's pre-tax
net profit on operations in Maricopa County calculated according
to generally acceptable accounting principles applicable to title
insurance agencies consistently applied, prorated in the first
year of employment for the period remaining in the Company's
fiscal year if less than twelve (12) months, such compensation to
be determined and paid within three months following the end of
each succeeding fiscal year. Pre-tax profits for purposes of this
Agreement shall be net taxable income attributable to operations
in Maricopa County as disclosed by the Company's federal income
tax returns and related internal records allocating income and
expenses separately as to the respective counties in which the
Company shall be conducting its Arizona business, but exclusive
of bonuses, dividends or other remuneration to stockholders,
directors or executive committees. Copies of the Company's
federal tax returns and records of results in each county of
operation shall be furnished to Employee when received by the
Company's accounting firm in final form. At the Company's option,
estimated compensation may be paid in successive fiscal years
with appropriate adjustments spread over twelve (12) month
periods in the event of any under or over estimated payments made
pursuant to this paragraph.
C. For purposes of subparagraph "B," Company operations shall
include revenues derived from subsidiaries or related title
business generated on Maricopa County real estate transactions.
D. Reimbursement for all necessary and pre-approved travel and
entertainment expenses incurred by Employee on behalf of the
Company, not to exceed Two Thousand Dollars ($2,000) per month,
which expenses shall be incurred by the Employee and reimbursed
by the Company in accordance with normal Company practices and
budget or other restrictions that may be imposed by the Board of
Directors.
5. SUPPLEMENTAL BENEFITS. During the term of this agreement, Employee shall
receive health insurance, vacation and other Employee benefits pursuant to the
terms and as set forth in the Company's Employee Handbook initially published on
October 1, 1993, as amended, a receipt of a copy of which is hereby acknowledged
by Employee.
6. DISABILITY AND INCAPACITY. If Employee shall be unable to perform his
duties by reason of disability or impairment of health for at least ninety (90)
consecutive calendar days, Company shall have the right to terminate this
Agreement by giving written notice to that effect, provided that at the time
such notice is given such disability or impairment is still continuing.
2
<PAGE>
7. DEATH. In the event of Employee's death while employed by Company, this
Agreement shall terminate at the end of the calendar month in which Employee's
death occurs, and his legal representative shall be entitled to receive the
compensation due through the last day of the calendar month in which his death
shall have occurred, and any other amounts which may have accrued to Employee
for periods prior to such date.
8. COMPENSATION ON TERMINATION.
A. Prior to the end of the employment period of this Agreement, if
the Company shall terminate employment of the Employee without
"just cause" as hereinafter defined, or if the Employee shall
terminate his employment for "good reason" as hereinafter
defined, then the Company shall pay to the Employee his aggregate
compensation, and such other amounts as shall be necessary to
continue any supplemental Employee benefits and prerequisites of
office which were provided the Employee prior to such
termination. In the event such benefits or prerequisites of
office are not continuable, the Employee shall be paid their cash
equivalent. All payments hereunder shall be payable during the
remaining term of this Agreement as if it had not been
terminated. Notwithstanding the foregoing, Employee shall have a
duty to mitigate his damages in the event of any such termination
without good cause and, to the extent his reasonable efforts
generate or could have generated replacement income during the
remaining term of this Agreement, such income shall be credited
to Company against the obligation to pay additional salary and
benefits pursuant to this paragraph. Company may withhold
payments for such period that Employee refuses to render all
reasonable or necessary cooperation to enable Company (1) to
determine the extent of any replacement income that may have been
paid or may be payable to Employee during which time Company may
be obligated to continue paying compensation after termination
pursuant to this paragraph, and (2) to determine whether Company
has from time to time exerted reasonable efforts to obtain
replacement income.
B. In the event of Employee's death or termination due to
disability, or if the Company shall terminate the employment of
the Employee for "just cause", or if the Employee shall terminate
his employment without "good reason", then the Company shall pay
the Employee his salary to the effective date of such
termination, and any accrued vacation not used, but no added
compensation as otherwise provided under paragraph 4.B shall be
deemed earned in any of such events.
C. As used herein, "just cause" shall mean (i) a material breach by
the Employee of this Agreement, (ii) incapacity of the Employee
3
<PAGE>
by reason of health or incompetence to perform his duties for
ninety (90) consecutive calendar days, or (iii) dishonesty,
theft, embezzlement or conviction of a felony. As used herein,
"good reason" shall mean a material breach by the Company of this
Agreement including but not limited to a material change in
Employee's duties as President (Maricopa County Operations) of
the Company.
9. ASSIGNMENT. The rights and obligations of the Company hereunder shall
inure to the benefit of, and be binding upon, the Company and any other
corporation or entity into which the Company shall be merged, or to which
substantially all of the assets of the Company shall be transferred and such
other corporation or entity shall thereupon be deemed the "Company" hereunder.
The rights and obligations of the Employee hereunder shall not be assignable
except as to compensation earned but not paid when due.
10. PROPRIETARY PROTECTION.
A. NON-COMPETITION. At all times while employed by Company, and for
a period of one (1) year after the date on which the Employee
ceases to be actively employed by the Company, the Employee shall
not compete in any way with the business of the Company anywhere
within Maricopa County, Arizona, whether directly or indirectly,
as an employee, agent, independent contractor, owner, or
otherwise. In addition, during such one (1) year period, the
Employee shall not directly or indirectly enter into or in any
manner take part in any other business or entity that competes
with the Company.
B. CONFIDENTIALITY. At all times while employed by Company, and
continuing after termination of such relationship without
limitation as to time, the Employee shall not directly or
indirectly use or disclose to others any confidential or
proprietary information or trade secrets of the Company. For the
purpose of this Agreement, confidential or proprietary
information includes all information regarding the Company,
whether disclosed by Company or originated by Employee while
employed by the Company, including, without limitation, Company's
policies and procedures, Company's suppliers and supply
information, Company's customer lists and customer information
(whether the customer is a past, present or prospective
customer), pricing, sales and marketing information, financial
and technical information, manufacturing processes, inventions
and know-how. Employee acknowledges that all trade secrets,
inventions, know-how, and all other information described in this
paragraph developed by Employee during the course of employment
belongs to Company.
4
<PAGE>
C. NON-PIRACY OF EMPLOYEES. Employee recognizes that Company's other
Employees are a valuable resource of the Company. Accordingly,
Employee agrees that for a period of one (1) year after the date
on which the Employee ceases to be actively employed by the
Company, Employee will not, alone or in conjunction with others,
solicit, induce, or recruit any Employee of the Company to leave
the Company's employment. Employee shall never, at any time,
attempt to induce another Employee of Company to violate a
contract of employment for a specified term of years.
D. CUSTOMER ANTI-PIRACY. Employee agrees that for a period of six
(6) months after the date on which Employee ceases to be actively
employed by the Company, Employee will not directly or indirectly
in any capacity whatsoever, either as an Employee, officer,
director, stockholder, proprietor, partner, joint venturer,
consultant, or otherwise, (a) induce any customer (past or
present) to patronize any company that is in competition with the
Company's business; (b) canvass, solicit, or accept any similar
business from any past or present customer of the Company; or (c)
request or advise any past or present customer of the Company to
withdraw, curtail, or cancel its business with the Company.
E. EMPLOYEE ACKNOWLEDGEMENT OF FAIRNESS. Employee acknowledges and
agrees that Employee's services to the Company are of a special
character with unique value to the Company, and that the
restrictive covenants set forth in this Agreement are reasonable,
fair and valid in scope or activity, duration, territory, and in
all other respects.
F. SEVERABILITY AND REFORMATION. If any court of competent
jurisdiction determines that any of the restrictive covenants in
this Agreement, or any part thereof, is or are invalid or
unenforceable, the remainder of the restrictive covenants shall
not thereby be affected and shall be given full effect, without
regard to invalid portions. If any of the provisions of this
paragraph should ever be deemed to exceed the temporal,
geographic, or occupational limitations permitted by applicable
laws, those provisions shall be and are hereby reformed to the
maximum temporal, geographic, or occupational limitations
permitted by law. In any litigation concerning this Agreement,
the prevailing party shall be entitled to recover reasonable
attorneys' fees incurred.
G. BREACH OF OBLIGATIONS BY EMPLOYEE. In the event of a breach or
threatened breach by the Employee of the obligations set forth in
subparagraphs A through D above, the Company shall be entitled to
apply to any appropriate court for an injunction restraining the
5
<PAGE>
Employee; provided, however, that this paragraph shall not be
construed as prohibiting the Company from pursuing any other
available remedies for such breach or threatened breach
including, but not limited to, the recovery of damages from the
Employee.
H. BREACH BY THE COMPANY. In the event the Company terminates
Employee without just cause, subparagraph "A" shall not be
enforceable, however, in any event, all other subparagraphs of
this section shall remain fully enforceable.
11. OPTION TO PURCHASE STOCK OF PUBLIC COMPANY.
A. On execution of this Agreement by both parties, the Company shall
cause the Capital Title Group, Inc. to grant an option in favor
of Employee, subject to the conditions set forth below, to
purchase up to 100,000 shares of the common stock of such Public
Company.
B. The purchase price for such option stock shall be One Dollar
($1.00) per share. Employee shall be entitled to exercise that
option as to not more than Fifty (50%) Percent of such option
shares after two full years of employment. The option may be
exercised as to the remaining Fifty (50%) Percent no later than
30 days after expiration of the term of this agreement.
C. All other terms of such option shall be as set forth in the
standard employee option agreement , receipt of a copy of which
Employee hereby acknowledges.
12. AGREEMENT. The entire agreement of the parties is herein written fully
and supersedes any prior agreement between the parties hereto, and the parties
hereto are not bound by any agreements, understandings, conditions or
inducements otherwise than are expressly set forth and stipulated hereunder.
13. NOTICES. All notices required to be sent pursuant to the terms of this
Agreement shall be sent by first class mail, postage prepaid, to the parties
hereto at the following addresses, or such other addresses as they may hereafter
designate in writing:
COMPANY:
CAPITAL TITLE AGENCY, INC.
Attention: Donald R. Head
138 North Montezuma
Prescott, Arizona 86301
6
<PAGE>
EMPLOYEE:
MILTON M. FERRANTELLI
3763 W. Park Ave
Chandler, AZ 85636
14. ATTORNEY FEES. In the event of any controversy, claim or dispute
between the parties affecting or relating to the subject matter of performance
of this Agreement, the prevailing party shall be entitled to recover from the
non-prevailing party all of its reasonable attorney fees.
15. GOVERNING LAW. This Agreement shall be construed both to as validity
and performance, and enforced in accordance with and governed by the laws of the
State of Arizona.
16. NORWEST NON-COMPETE AGREEMENT.. Employee has disclosed to the Company
that he is under covenant to Norwest Corporation, as successor in interest to
United Title Agency of Arizona, Inc., pursuant to a Non-Competition Agreement
dated December 15, 1993. Employee represents and warrants that the obligations
under such agreement expire on November 7, 1997. Employee further represents and
warrants that he has not received, and has not been given or promised, any
incentive or inducement by the Company to violate the terms of such Agreement.
Employee further agrees that in the event the Company learns or has good reason
to believe that any time prior to expiration of such Agreement, Employee shall
have violated its terms in any material particular, the Company shall have the
option to terminate this agreement without any further obligation to Employee.
IN WITNESS WHEREOF, the parties have hereunto executed this Agreement as of
the day above written.
COMPANY: EMPLOYEE:
CAPITAL TITLE AGENCY, INC. /s/ Milton M. Ferrantelli
----------------------------
MILTON M. FERRANTELLI
By /s/ Donald R. Head
---------------------------
Donald R. Head
Its CEO
-------------------------
7
<PAGE>
CAPITAL TITLE AGENCY, INC.
AMENDMENT TO FERRANTELLI EMPLOYMENT AGREEMENT
THIS AGREEMENT is made this 3rd day of February, 1998, and amends the
Employment Agreement of June 17, 1997, by and between CAPITAL TITLE AGENCY, INC.
(the "Company") and MILTON M. FERRANTELLI (the "Employee), effective and
commencing as of February 1, 1998, in the following particulars:
1. Employee's title shall be President of the Company in charge of Arizona
operations, and Executive Vice President of CAPITAL TITLE GROUP, INC. (hereafter
"CTGI"). Employee shall perform his duties in accordance with policies and
practices of CTGI. He shall report to and be supervised by DONALD R. HEAD, Chief
Executive Officer of the Company, or such other supervisor as the Board of
Directors of the Company or the Board of Directors of CTGI may hereafter
designate from time to time.
2. Employee's fixed salary shall be increased to $132,000 annually.
Employee's Paragraph 4B compensation shall be equal 3.333% of the Company's
pre-tax net profit on Maricopa County business and 5% on all other Arizona
agency operations; provided, however, that irrespective of the level of net
profits realized by the Company in any given county, Paragraph 4B compensation
shall not exceed $10,000 per county per year, nor be calculated on aggregate net
profits on Arizona operations in excess of the first $200,000 thereof annually.
In any event, Paragraph 4B compensation is calculated only with respect to
current year net profits, and no carry forwards or other adjustments are
permitted in successive years.
3. Paragraph C is clarified in this particular: the term "Company
operations" does not include net profits of business entities owned or
controlled by CTGI, and which are not subsidiaries of the Company.
4. Subject to the foregoing amendments, the terms of the subject Employment
Agreement remain in full force and effect.
5. Employee is granted an additional option to purchase the common stock of
CTGI under the same terms, conditions and time limits set forth in Paragraph 11
of the subject Employment Agreement, limited to 25,000 shares at $2.00 per
share.
IN WITNESS WHEREOF, the parties have hereunto executed this Agreement.
COMPANY: EMPLOYEE:
CAPITAL TITLE AGENCY, INC.
By /s/ Donald R. Head /s/ Milton M. Ferrantelli
------------------------------ ------------------------------
DONALD R. HEAD, MILTON M. FERRANTELLI
Chief Executive Officer
EXHIBIT 10.15
UNITED GENERAL TITLE INSURANCE COMPANY
ISSUING AGENT AGREEMENT
This agreement, ("Agreement") made this 21st day of January, 1998 between
UNITED GENERAL TITLE INSURANCE COMPANY, a corporation organized under the laws
of the State of Louisiana, having its main office at 999 18th Street, Suite
3400, Denver, Colorado, 80202, hereinafter referred to as "Company", and CAPITAL
TITLE AGENCY, INC., operating as a licensed Underwritten Title Company in
ARIZONA, hereinafter referred to as "Issuing Agent".
The parties hereto, in consideration of the mutual promises, covenants and
agreements herein contained, do agree as follows:
1. APPOINTMENT
The Company hereby appoints Issuing Agent as its representative to
originate and solicit applications for and to sign, countersign and issue
commitments, binders, guarantees, title reports, title insurance policies
endorsements and other contracts under which the Company assume liability for
the condition of title to land (hereafter sometimes referred to as "Title
Assurance") with the rules, regulations, procedures and instructions of the
Company as set forth herein, and subject to all applicable laws, rules and
regulations of the Territory, as hereinafter defined, whether now in force or
hereafter issued and promulgated. The appointment of the Issuing Agent herein is
on a mutually non-exclusive basis and is subject to rights of other Issuing
agents of the Company to conduct business and to the right of the Company to
appoint other Issuing agents.
2. TERRITORY
The Issuing Agent shall have the authority to operate its title business
under the terms and conditions of this agreement in the following geographical
area, hereinafter referred to as Territory, but not otherwise:
MARICOPA, MOHAVE AND YAVAPAI COUNTIES
- --------------------------------------------------------------------------------
3. ISSUING AGENT RIGHTS AND RESPONSIBILITIES
a. During the term of this agreement, Issuing Agent shall maintain and
operate a business office devoted to the conduct of a title insurance agency
business, maintain adequate personnel to originate and service such business,
and actively remain engaged in the title insurance agency business.
b. Issuing Agent shall receive and process applications for title insurance
in a prudent, safe, sound and ethical manner and in accordance with recognized
underwriting principles and the rules, regulations and procedures of the
Company, and subject to all applicable laws, rules and regulations of the state
or states in which it operates, whether now in force or hereafter issued and
promulgated.
c. Issuing Agent shall determine insurability of title based on one or more
of the following methods:
i An examination of mailers disclosed in a search by Issuing Agent
of all relevant public records.
1
<PAGE>
ii. An examination of an abstract of title which shows all relevant
public records prepared and certified by Issuing Agent or by
another recognized professional abstractor whose work is accepted
by prudent local title examiners and is approved by the Company.
iii. An examination of Issuing Agent's indices and records
supplemented to the extent necessary by an abstract or search of
the public records.
iv. Title reports or opinions, on forms furnished or approved by
Company, by Attorneys at Law approved by Company, if permitted by
law.
v. Title reports, commitments, or certificates issued by Company,
the contents of which shall be the responsibility of Company.
d. All supporting documents on which insurability of title is based,
including, but not limited to abstracts, examinations of title, title reports,
title notes, chain of title printouts, copies of recorded documents, policies,
commitments, affidavits, lien waivers, surveys, worksheets and maps. shall be
preserved and maintained in the Issuing Agent's Possession and control during
the term of this Agreement and thereafter for a period of at least ten years, or
for any longer periods as required by law. The Company shall have a reasonable
right of access to each such file and its complete contents, or a duplicate copy
thereof, pertaining to the issue of a title policy of the Company or any other
matter for which the Company may have responsibility.
e. Issuing Agents shall collect or see to the collection of all title
underwriting premiums due the Company for Title Assurances from the parties
responsible therefor. Immediately upon receipt by the Issuing Agent, these
premiums become the property of the Company and are held in trust on behalf of
the Company by and shall be deposited in a segregated trust account in the name
of the Company by the Issuing Agent Issuing Agent shall, on a monthly basis,
submit a report to the Company of all Title Assurances issued during the
preceding month and premium fees therefrom due the Company. Methods of reporting
are described in the Issuing Agent's Procedures Manual and in periodic Company
bulletins. Each report shall include a complete copy of the policy schedules and
endorsements as issued to the insured. - Issuing Agent may retain commissions as
calculated in accordance with Schedule A hereto and remit only the amount due
Company. If the Issuing Agent is eligible for and participates in the Company's
premium billing plan, payment in full of premium billed is expected within
thirty days of receipt of said bill. Failure to remit premium due within thirty
days may result in either a suspension or revocation of the Issuing Agent's
authority to issue title policies on behalf of the Company.
f. Issuing Agent shall, maintain a policy register in form provided by or
approved by Company by which Issuing Agent shall enter a record of all insuring
forms supplied by Company and their disposition.
g. Safely keep and store all policies and forms delivered by Company to
Issuing Agent and be liable to Company for any loss or damage suffered by
Company by reason of wrongful or negligent use of such forms. Further, Issuing
Agent shall maintain a policy register and shall account for said forms and
return all spoiled, obsolete or canceled policies and forms to Company.
h. Agents agrees to cooperate and assist in the defense of any litigation
brought as a result of any claim based upon a policy or commitment issued by
Issuing Agent or insured closing service- letter issued on behalf of Issuing
Agent, or in any matter in which the Company becomes involved as a result of the
Issuing Agent's business.
i. The Issuing Agent shall immediately notify Company of an attempted
service of process upon Issuing Agent as representative of Company and the
reasons therefore, if readily obtainable.
j. If a claim is filed with Issuing Agent arising under any title insurance
issued by Issuing Agent, Issuing Agent will immediately make a written report
thereof to Company at 999 Eighteenth Street, Suite 3400, Denver, Colorado 80202
and shall lend all reasonable assistance to Company in investigating, adjusting
or contesting any claim.
k. The parties hereto understand and agree that Issuing Agent is not an
Issuing Agent of Company for purposes of conducting an escrow or settlement
business. However, because Company may be liable for acts of Issuing Agent with
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regard to the settlement or escrow business Issuing Agent, under state law, or
regulation, or otherwise, Issuing Agent shall allow Company's representatives to
audit or review the accounts, checks, books, files and records of Issuing Agent
to the extent permitted by law at any reasonable time without notice. Issuing
Agent shall provide Company with a copy of any audit performed of Issuing
Agent's books and records by any public or private auditor or agency within
thirty (30) days after Issuing Agent receives said audit report. In those
instances where Issuing Agent closes transactions and receives and disburses the
money of others, Issuing Agent shall keep and maintain a separate bank account
or accounts for escrow, settlement or closing funds. Issuing Agent shall
maintain such funds in trust for the parties entitled thereto, Issuing Agent
further agrees to reconcile said escrow accounts on a monthly basis and to
maintain adequate records of said escrow, settlement or closing funds and submit
same to Company upon request
l. Issuing Agent agrees to follow the minimum guidelines described below
for handling, accounting and disbursement of closing or escrow funds which come
into the Issuing Agents possession and for which the Company may be or become
responsible:
i. Issuing Agent agrees that funds received in connection with an
escrow, closing, funding or transaction in which a policy of
title insurance of the Company is to be issued are "trust funds"
and agrees to keep such trust funds in a federally insured
financial institution, in an account or accounts separate `from
the Issuing Agent's operating account and designated as "trust"
or "escrow" account and to disburse such funds only for the
purposes for which they were entrusted.
ii. A record of each and every receipt and disbursement transaction
shall be kept in an escrow accounting ledger or system which
contains a record of each escrow for which Issuing Agent has
assigned an internal file number. This accounting record should
contain sufficient detail for purposes of identifying every
receipt and check by number and escrow number, and the
disbursements and deposits must balance on a daily basis wit the
escrow bank account balances involved. Any debit (shortage)
balances which appear for any escrow must be immediately
rectified by either correction of an error or the deposit of
sufficient funds to eliminate the shortage.
iii. The bank account should be reconciled to the control account
(checkbook) monthly. A trial balance of the individual escrow
ledger records should be prepared monthly, retained, and the
total reconciled to the control account (checkbook) and
reconciled bank balance monthly. Checks and drafts should be
pre-number, used in numerical sequence, properly safeguarded and
required dual signatures unless impractical.
m. Issuing Agent shall not, without written approval of the Company which
approval shall be at the Company's sole absolute and unfettered discretion:
i. Commit the Company to a risk in excess of $500,000.00.
ii. Commit the Company to a risk involving a title where Issuing
Agent has knowledge of defects, adverse claims or questions of
title known in the community.
iii. Any unusual, uninsurable or, or extra ordinary risk as set forth
in Company's rules, instructions or manuals or known by Issuing
Agent
iv. Accept an application for title insurance for an amount less than
the present fair market value of the premises involved for
owner's policies nor for less than the amount of indebtedness for
loan policies.
v. Vary or. change the printed portion of any form of commitment,
policy or endorsement, nor commit Company to any particular
interpretation of the terms or provisions of any commitment,
policy or endorsement.
vi. Incur debt in the name of the Company, adjust any claim for loss
on behalf of the Company or accept service of summons, or other
process on behalf of the Company.
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vii. Receive any fund, including escrow or closing funds, in the name
of the Company, but shall receive and account for same on its own
account.
viii.Issue any Title Assurance on land in which Issuing Agent or any
of its employees, officers or directors, partners or stockholders
have an interest or will have an interest upon issuance of the
Title Assurance.
ix. Charge a premium less than one approved by Company or promulgated
by the Insurance Commissioner in the state of operation,
exclusive of any special work charges where permitted.
x. Issuing Agent shall not create liability of Company to any party
for funds deposited in the Issuing Agents escrow or trust
account.
n. Issuing Agent agrees to indemnify Company for all loss, costs or damage
including attorney's fees and other costs which Company may sustain or become
liable for on account of:
i. Failure of Issuing Agent to comply with the terms of this
Agreement or with rules, regulations and instructions given to
Issuing Agent by Company.
ii. Any dishonest, fraudulent malicious, criminal or grossly
negligent act, or dishonest fraudulent malicious or grossly
negligent omission by Issuing Agent, its employees or its agent,
in connection with either:
a. The issuance of an abstract of title, commitment, evidence
of title, or policy of the company, or
b. A closing by the Issuing Agent its employees, or its agents
of any transaction involving the issuance of a policy of the
company.
iii. Escrow loss limited to losses occasioned by Issuing Agent's
failure to disburse properly or close in accordance with escrow
instruction; or where such escrow funds are misappropriated by
Issuing Agent, its officers, employees or agents.
iv. Any loss suffered by an insured under a usual form of title
policy where any printed exceptions, conditions and stipulations
have been eliminated or modified without the express approval of
the Company.
v. Any and all losses payable on the basis of erroneous preliminary
reports or other title reports when no title insurance policy has
been issued.
vi. Any and all losses arising from the payoff of existing liens by
parties other than the Issuing Agent unless approved by the
Company.
vii. Fraud, dishonesty or defalcation of Issuing Agent, its employees,
officers, directors or agents of Issuing Agent.
viii.Any act or failure to act of an employee, agent, officer pr
attorney of Issuing Agent which could result in Company being
liable for bad faith, unfair claim practices, punitive damages or
deceptive trade practices.
o. Issuing Agent may, at its option, pay any and all claims brought against
it under terms of this section, and shall then be subrogated to the rights of
Company with respect to same.
p. Issuing Agent shall carry at its own cost and expense the professional
liability insurance policy or policies and/or bonds shown on Schedule B attached
hereto, and provide complete copies of same to the Company.
q. Issuing Agent shall not use in its corporate name or any assumed
business name the words "United General" with out the written consent of the
president of the Company. Issuing Agent shall not state or imply in advertising,
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business promotional material or otherwise, the existence of any relationship or
affiliation between the Company and Issuing Agent other than that Issuing Agent
is an authorized policy issuing agent of Company.
4. COMPANY RIGHTS AND RESPONSIBILITIES
a. Company shall have the right at all reasonable times to examine all
trust or escrow accounts or records of Issuing Agent and to check any and all
settlement checks, books, records and files of Issuing Agent pertinent to its
title and escrow operations. Issuing Agent shall promptly, upon request by
Company, authorize the bank or other depository institution where such trust or
escrow accounts pertaining to the title and escrow operations are located to
allow the Company a right of access to such accounts.
b. Company shall determine promptly all questions of risk submitted by the
Issuing Agent and to issue a written approval or denial of the risk, if the risk
submitted is in writing or if specifically requested by Issuing Agent to issue a
written memorandum regarding basis of the denial of incurring such risk.
c. The Company shall be liable for all losses, damages, expenses and costs
arising out of claims covered by and based upon title insurance forms issued
under the terms of this Agreement excepting only those losses, damages, expenses
and costs caused by actions or omissions for which Issuing Agent is made
responsible herein.
d. Company shall have the right to adjust, settle or compromise claims and,
in its sole discretion, to commence, defend, compromise or withdraw from
actions, suits or prosecutions and in general do all things in connection
therewith that it may deem expedient.
5. TERMINATION
a. This Agreement may be canceled by either party hereto by written notice
of intention to cancel sent by certified mail by either party to the other. Any
cancellation shall take effect at the expiration of sixty (60) days after the
mailing of such notice, unless mutually agreed by the parties to take effect at
an earlier or later date. In the event of a material breach of this Agreement, a
party may terminate this Agreement effective immediately by giving notice to the
other by certified mail.
b. This Agreement may be terminated by either party hereto after thirty
(30) days following the filing of a petition in bankruptcy by either party
hereto, or when the petition, if filed by a creditor of such party, contains an
allegation of insolvency and results in a final adjudication of bankruptcy
against either party, or if either party should go into liquidation,
receivership or have a conservator or rehabilitator appointed.
c. The Company shall have the right forthwith to cancel and terminate this
Agreement in the event Issuing Agent falls to report and to pay to Company the
underwriting risk premium due the latter in accordance with the provisions of
paragraph 3e herein above, or otherwise fails to company with the terms and
provisions of this Agreement or if Company shall receive information of any act
of apparent fraud or dishonesty on the part of the Issuing Agent or any of
Issuing Agent's officers. employees or agents.
d. In the event of any shortage of funds in Issuing Agent's escrow, closing
or trust account, Company may terminate this Agreement immediately upon written
notice to the Issuing Agent, notwithstanding any provision s herein to the
contrary.
e. The issuance of a Cease and Desist Order by any legally authorized
regulatory agent by the terms of which Issuing Agent is prohibited from further
business activity in Arizona as a title insurance agency.
f. Issuing withdrawal, voluntary, by Company from the Territory, or any
part thereof covered by this Agreement or the disqualification of Company to
transact or continue to transact business therein, shall automatically terminate
this agreement. It is expressly agreed that Company has the right at any time,
solely at its option, to withdraw from such Territory, or any part thereof, or
cease business therein for any reason deemed proper and sufficient by Company,
including but not limited to business, economic and financial reasons, or on
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account of any taxes, license fees, laws, restriction, or of regulations or
orders of any governmental authority affecting the business contemplated
hereunder or the mode or cost of transacting same, or premiums or income arising
therefrom.
g. Upon the termination of this Agreement, all supplies, forms and records
of Company in the possession of Issuing Agent shall promptly be delivered by
Issuing Agent to Company, and Issuing Agent shall promptly account for and pay
to Company all underwriting fees due, including but not limited to underwriting
fees which Issuing Agent has collected for policies to be issued, pursuant to
outstanding commitment. Notwithstanding a termination of the agreement, all
duties obligations and undertaking s of the Issuing Agent herein contained shall
survive such termination and remain in full force and effect until such time as
the same have been fully performed.
h. If, upon termination of this Agreement, Issuing Agent shall have in its
possession or under its control any funds or other indemnity against loss or
damage to Company, upon or by reason of a commitment or policy, Issuing Agent
shall forthwith transfer said funds and other indemnity to Company, together
with all agreements and other writings pertaining thereto.
i. At the option of Company, this Agreement may be terminated should there
be a change in ownership of the controlling interest of the Issuing Agent or a
change in the management of the Issuing Agent. A change in the ownership of the
capital stock of at least 51% or more of such stock shall be deemed to be a
change in the ownership or controlling interest of the Issuing Agent.
Notification to the Company of such change in ownership or control must occur
within thirty days of said change.
6. MISCELLANEOUS
a. Company may from time to time promulgate rules for the transaction of a
title insurance business by Issuing Agent. Issuing Agent agrees to abide by such
rules and regulations.
b. All notices provided herein shall be in writing, by certified mail,
return receipt requested, addressed to the parties set forth below or as may be
changed by further communications in writing.
i. Notices to Issuing Agent shall be sent to:
Capital Title Agency, Inc.
4808 N. 22nd Street, Suite 200
Phoenix, Arizona 85016
Attn: Donald A. Head
ii. Notices to Company shall be sent to:
United General Title Insurance Company
999 Eighteen Street, Suite 3400
Denver, Colorado 80202
Attn: Agency Department
c. This agreement together with all of the schedules attached hereto
constitutes the entire relations between the parties and there are no
representations, warranties, covenants or promises, whether made as inducement
to the execution hereof, or otherwise, not set forth herein, all such and all
prior negotiations being expressly merged and integrated herein.
d. This Agreement is binding on and ensures to the benefit of any corporate
successors of Company.
e. This Agreement is not transferable by either party without the written
consent of the other.
f. In the event any portion of this Agreement is held to be invalid and/or
unenforceable under applicable law, the remaining portion of this Agreement
shall continue in full force and effect as if the invalid and/or unenforceable
portion had never been included in this Agreement.
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g. If either party shall institute an action against the other party for
breach of this Agreement, the unsuccessful party shall pay court costs and
reasonable attorney's fees to the successful patty.
h. If this Agreement is canceled pursuant to any of the terms hereof, the
obligations to make any payments, provide notification as to claims and to
provide the records and files or access thereto shall continue beyond the date
of the cancellation of this Agreement.
i. Company agrees to pay premium taxes or any taxes similar thereto
assessed against the title insurance premiums and Issuing Agent agrees to pay
all other taxes of whatever nature to all other taxing authorities.
j. No failure by Company to insist upon strict performance of any provision
of the Agreement or to exercise any right power, or remedy arising out of a
breach of this Agreement and no acceptance of any payment or remittance from
Issuing Agent during such breach, shall constitute a waiver of such breach or of
any such provision. No express waiver of any such breach shall affect this
Agreement, which shall continue in full force and effect. No express waiver of
any such breach shall affect the rights of Company as to any other then existing
or subsequent breach of any provision of this Agreement.
k. Captions used in this Agreement are not binding as they relate to the
body of the Agreement.
In witness whereof, the parties hereto have caused this agreement to be executed
the day and year first above written.
UNITED GENERAL TITLE INSURANCE COMPANY CAPITAL TITLE AGENCY, INC.
a Louisiana corporation
BY: /s/ Wayne Johnston BY:/s/ Donald R. Head
----------------------------------- ----------------------------
DON HEAD
ITS: Vice President ITS: CEO
---------------------------------- ---------------------------
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SCHEDULE A
Attached to and made a part of the Agreement between UNITED GENERAL TITLE
INSURANCE COMPANY, hereinafter referred to as Company and
CAPITAL TITLE AGENCY. INC.
hereinafter referred to as Issuing Agent.
EFFECTIVE DATE OF AGREEMENT, DESCRIPTION OF
ISSUING AGENT'S TERRITORY, RISK LIMITS, TITLE INSURANCE
RATES, COMMISSIONS, AND CANCELLATION
1. Effective date of this Agreement:
2. Issuing Agent shall not insure any risk in excess $500,000.00 without prior
approval of Company.
3. RATES. Attached to this Schedule A and identified as "Exhibit 1" are the
title insurance rates referred to in this Agreement This Agreement and this
schedule shall automatically be amended to include any amendments to title
insurance rates that may be enacted or promulgated by any governmental
agency, legislature or commission. Company shall provide copies of said
amendments to Issuing Agent;
4. COMMISSIONS. Issuing Agent shall be entitled to a commission on all Title
Assurances issued by Issuing Agent for Company, which commission shall be
90 % of the title insurance rates set forth in Exhibit 1 attached hereto.
5. COMMISSIONS. In cases where Company directly refers title insurance
business to Issuing Agent, Issuing Agent shall be entitled to a commission
on those Title Assurances issued by Issuing Agent for such referred
business, which commission shall be 90% of the insurance rates set forth
in Exhibit 1 attached hereto.
6. CANCELLATION. This Agreement may be canceled by either party hereto, other
than as set forth in Section 5 of the Agency Agreement, by written notice
of intention to cancel sent by registered or certified United States mail
to the other party hereto at their last known business address. Any such
cancellation shall take effect at the expiration of sixty (60) days after
the mailing of such notice.
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SCHEDULE B
Attached to and made a part of the Agreement between UNITED GENERAL TITLE
INSURANCE COMPANY, hereinafter referred to as Company and
CAPITAL TITLE AGENCY. INC.
hereinafter referred to as Issuing Agent.
ISSUING AGENT'S FINANCIAL CONDITION AND
INSURANCE COVERAGES
1. Issuing Agent shall, upon request, provide Company with a balance sheet and
income statement, as of the close of Issuing Agent's most recent fiscal
year or at such other times as requested by Company.
2. Issuing Agent agrees that it will obtain and maintain the following
insurance coverages in a form acceptable to the Company.
The following provisions as indicated and initialed are applicable to this
Agreement.
[ ] Title Insurance Agent's Errors and Omissions Policy and Opinion of Title
Coverage with limits of not less than $_____.
[ ] Abstractor's Error and Omissions Policy with limits of not less then
$________________.
[ ] Escrow Agent's Errors and Omissions Policy with limits of not less than
$_______________.
[ ] Commercial blanket bond or similar fidelity bond covering its officers
and employees with limits of not less than $__.
[ ] Lawyer's Professional Liability insurance with limits of not less than
$______________.
[ ] Such other insurance or bonding as required by the laws of the state or
territory where Issuing Agent is engaged in business.
Any of the above policies shall provide that at least ten (10) days prior notice
of cancellation shall be given to Company. Issuing Agent agrees to furnish
Company with evidence of compliance with this provision, including a copy of
said policy(ies) and every renewal thereof.
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SCHEDULE C
Attached to and made a part of the Agreement between UNITED GENERAL TITLE
INSURANCE COMPANY hereinafter referred to as Company and
CAPITAL TITLE AGENCY. INC.
hereinafter referred to as Issuing Agent
INSURED CLOSING AGENCY AGREEMENT
WHEREAS, Issuing Agent is authorized to issue tide insurance on behalf of
Company in the State of ARIZONA and in connection therewith, has been requested
by one or more lending institutions to close real estate loans on behalf of such
lending institutions and issue Title Assurances in connection therewith; and
WHEREAS, such lender or lenders have or may in the future request, in
connection with such loan closings, a guaranteed loan closing letter from
Company assuring the faithful performance of the closing instructions of such
lender by Issuing Agent
NOW, THEREFORE, in consideration of the issuance of such guaranteed closing
letters in the past or hereafter by Company, Issuing Agent undertakes to
indemnify Company from any and all liability, loss or damage Company may suffer
as a result of claims, demands, costs or judgments arising against it as a
result of its issuance of any such guaranteed closing letters.
It is agreed that Company may. at any time, and without notice to Issuing
Agent, cancel such guaranteed closing letters.
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first above written.
BY:/s/ E. Wayne Johnston BY: /s/ Donald A. Head
-------------------------------------- ----------------------------
E. Wayne Johnston Donald A. Head
Vice President Chairman/CEO
United General Title Insurance Company Capital Title Agency, Inc.
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SCHEDULE D
Attached to and made a part of the Agreement between UNITED GENERAL TITLE
INSURANCE COMPANY, hereinafter referred to as Company and
CAPITAL TITLE AGENCY. INC.
hereinafter referred to as Jssuing Agent
Being part of a certain Agency Contract between United General Title Insurance
Co.,. and Issuing Agent:
1. If co-insurance is required by an insured, the cost of such co-insurance
will be deducted from the premium and sent to Company together with the
normal underwriting fee on the balance..
2. Issuing Agent shall indemnify and hold the Company harmless from all losses
sustained by it as a proximate result of Issuing Agent's fraudulent or
other willful misconduct, or gross negligence, while acting in any capacity
by reason of which the Company becomes legally responsible for such acts or
omissions.
3. Issuing Agent shall be liable for the first Five Thousand ($5,000.00)
dollars, including the Company's attorney fees and preliminary
investigation expenses relating to claims or demands made under title
insurance undertakings issued by Company though Issuing Agent provided such
losses are not the proximate result of fraud or other willful misconduct or
gross negligence on the part of Issuing Agent.
11
EXHIBIT 10.16
[LETTERHEAD OF IMPERIAL BANK]
NOTE
$ 350,000.00 Beverly Hills, California November 15, 1996
On November 15, 1999, and as hereinafter provided, for value received. the
undersigned promises to pay to IMPERIAL BANK ("Bank") a California banking
corporation, or order, at its Beverly Hills Regional office, the principal sum
of $350,000.00 or such sums up to the maximum if so stated, as the Bank may now
or hereafter advance to or for the benefit of the undersigned in accordance with
the terms hereof, together with interest from date of disbursement or N/A,
whichever is later, on the unpaid principal balance [ ] at the rate of %
per year [X] at the rate of 0.000% per year in excess of the rate of interest
which Bank has announced as its prime lending rate (the "Prime Rate"). which
shall vary concurrently with any change in such Prime Rate, or $ 250.00,
whichever is greater. Interest shall be computed at the above rate on the basis
of the actual number of days during which the principal balance is outstanding,
divided by 360, which shall, for interest computation purposes, be considered
one year.
Interest shall be payable [X] monthly [ ] quarterly [ ] included with principal
[ ] in addition to principal [ ], beginning December 15, 1996, and if not so
paid shall become a part of the principal. All payments shall be applied first
to any late charges owing, then to interest and the remainder, If any, to
principal. [X] (If checked), Principal shall be payable in installments of
$11,000.00 or more, each installment on the 15th day of each month, beginning
December 15, 1996. Advances not to exceed any unpaid balance owing at any one
time equal to the maximum amount specified above, may be made at the option of
Bank.
Any partial prepayment shall be applied to the installments, if any, in inverse
order of maturity Should default be made in the payment of principal or Interest
when due, or in the performance or observance, when due. of any item, covenant
or condition of any deed of trust, security agreement or other agreement
(Including amendments or extensions thereof) securing or pertaining to this
note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year In excess of the rate provided for
above, as it may vary from time to time.
Defaults shall include, but not be limited to. the failure of the maker(s) to
pay principal or interest when due; the filing as to each person obligated
hereon, whether as maker, co-maker, endorser or guarantor (individually or
collectively referred to as the "Obligor") of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act; the issuance of any
attachment or execution against any asset of any Obligor; the death of any
Obligor or any deterioration of the financial condition of any Obligor which
results in the holder hereof considering itself, in good faith, insecure.
[X] If any installment payment, interest payment principal payment or principal
balance payment due hereunder is delinquent ten or more days, Obligor agrees to
pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in
addition to the payment; but nothing in this paragraph is to be construed as any
obligation on the part of the holder of this note to accept payment of any
payment past due or less than the total unpaid principal balance after maturity.
If this note is not paid when due, each Obligor promises to pay all costs and
expenses of collection and reasonable attorneys fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon. Each Obligor shall be jointly
and severally liable hereon and consents to renewals, replacements and
extensions of time for payment hereof, before, at, or after maturity; consents
to the acceptance, release or substitution of security for this note; and waives
demand and protest and the right to assert any statute of limitations. Any
married person who signs this note agrees that recourse may be had against
separate property for any obligations hereunder. The indebtedness evidenced
hereby shall be payable in lawful money of the United States. In any action
brought under or arising out of this note, each Obligor, including successor(s)
or assign(s) hereby consents to the application of California law, to the
jurisdiction of any competent court within the State of California, and to
service of process by any means authorized by California law.
No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or to exercise of any other such
power. The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect to
any of the security. Any delay or omission on the part of the holder hereof in
exercising any right hereunder, or under any deed of trust, security agreement
or other agreement, shall not operate as a waiver of such right, or of any other
right, under this note or any deed of trust, security agreement or other
agreement in connection herewith
Notwithstanding the amount specified for the monthly payment, the amount due
monthly shall never be less than interest accrued.
CAPITAL TITLE AGENCY. INC.
By: /s/ Donald R. Head
------------------------------------------
Donald R. Head, Chairman of the Board/CEO
EXHIBIT 10.17
[LETTERHEAD OF IMPERIAL BANK ARIZONA]
NOTE
$ 250,000.00 Phoenix Arizona, November 17, 1997
On November 16, 1998, and as hereinafter provided, for value received. the
undersigned promises to pay to IMPERIAL BANK ARIZONA ("Bank") an Arizona banking
corporation, or order, at its Phoenix Regional office, the principal sum of $
250,000.00 MAXIMUM or such sums up to the maximum if so stated, as the Bank may
now or hereafter advance to or for the benefit of the undersigned in accordance
with the terms hereof, together with interest from date of disbursement or N/A,
whichever is later, on the unpaid principal balance [ ] at the rate of % per
year [X] at the rate of 0.000% per year in excess of the rate of interest which
Bank has announced as its prime lending rate (the "Prime Rate"). which shall
vary concurrently with any change in such Prime Rate, or $ 250.00, whichever is
greater. Interest shall be computed at the above rate on the basis of the actual
number of days during which the principal balance is outstanding, divided by
360, which shall, for interest computation purposes, be considered one year.
Interest shall be payable [X] monthly [ ] quarterly [ ] included with principal
[ ] in addition to principal [ ], beginning January 1, 1998, and if not so paid
shall become a part of the principal. All payments shall be applied first to any
late charges owing, then to interest and the remainder, If any, to principal.
[ ] (If checked), Principal shall be payable in installments of $ ,or more,
each installment on the day of each , beginning .
Advances not to exceed any unpaid balance owing at any one time equal to the
maximum amount specified above, may be made at the option of Bank.
Any partial prepayment shall be applied to the installments, if any, in inverse
order of maturity Should default be made in the payment of principal or Interest
when due, or in the performance or observance, when due. of any item, covenant
or condition of any deed of trust, security agreement or other agreement
(including amendments or extensions thereof) securing or pertaining to this
note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year In excess of the rate provided for
above, as it may vary from time to time.
Defaults shall include, but not be limited to. the failure of the maker(s) to
pay principal or interest when due; the filing as to each person obligated
hereon, whether as maker, co-maker, endorser or guarantor (individually or
collectively referred to as the "Obligor") of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act; the issuance of any
attachment or execution against any asset of any Obligor; the death of any
Obligor or any deterioration of the financial condition of any Obligor which
results in the holder hereof considering itself, in good faith, insecure.
If any installment payment, interest payment principal payment or principal
balance payment due hereunder is delinquent ten or more days, Obligor agrees to
pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in
addition to the payment; but nothing in this paragraph is to be construed as any
obligation on the part of the holder of this note to accept payment of any
payment past due or less than the total unpaid principal balance after maturity.
If this note is not paid when due, each Obligor promises to pay all costs and
expenses of collection and reasonable attorneys fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon. Each Obligor shall be jointly
and severally liable hereon and consents to renewals, replacements and
extensions of time for payment hereof, before, at, or after maturity; consents
to the acceptance, release or substitution of security for this note; and waives
demand and protest and the right to assert any statute of limitations. Any
married person who signs this note agrees that recourse may be had against
separate property for any obligations hereunder. The indebtedness evidenced
hereby shall be payable in lawful money of the United States. In any action
brought under or arising out of this note, each Obligor, including successor(s)
or assign(s) hereby consents to the application of Arizona law, to the
jurisdiction of any competent court within the State of Arizona, and to service
of process by any means authorized by Arizona law.
No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or to exercise of any other such
power. The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights, with respect
to any of the security. Any delay or omission on the part of the holder hereof
in exercising any right hereunder, or under any deed of trust, security
agreement or other agreement, shall not operate as a waiver of such right, or of
any other right, under this note or any deed of trust, security agreement or
other agreement in connection herewith
Default by Borrower under any obligation to Bank shall be a default hereunder.
CAPITAL TITLE AGENCY. INC.
By: /s/ Donald R. Head
-----------------------------------------
Donald R. Head, Chairman of the Board/CEO
EXHIBIT 10.18
ACQUISITION CONSULTING AGREEMENT
THIS ACQUISITION CONSULTING AGREEMENT (the "Agreement") is entered into as
of the 28th day of January, 1998 (the "Effective Date") by and between CAPITAL
TITLE GROUP, INC., a Delaware corporation (the "Company" or "Capital Title"),
and MILLER CAPITAL CORPORATION, an Arizona corporation ("MCC").
In consideration of the mutual premises, covenants and undertakings set
forth herein, the parties hereby agree as follows:
I. RESPONSIBILITIES OF MCC
1.1 Subject to the terms and conditions hereof, Capital Title hereby
retains MCC to provide acquisition consulting services to Capital Title and MCC
agrees to provide such services to Capital Title. MCC shall assist with the
identification of acquisition candidates and with negotiating and structuring
acquisitions all in accordance with Capital Title's expansion plans as may be in
effect from time to time.
1.2 Capital Title acknowledges and understands that MCC, in order to
perform its services effectively under this Agreement, requires the prompt
receipt of all material information with respect to Capital Title, its
operations and prospects. Accordingly, Capital Title agrees to furnish promptly
to MCC copies of all publicly available reports and filings made with the
Securities and Exchange Commission (the "SEC"), all communications with
stockholders (in the stockholders' capacity as a stockholder) and all reports
received from Capital Title's auditors that have significance to the scope of
MCC's services hereunder; provided, however, Capital Title shall have no
obligation to provide MCC with any information that Capital Title deems
confidential. Capital Title recognizes the necessity of promptly notifying MCC
of all material developments concerning Capital Title, its business and
prospects and to supply MCC with sufficient information necessary for MCC to
make a determination as to its compliance with its own procedures as well as any
legal requirements. MCC agrees that it shall keep confidential all information
received from Capital Title until such time that MCC is authorized to release
such information.
II. COMPENSATION
In the event the Company effectuates a corporate restructuring, merger,
joint venture, or acquisition during the term hereof, or such a transaction
occurs on or prior to one year from the date of termination of this Agreement
(irrespective of any reason for such termination), then the Company hereby
agrees to pay the following consideration, which payment shall be due and
payable eighty (80%) percent in cash and twenty (20%) percent in common stock
(with registration rights) on the date of any such closing with respect thereto:
<PAGE>
Capital Title Group, Inc.
Acquisition Consulting Agreement
January 28, 1998
5% of the consideration from $1 and up to $2,000,000, plus
4% of the consideration in excess of $2,000,000 and up to
$10,000,000, plus
3% of the consideration in excess of $10,000,000 and up to
$20,000,000, plus
2% of the consideration in excess of $20,000,000 and up to
$30,000,000, plus
1% of the consideration in excess of $30,000,000.
III. EXPENSE REIMBURSEMENT
Capital Title agrees to reimburse MCC for all reasonable out-of-pocket
expenses including but not limited to, the cost of telephone calls, travel,
facsimile transmissions, translation, interpretation, paper duplication, postage
and delivery services, or fees of counsel, incurred in connection with the
performance by Miller of its duties as contemplated by this Agreement. All
out-of-town travel, counsel or third party consultant fees, and other
significant expenses over $1,000 will be approved by Capital Title in advance.
IV. TERM
The term of this Agreement shall be for two years commencing as of the date
first written above and terminating one day prior to the 2nd anniversary hereof.
Thereafter, this Agreement shall be renewed for subsequent two year terms upon
mutual agreement of the parties.
V. ASSIGNMENT AND TRANSFER OF OBLIGATIONS
In the event that Capital Title transfers or otherwise conveys all or
substantially all of its assets (including without limitation the assets of its
subsidiaries) or grants the authority to operate its business(es) or affiliated
business(es) to a new entity, whether a corporation, partnership, or natural
person ("New Entity") all of Capital Title's obligations under this Agreement
will be binding upon such New Entity and Capital Title will not enter into or
create an agreement, undertaking or legal obligation with a New Entity without
requiring such New Entity to accept and satisfy Capital Title's obligations
under this Agreement. Notwithstanding anything to the contrary contained in this
Article V, this Article V shall not be applicable and will be of no force or
effect if compliance with this Article V would result in the violation of any
law or statute, the breach of any Agreement to which Capital Title or its
affiliates is a party, or the inability of Capital Title to operate in
accordance with its usual and customary practices.
2
<PAGE>
Capital Title Group, Inc.
Acquisition Consulting Agreement
January 28, 1998
VI. INDEMNIFICATION
6.1 In connection with the terms and agreements set forth herein, Capital
Title agrees to indemnify and hold harmless MCC, its officers, directors,
employees, agents and legal counsel (collectively, the "MCC Parties"), against
any and all losses, claims, damages, liabilities or costs (and any reasonable
legal or other expense in giving testimony or furnishing documents in response
to a subpoena or otherwise), including the costs of investigation, preparing or
defending any action or claim, directly or indirectly, caused by, relating to,
based upon or arising out of this Agreement. Capital Title also agrees that the
MCC Parties shall not have any liability (whether direct or indirect, in
contract, tort or otherwise) to Capital Title for or in connection with the
engagement of MCC.
6.2 MCC agrees to indemnify Capital Title and hold harmless Capital Title,
its officer, directors, employees, agents and legal counsel (collectively, the
"Capital Title Parties") against any and all liabilities, expenses, costs and
damages (including the cost of defense) alleged against or incurred by any
Capital Title Party in connection with this Agreement to the extent that such
liability, expense, cost, or damage was incurred or is alleged to have been
incurred in whole or in part, directly or indirectly, due to any action or
omission to act by MCC, which action or omission is determined to be the result
of MCC's gross negligence or wilful misconduct.
6.3 If any action, proceeding, or investigation is commenced or claim is
made as to which either a MCC Party or a Capital Title Party proposes to demand
indemnification, the party claiming indemnification (the "Indemnified Party")
will notify the party against whom indemnification is claimed (the "Indemnifying
Party") with reasonable promptness. The Indemnifying Party reserves the right to
assume the defense of the Indemnified Party with counsel of its choosing, which
counsel shall be reasonably acceptable to the Indemnified Part. The Indemnifying
Party will not be liable for any settlement of any claim against any Indemnified
Party made without the Indemnifying Party's written consent.
VII. NOTICES
All notices and other written communications required to be given under
this Agreement shall be in writing and shall be deemed to have been duly given
if delivered to the addressee in person or mailed by registered or certified
mail, return receipt requested, to the following addresses:
3
<PAGE>
Capital Title Group, Inc.
Acquisition Consulting Agreement
January 28, 1998
If to MCC: Mr. Rudy R. Miller
Chairman and CEO
Miller Capital Corporation
4909 East McDowell Road
Phoenix, Arizona 85008
If to Capital Title: Mr. Donald R. Head
Chairman and CEO
Capital Title Group, Inc.
14555 North Scottsdale Road, Suite 320
Scottsdale, Arizona 85254
Either party may change the address at which notice is to be given by notifying
the other party in writing. Notices shall be deemed delivered upon delivery, if
personally delivered, or, if mailed, three (3) days after deposit in the Untied
States mail.
VIII. APPLICABLE LAW
The validity and interpretation of this Agreement shall be governed by the
laws of the State of Arizona, without giving effect to the State of Arizona's
choice of law principles, and all actions arising under this Agreement or
arising out of the operative facts represented by services performed pursuant to
this Agreement shall be resolved in the courts of the State of Arizona.
IX. MISCELLANEOUS
9.1 ASSIGNMENT. MCC shall not assign this Agreement to a third party
without the prior written consent of a duly authorized representative of Capital
Title, which consent shall not be unreasonably withheld.
9.2 ENTIRE AGREEMENT. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subject
hereof and that no understandings or agreements, verbal or otherwise, exist
between the parties except as set forth in the Agreement.
9.3 AMENDMENT. Any modifications to the Agreement must be reduced to
writing by both parties, and attached to the Agreement to be effective.
4
<PAGE>
Capital Title Group, Inc.
Acquisiton and Consulting Agreement
January 28, 1998
9.4 SEVERABILITY. In the event any term or provision of this Agreement is
declared to be invalid or illegal for any reason, this Agreement shall remain in
full force and effect and the same shall be interpreted as though such invalid
and illegal provision were not a part hereof. The remaining provisions shall be
construed to preserve the intent and purpose of this Agreement and the parties
shall negotiate in good faith to modify the provisions held to be invalid or
illegal to preserve each party's anticipated benefits thereunder.
9.5 TITLES AND SUBTITLES. The titles of articles and sections of this
Agreement are for convenience of reference only and are not to be considered in
construing this Agreement.
9.6 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power
or remedy accruing to any party shall impair any such right, power or remedy of
such party, nor shall it be construed to be a waiver of any breach or default
under this Agreement, or an acquiescence therein, or in any similar breach or
default thereafter occurring; nor shall any delay or omission to exercise any
right, power or remedy or any waiver of any single breach or default be deemed a
waiver of any other right, power or remedy or breach or default theretofore or
thereafter occurring.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
CAPITAL TITLE GROUP, INC.
By: /s/ Donald R. Head
-----------------------------
Donald R. Head
Chairman and CEO
MILLER CAPITAL CORPORATION
By: /s/ Rudy R. Miller
-----------------------------
Rudy R. Miller
Chairman and CEO
5
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