ITEM 1. BUSINESS
COMPANY HISTORY AND OVERVIEW
Capital Title Group, Inc. (the "Company") is a Delaware corporation which acts as the parent holding company of the following subsidiaries:
Capital Title Agency Inc. ("Capital Title") is an Arizona corporation which has operated under the authority of the State Banking Commission since November 1, 1981. Capital Title is an independent title agency that provides escrow services and, as an agent for five title insurance companies, issues title insurance policies to the real estate industry in Maricopa, Yavapai and Mohave Counties in Arizona. As of March 15, 2000 Capital Title operated 32 offices located throughout Maricopa, Yavapai and Mohave Counties in Arizona.
New Century Title Company ("New Century"), a California corporation, is an independent title agency that provides escrow and title services to the real estate industry in selected California counties. New Century began operations in July 1998 with the purchase of a dormant escrow and title agency in San Diego, California. New Century currently has three offices in San Diego County. New Century also has operations in northern California, which it obtained by acquisition in November 1998. New Century currently has 11 offices in Sonoma, Contra Costa and Alameda Counties in California. During 1999, New Century was granted a license to operate in six additional southern California counties and opened an office in Orange County in February 2000.
The Company plans to continue its growth in Arizona and California, and as conditions merit, to expand into other southern and southwestern states. The Company intends to accomplish this planned expansion primarily through 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 commissions based on revenue generated and stock options.
The principal executive offices of the Company are located at 2901 East Camelback Road, Phoenix, Arizona 85016 and the Company's telephone number is (602) 954-0600.
COMPANY OPERATIONS
The Company is an independent title agency providing escrow services and, as an agent for First American Title Insurance Company, Chicago Title Corporation, Stewart Information Services Corporation, United General Insurance Company, Old Republic Insurance Company and American Pioneer Title Insurance Company, issues title insurance policies to service the real estate industry.
Capital Title's operations commenced in 1981 in Prescott, Arizona. The Company is licensed to conduct business in three counties in Arizona and 10 counties in California. During late 1996 the Company began its expansion in Maricopa County, Arizona and in 1998 expanded into Mohave County, Arizona along with entering the California market.
The Company's operations are positively impacted by the geographic locations in which it operates as Arizona and California rank among the top states in the nation in the rate of new job creation, population growth and gains in personal income. Additionally, these states have some of the largest single family housing markets in the nation with Phoenix and San Diego currently the 6th and 7th largest cities in the United States as reported by the U.S. Census Bureau.
December 1999 market share reports show Capital Title as the top title insurer in Yavapai County. As of December 1999, Capital Title ranked third in Maricopa County market share, having moved up from fourth in 1998 and from tenth just three years before. The Company believes that its combination of technology, management and employee stock options will play a significant role in positively impacting its market share in the locations in which it is currently operating and in the areas into which it expands.
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 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. 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 Company possesses advanced title report generation and processing technology that combines title information from multiple sources via electronic data exchange. The Company has implemented this technology in its Arizona operations and a substantial portion of its California operations. This technology facilitates expansion of the Company's operations in existing markets, and management believes it outperforms the technology of other major title companies that possess greater resources than the Company.
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 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.
Title insurance policies are issued on the basis of a preliminary report or commitment. These reports are prepared after a search of public records, maps and other relevant documents to ascertain title ownership and the existence of easements, restrictions, rights of way, conditions, encumbrances or other matters affecting the title to, or use of, real property. A visual inspection of the property may also be made prior to the issuance of certain title insurance policies.
To facilitate the preparation of preliminary reports without the necessity of manually searching public records, copies of public records, maps and other relevant historical documents are compiled and indexed in a "title plant." Each title plant relates to a particular county and is kept current on a daily or other frequent basis by the addition of copies of recorded documents that affect rights in real property in the particular county. Title companies often subscribe to independent title information services to assist in the updating of their title plants and the maintenance of title records.
DIRECT VS. AGENCY SALES. Preliminary reports and commitments to issue 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.
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) 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.
(iii) 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.
(iv) Once the transaction is closed and all monies have been released, the policy is issued (a) to the owner and the lender on a resale transaction or (b) to the lender only on a refinancing transaction.
LOSSES AND RESERVES. The maximum amount of liability under a title insurance policy is usually the face amount of the policy plus the cost of defending the 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. Because the Company operates an independent agency, it provides title insurance on behalf of third party underwriters. As such, the Company's losses and reserves are less than those carried by a title insurance underwriter (see Company Operations-Claims and Underwriting).
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.
During 1999, there was a significant decrease in the refinance market from 1998 levels as a result of increased mortgage interest rates.
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. 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 as this business has historically been more consistent and less prone to fluctuation than commercial, new home sales or refinancing segments of the market. To set itself apart as a service company, the Company continues to enhance industry specific information technology to better serve its clients.
MANAGEMENT. The Company recognizes that its aggressive growth plan calls for executive management with extensive industry operational and expansion experience. The Company was co-founded by Donald R. Head, and he has served as Chairman of the Board and Chief Executive Officer since inception. Mr. Head has extensive experience as a developer and entrepreneur within the real estate industry and has nearly 20 years of experience in the title insurance industry.
In February 1998, the Company appointed Milt Ferrantelli, Executive 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 25 years of experience in the title and escrow industry in the Arizona marketplace.
In September 1999, the Company appointed Mervyn L. Morris as President of California Operations for New Century Title Company. He is directly responsible for the California operations. Prior to joining New Century, Mr. Morris was Executive Vice President, Southern Division Manager for Old Republic Title Company, covering 25 branch offices and approximately 600 employees. He has 28 years of experience in the California market.
In addition, the Company employs managers to run the day-to-day operations in the counties the Company operates in and to support the above mentioned executives. These managers average over 20 years of experience in the title and escrow industry.
EQUITY PARTICIPATION BY ESCROW OFFICERS. Escrow officers are the major revenue producers for title insurance companies. It is their business relationships with real estate brokers, lenders and other industry participants whom are primarily responsible for the direction of escrow and title business. The Company will seek to attract the most successful escrow officers through employment packages that include commissions based on revenue produced and stock options 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.
COMPANY OPERATIONS
The Company reported revenue of $36.1 million for the year ended December 31, 1999 compared to $23.2 million for the year ended December 31, 1998. (See Management's Discussion and Analysis of Financial Condition and Results of Operations).
MARKETING. The Company believes that the primary source of its business is from referrals from participants in the real estate industry such as real estate brokers, mortgage lenders, developers and attorneys. In addition to the referral market, the Company markets its services directly to larger brokerages and real property lenders. Marketing activities are performed by the escrow officers of the Company and marketing representatives whose sole function is the solicitation of business from major real estate brokers, developers, owners and lenders.
ESCROW SERVICE. The Company's escrow departments are responsible for handling the consummation of real estate transactions.
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. The escrow officers then receipt in funds and disburse them pursuant to the escrow instructions.
The escrow agent is held accountable by state governmental agencies for strict compliance with its fiduciary responsibilities outlined by the escrow instructions. The officer must possess a high degree of skill, professionalism and confidentiality in the handling, preparation, collecting and recordation of all escrow matters between the buyer, seller, real estate brokers and their agents, developers, lenders and investors.
TITLE DEPARTMENT. The primary function of the title department is the accumulation and analysis of various documents from the many sources that make up the public record. From this analysis, a preliminary report is written showing the present condition of title. This report is given to the escrow officer who, in turn, distributes it to the parties involved in the purchase agreement. After the preliminary report has been read and approved by all the parties and the requirements of the report have been fulfilled, the escrow will proceed to closing and a final title insurance policy will be issued.
The accumulation of title data from public records which provides the history of each parcel of real estate in a particular county is referred to as a "title plant." The Company has entered into multi-year service agreements for title plant access in the counties it operates. In certain counties, the Company may be a partial owner in a title plant or own a title plant which contains data prior to the time period covered by a third party title plant provider. The Company believes it will be able to obtain title plants on terms and conditions that are acceptable to it as the Company expands into other markets; however, there can be no assurance in this regard.
CLAIMS AND UNDERWRITING. The Company provides title insurance as an agent of six title insurance companies. These services are provided pursuant to Underwriting Agreements with each of these underwriters which state the conditions on which the Company is authorized to issue a title insurance policy on behalf of the underwriter and prescribe the circumstances under which the Company may be liable to the underwriter if a policy loss is attributable to errors made by the Company.
Claims against title insurance policies 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. With certain exceptions, the Company's exposure is limited to $5,000 for any loss resulting from a title insurance claim. The Company assumes the entire risk of losses incurred in errors made during the escrow process; however, it has secured insurance coverage to limit any significant losses.
OTHER SERVICES. In addition to title and escrow services, the Company also provides account servicing, foreclosure and tax-free exchange services.
CUSTOMERS
The Company 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 and California include First American, Chicago Title, Old Republic, Security Title, ATI Title Agency, Stewart Title, Fidelity Title and Lawyers 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 financial and other resources greater than those of the Company. The Company believes that quality and timeliness of service are the key competitive factors in the industry because parties to a real estate transaction are usually concerned with time schedules and costs associated with delays in the closing of transactions. In those states where prices are not established by regulation, the price of title insurance is also an important competitive factor.
REGULATION
The Company conducts its business under licenses granted by the State Banking and Insurance Departments of the State of Arizona and the Department of Insurance in California. 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, 1999, the Company had a total of 468 employees, of which 288 are located in Arizona and 180 are in California. The Company believes that its relations with its employees are excellent.
ITEM 2.
ITEM 2. PROPERTIES
The Company conducts its business operations primarily in leased office space. The Company currently leases offices at 46 locations with remaining lease periods ranging from one to sixty months. The Company's monthly rental payments at the foregoing locations are approximately $209,600. The Company owns a 24,000 square foot building in Phoenix, Arizona, which houses its corporate headquarters and its Maricopa County operations. In addition, the Company owns two buildings in Northern California in which it conducts title and escrow operations.
ITEM 3.
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.
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, 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been quoted on The Nasdaq SmallCap Market under the symbol "CTGI" since September 21, 1998 and on the OTC Electronic Bulletin Board market from May 15, 1997 to September 20, 1998.
The following table sets forth high and low bid prices of the Company's Common Stock for the periods indicated. Bid quotations represent interdealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.
Date High/Bid Low/Bid ---- -------- ------- First Quarter $2.56 $1.56 Second Quarter 3.62 2.63 Third Quarter 4.50 3.25 Fourth Quarter 4.06 3.38 First Quarter 3.94 3.00 Second Quarter 3.56 2.50 Third Quarter 2.88 2.13 Fourth Quarter 2.30 1.50 First Quarter (through March 15) 2.00 1.31
As of December 31, 1999, the Company had issued and outstanding 16,947,901 shares of common stock. In addition, 3,900,000 shares are reserved for issuance
under the Company's 1996 Stock Option Plan and 600,000 shares are reserved for issuance under the Company's Directors Non-Employee Plan. At December 31, 1999, there were 327 record holders of the Company's Common Stock.
In March 1998, the Company issued 463,500 warrants in conjunction with a private placement. Each warrant entitles the holder to purchase one share of the Company's common stock at $2.50 until September 30, 2000. In April 1998, the Company issued 308,642 warrants to an investment banking firm that acted as placement agent in connection with another private placement. Each warrant entitles the holder to purchase one share of the Company's common stock at $1.62 until May 1, 2001.
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).
ITEM 6.
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.
OVERVIEW
Capital Title Group, Inc. reported an operating loss of $1,969,027 for the year ended December 31, 1999 due to losses in its California operations, a downturn in refinance business resulting from increased interest rates, and costs associated with expansion. The California operations, which were heavily dependent on the refinance market lost approximately $3,474,000 for the year ended December 31, 1999. During late 1999, the Company had a change in four senior management positions in California and is focusing on increasing its residential resale business, which has historically been more stable and profitable. Contributing to the loss, were increased operating costs associated with the Company's commitment to its California operations as it invested in expanding its infrastructure and branch operations. This approach to internal growth was developed utilizing the same successful formula employed in growing the Arizona market and was chosen because the strong economy earlier in the year had placed excessive values on targeted acquisitions.
The Company's core operations in Arizona (Maricopa and Yavapai Counties) had net income of approximately $2,974,000 (13.4% of revenue on a pre-tax basis) for the year ended December 31, 1999. The net income in these counties was negatively impacted by the decline in refinance business and costs associated with opening seven new branch offices during 1999.
During the year ended December 31, 1999, there were approximately $3,721,000 of operating expenses (net of revenue recognized) related to costs for the Company's California and Mohave County (Arizona) operations. Excluding these costs, income, before income taxes, from existing operations would have been approximately $1,752,000 for the year ended December 31, 1999.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components of the Company's revenue and expenses along with the percentage they bear to total revenue:
FISCAL 1999 COMPARED TO FISCAL 1998
The Company's revenues increased by $12,941,202 or 55.8% for the year ended December 31, 1999 as compared to the year ended December 31, 1998. Approximately $9,300,000 of this increase resulted from 1999 being the first full year of operations for companies acquired or opened during 1998. The remaining increase is attributable to the Company's expansion and increased market share, primarily in Arizona, and a favorable real estate market.
The Company's revenue from title insurance premiums and escrow fees is primarily from three sources. The largest revenue source is from residential resales. The current residential resale marketing projections for the counties in which the Company operates predict that the resale market should continue to be strong as new house prices continue to climb and the economy remains strong. The Company's marketing plan is to have the vast majority of the Company's title and escrow revenue be derived from the resale business. Historically, the resale business has been more consistent and less subject to fluctuations than commercial, new homes sales, or refinancing segments of the market. The commercial, new home sales and refinancing markets tend to be more influenced by interest rates and other economic conditions.
Personnel costs, including commissions, are the most significant component of the Company's operating expenses. The number of people employed by the Company decreased from 477 on December 31, 1998 to 468 on December 31, 1999. For the year ended December 31, 1999, personnel costs including commissions were 65.3% of total revenue compared to 57.9% of total revenue for the year ended December 31, 1998. This increase was a result of lower productivity given the decline in refinance business and higher costs associated with the Company's California operations.
Title remittance fees relate to the amounts paid pursuant to title insurance underwriting agreements the Company has with six national title companies. Title remittance fees as a percentage of revenue have remained relatively unchanged when comparing 1999 results with fiscal year 1998.
Rent expense increased as a percentage of revenue in the year ended December 31, 1999 to 6.0% from 5.4% in 1998. This increase was a result of adding new offices and the fixed nature of these costs in relation to revenue.
The significant components of other operating expenses include supplies, utilities, insurance, depreciation, title plant maintenance and access, postage and professional fees. Other operating expenses increased as a percentage of total revenue to 27.3% in 1999 from 22.1% in 1998. This increase was the result of increased costs related to the Company's expansion and the relatively fixed nature of many of these expenses in relation to the decline in refinance business.
No income tax provision was recorded for the year ended December 31, 1999 as a result of the net loss reported. As of December 31, 1999, the Company has a net operating loss carryforward of $2,074,000.
FISCAL 1998 COMPARED TO FISCAL 1997
The Company's revenues increased by $14,857,721 or 178% for the year ended December 31, 1998 as compared to the year ended December 31, 1997. Approximately $3,626,000 of this increase resulted from acquisitions and startup operations. The remaining increase is attributable to the Company's expansion and increased market share in Maricopa and Yavapai counties, Arizona, a favorable real estate market and favorable interest rates.
During the year ended December 31, 1998, there were approximately $1,270,000 of operating expenses (net of revenue recognized) related to startup costs for the Company's San Diego, California and Mohave County operations and from costs associated with the Company's property and casualty insurance agency. Excluding the startup costs (net of revenue recognized) of $1,270,000, income, before income taxes, from existing operations would have been approximately $3,105,000 for the year ended December 31, 1998.
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 business plan, the number of people employed by the Company increased from 175 on December 31, 1997 to 477 on December 31, 1998. For the year ended December 31, 1998, personnel costs including commissions were 57.9% of total revenue compared to 61.9% of total revenue for the year ended December 31, 1997. This decrease was a result of higher productivity and the somewhat fixed nature of those expenses in relation to the increase in revenue.
Title remittance fees relate to the amounts paid pursuant to title insurance underwriting agreements the Company has with five national title companies. Title remittance fees as a percentage of revenue have remained relatively unchanged when comparing 1998 results with fiscal year 1997.
Rent expense decreased as a percentage of revenue in the year ended December 31, 1998 to 5.4% from 8.3% in 1997. These decreases were the result to the fixed nature of these costs in relation to the increase in revenue.
The significant components of other operating expenses include supplies, utilities, insurance, depreciation, title plant maintenance and access, postage and professional fees. Other operating expenses decreased as a percentage of total revenue to 22.1% in 1998 from 26.4% in 1997. This decrease was the result of the relatively fixed nature of most of these expenses in relation to the increase in revenue.
An income tax provision of $159,449 was recorded for the year ended December 31, 1998 based on the estimated annual effective tax rate after giving consideration to the available net operating loss carryforward. As of December 31, 1998, the Company's net operating loss carryforward was fully utilized.
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, 1999, the Company financed its operating and business development activities through operating revenue, through the use of cash on hand, and through additional borrowings.
At December 31, 1999, the Company had current assets totaling $2,696,828 compared to current liabilities, which totaled $2,099,267. Management believes that cash on hand, future cash receipts and borrowings available under its credit facility will be sufficient to meet the Company's expansion plans and to pay all obligations as they become due.
The Company has a $2,000,000 revolving line of credit, which bears interest on any outstanding balance at the prime rate. At December 31, 1999, $500,000 had been drawn against this credit facility, in addition to $150,000 which is committed for a standby letter of credit pursuant to an office lease. In addition, the Company has a commitment from the same bank, subject to bank approval and various conditions being met, to lend up to $3,000,000 for acquisitions and capital expenditures. These credit facilities mature in February 2001.
In August 1999 the Company sold a building in Oakland, California, which provided approximately $1,157,000 in cash and retired $1,515,000 in debt. In September 1999, the Company purchased a building in Phoenix, Arizona to serve as its corporate offices for $4,309,000. This purchase was financed with a 10-year $3,130,000 loan, which bears interest at 8.32% per annum and requires monthly principal and interest payments of $23,540.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in business critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its business critical computer applications and those of its vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains certain forward-looking statements. The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties. Among others, these forward-looking statements are based on assumptions that (a) the volume of real estate transactions in the Company's market areas will remain at sufficient levels to support the Company's business, (b) the Company will be able to successfully integrate acquired businesses and the results of operations therefrom will support the acquisition price, (c) that the Company will be able to retain, and when needed, add key personnel, (d) that the Company's forecasts will accurately anticipate market demand, (e) that there will be no material adverse changes in the Company's existing operations and (f) the Company will be able to obtain sufficient equity or debt funding to increase its capital resources by the amount needed for new business acquisitions, if any. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized. In addition, the business and operations of the Company are subject to substantial risks, which increase the uncertainty inherent in such forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the Company's plans or objectives will be achieved.
ITEM 7.
ITEM 7. FINANCIAL STATEMENTS
Report of Independent Auditors
Shareholders and Board of Directors Capital Title Group, Inc.
We have audited the accompanying consolidated balance sheets of Capital Title Group, Inc. and Subsidiaries (the Company) as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1999. 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.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Phoenix, Arizona March 3, 2000
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------------------- 1999 1998 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents $ 1,884,059 $ 4,833,826 Accounts receivable, net 110,796 364,725 Notes and other receivables 291,262 406,028 Other current assets 410,711 575,875 ----------- ----------- Total Current Assets 2,696,828 6,180,454
Property and Equipment, net 11,259,054 8,863,133
Other Assets: Notes receivable 72,608 231,531 Investment in title plant 521,278 520,249 Deposits and other assets 403,224 473,963 Goodwill 246,399 259,024 ----------- ----------- Total Assets $15,199,391 $16,528,354 =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 717,507 $ 532,346 Accounts payable 362,786 664,737 Accrued expenses 1,018,974 2,656,572 ----------- ----------- Total Current Liabilities 2,099,267 3,853,655
Long-Term Debt 4,173,032 1,766,815 Other Liabilities 383,236 117,905
Stockholders' Equity: Common stock, $.001 par value, 50,000,000 shares authorized, 16,947,901 and 16,926,791 shares issued and outstanding in 1999 and 1998, respectively 16,948 16,927 Additional paid-in capital 10,667,177 10,944,294 Accumulated deficit (2,140,269) (171,242) ----------- ----------- Total Stockholders' Equity 8,543,856 10,789,979 ----------- ----------- Total Liabilities and Stockholders' Equity $15,199,391 $16,528,354 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, --------------------------- 1999 1998 ------------ ----------- REVENUE: Title insurance premiums $22,979,047 $14,634,442 Escrow and related fees 11,087,910 7,030,248 Account servicing 510,475 504,813 Interest and other income 1,569,995 1,036,722 ----------- ----------- 36,147,427 23,206,225 ----------- -----------
EXPENSES: Personnel costs 20,819,793 11,186,564 Escrow commissions 2,781,947 2,249,468 Title remittance fees 2,170,919 1,459,452 Rent 2,193,615 1,254,010 Other operating expenses 9,863,660 5,121,998 Interest expense 286,520 99,257 ----------- ----------- 38,116,454 21,370,749 ----------- -----------
Income (loss) before income taxes (1,969,027) 1,835,476
Income tax provision -- 159,449 ----------- -----------
Net income (loss) $(1,969,027) $ 1,676,027 =========== ===========
Net income (loss) per common share: Basic $ (.12) $ .11 =========== =========== Diluted $ (.12) $ .11 =========== ===========
Weighted average shares outstanding: Basic 16,868,292 14,566,390 =========== =========== Diluted 16,868,292 15,938,041 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of the consolidated financial statements
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF CORPORATION:
Capital Title Group, Inc. (the "Company") is a Delaware corporation, which acts as the parent holding company of the following subsidiaries.
Capital Title Agency, Inc. ("Capital Title") is an Arizona corporation, which has operated under the authority of the State Banking Commission since November 1, 1981. Capital Title is an independent title agency providing escrow services and, as an agent for six title insurance companies, issues title insurance policies to the real estate industry in Maricopa, Yavapai and Mohave Counties in Arizona. As of March 1, 2000 Capital Title operated 32 offices located throughout Maricopa, Yavapai and Mohave Counties in Arizona.
New Century Title Company ("New Century"), a California corporation, is an independent title agency that provides escrow and title services to the real estate industry in selected California counties. New Century began operations in July 1998 with the purchase of a dormant escrow and title agency in San Diego, California. New Century currently has three offices in San Diego County. New Century also has operations in northern California, which it obtained by acquisition in November 1998. New Century currently has 11 offices in Sonoma, Contra Costa and Alameda Counties in California. During 1999, New Century was granted a license to operate in six additional southern California counties and opened an office in Orange County in February 2000.
BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. 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 months or less.
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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. The allowance for non-collectible accounts was $13,750 and $27,942 in 1999 and 1998, respectively.
INCOME RECOGNITION:
Title insurance premiums and escrow fees are recognized as revenue at the time of closing the related real estate transaction. Income from account 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 on a straight-line basis over estimated useful lives and consist of the following:
Useful Lives 1999 1998 ------------ ----------- ----------- Land and construction in progress N/A $ 656,577 $ 1,872,271 Buildings and leasehold improvements 10-40 years 6,759,648 4,174,975 Office equipment 5 years 6,016,139 4,533,085 Furniture and fixtures 7 years 3,006,607 2,583,289 Vehicles 5 years 85,456 270,098 ----------- ----------- 16,524,427 13,433,718 Less: accumulated depreciation and amortization (5,265,373) (4,570,585) ----------- ----------- $11,259,054 $ 8,863,133 =========== ===========
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.
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 is expensed as incurred. Title plants are not amortized as they are considered to have an indefinite life if maintained.
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
GOODWILL:
The Company recorded approximately $263,000 of goodwill in 1998 related to cost in excess of net assets acquired pursuant to its purchase of a title agency in San Diego, California. Goodwill is being amortized over twenty years and accumulated amortization at December 31, 1999 was approximately $16,736.
IMPAIRMENT OF LONG-LIVED ASSETS:
In accordance with the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. This methodology includes goodwill and intangible assets acquired. As of December 31, 1999, management has not identified any events or circumstances which indicate that any assets are impaired.
INCOME TAXES:
The Company and its subsidiaries 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. Statement 109, 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 ("NOL") carryforwards, net of valuation allowances. 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.
EARNINGS PER SHARE:
The Company calculates earnings per share ("EPS") in accordance with the Financial Accounting Standards Board Statement No. 128, EARNINGS PER SHARE. Basic EPS excludes any dilutive effects of options, warrants and convertible securities.
The following table sets forth the computation of basic and diluted EPS:
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, cash equivalents, certificates of deposit, notes receivable and debt obligations approximate their fair values at December 31, 1999 and 1998.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation.
2. ACQUISITION:
In November 1998, the Company acquired Northwestern Consolidated Corporation for a purchase price of approximately $3.5 million in cash and 665,647 restricted shares of its common stock. The merger, which is being accounted for as a purchase, was effective November 1, 1998.
The assets acquired and liabilities assumed in this acquisition were as follows:
Assets acquired at fair value $ 7,917,911 Liabilities assumed at fair value (2,454,351) ----------- Total purchase price $ 5,463,560 ===========
The unaudited proforma results of operations, assuming this acquisition occurred at the beginning of 1998, is indicated in the following table. These unaudited proforma results do not purport to be indicative of the results of operations which actually would have resulted had the combination been in effect for the entire year ended December 31, 1998.
Revenue $31,583,000 Net income $ 2,335,000 Basic EPS $ 0.15 Diluted EPS $ 0.14
3. 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, 1999, the accounts contain balances of approximately $49,860,000.
4. 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, 1999, the Company had uninsured cash and cash equivalents of approximately $726,460.
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. INCOME TAXES:
The income tax provision consists of the following:
Year Ended December 31, ----------------------- 1999 1998 -------- -------- Current tax provision $ -- $119,544 Deferred tax provision -- 39,905 -------- -------- $ -- $159,449 ======== ========
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. Significant components of the Company's deferred tax assets as of December 31, 1999 and 1998 are as follows:
1999 1998 --------- --------- Accounts receivable $ 60,000 $ 5,501 Property and equipment (156,251) (115,980) Alternative minimum credit 45,588 70,574 Net operating loss carryforwards 850,071 -- Other 10,000 -- --------- --------- 809,408 (39,905) Less: valuation allowance (849,313) -- --------- ---------
$ (39,905) $ (39,905) ========= =========
At December 31, 1999, the Company has a net operating loss carryforwards of approximately $2,074,000 for federal and state income tax purposes.
The reconciliation of the provision for income taxes with the expected income taxes based on the statutory federal income tax rate is as follows:
Year Ended December 31, ------------------------- 1999 1998 --------- --------- Expected income tax provision (benefit) at the federal statutory rate $(669,469) $ 642,106 State income taxes net of federal benefit (154,481) 16,154 Effect of rate schedule -- (5,334) Effect of net permanent differences 15,470 15,612 Effect of alternative minimum tax -- 70,574 Utilization of net operating loss carryover -- (579,663) Other (40,833) -- Increase to valuation reserve 849,313 -- --------- --------- $ -- $ 159,449 ========= =========
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. LONG TERM DEBT:
Long term debt consists of the following:
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On February 2, 1998, the Company issued $125,000 in convertible notes for the purpose of obtaining capital for expansion. The convertible notes required payment of interest only for eighteen months at prime plus 2 1/2%. The note holders had an option to convert the obligation into common stock of the Company at $2.00 per share. In August 1999 the notes were retired by the payment of $95,000 with the balance owed converted to 15,000 shares of the Company's common stock.
In February 1999, the Company secured a $5,000,000 credit facility from a bank, which will bear interest on any outstanding balance at the prime rate. This credit facility is comprised of a $2,000,000 revolving line of credit and a $3,000,000 term loan to be used for future acquisitions. As of December 31, 1999 $500,000 was drawn on the credit line in addition to $150,000, which is committed for a standby letter of credit required pursuant to an office lease.
The maturities of long-term Debt as of December 31, 1999 were as follows:
2000 $ 717,507 2001 124,826 2002 976,026 2003 34,554 2004 36,832 Thereafter 3,000,794 ---------- $4,890,539 ==========
7. OPERATING LEASE COMMITMENTS:
The Company leases offices and office equipment at 46 locations. The remaining lease periods range from one month to sixty months with renewal options up to ten years. For the years ended December 31, 1999 and 1998 rental expense was $2,193,615 and $1,254,010 respectively.
The Company's future minimum lease commitments as of December 31, 1999 were as follows:
2000 $ 2,699,385 2001 2,336,099 2002 1,906,927 2003 1,167,470 2004 560,499 Thereafter 4,799,642 ----------- $13,470,022 ===========
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. RELATED PARTY TRANSACTIONS:
During the year ended December 31, 1998, the Company paid $55,866 to Dale A. Head for legal services. Dale A. Head is Donald R. Head's brother. In October 1998, the Company hired Dale A. Head as Executive Vice President and General Counsel.
9. 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, 1999 and 1998, the Company had accrued $155,000 and $173,000, respectively, for possible title and escrow losses.
The California State Controller's Office is currently examining all title companies to identify unclaimed property escheatable to the State of California. At December 31, 1999, the Company has an accrual of approximately $203,000 related to escheatable funds owed by subsidiaries the Company acquired. Approximately $166,000 was remitted to the State of California in January 2000 to fulfill the Company's obligations identified in the examination of its northern California operations. The examination of the Company's southern California operations is still ongoing but management believes the outcome will not have a material adverse effect on the Company's financial position, results of operations or liquidity.
10. SUPPLEMENTARY CASH FLOW INFORMATION:
The following supplemental cash flow information is provided with respect to interest and tax payments, as well as certain non-cash investing and financing activities. Year Ended December 31, ----------------------- 1999 1998 -------- -------- Cash paid during the year: Interest $ 286,520 $ 99,257 Income taxes 228,604 -- Non-cash investing and financing activities: Equipment purchased under capital leases -- 372,270 Conversion of convertible debt 30,000 250,000 Shares issued in connection with a building purchase 19,149 260,136 Acquisition of New Century Title Company -- 95,000 Acquisition of Northwestern Consolidated Corporation (454,140) 806,556
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. EMPLOYEE BENEFIT PLAN:
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 15% of their salary. The Company contributes $.25 for every $1.00 the employee contributes, up to a maximum of four percent of the employee's earnings. Vesting of matching contributions is based on certain service requirements. Employees are fully vested after six years of service.
Employer contributions for the years ended December 31, 1999 and 1998 were approximately $72,660 and $33,600, respectively.
CAFETERIA PLAN:
The Company maintains an Internal Revenue Code Section 125 Cafeteria Plan as a benefit to its employees. The plan provides for employee and dependent coverage to be paid from before tax compensation. As such, there is no effect on the financial statements.
12. PRIVATE PLACEMENTS OF COMMON STOCK:
On March 31, 1998, the Company completed a private placement of 463,500 units at $3.00 per unit. Each unit consisted of two shares of common stock and a warrant to purchase one share of common stock at a per share price of $2.50 within a two year period. The net proceeds from this private placement were approximately $1.3 million.
On April 30, 1998 the Company completed a $5.0 million private placement of common stock in which 3,703,703 shares of common stock were issued at $1.35 per share. In addition, the Company issued three-year warrants to purchase an additional 308,642 shares of common stock at $1.62 per share to an investment banking firm that acted as placement agent in the transaction. The net proceeds from this private placement of approximately $4.4 million were used by the Company to support expansion of its business in Arizona and California and for working capital and general corporate purposes.
On October 29, 1998, the Company issued 86,712 shares of common stock to developers in a transaction to acquire a build-to-suit building for its corporate offices.
13. 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 (Statement 123) requires use of option 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.
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company's 1996 Stock Option Plan ("The Plan") has authorized the grant of common stock options to all the Company's employees. Currently, 3,900,000 shares of Common Stock are authorized for issuance pursuant to the Plan. As of December 31, 1999, 2,728,400 shares have been granted under the Plan. All options granted have 5-year terms. Fifty percent of the options can be exercised after two years, the remaining shares can be exercised after three 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.
The Company's Non-Employee Directors Stock Option Plan ("Directors Plan") has authorized the grant of options to non-employee members of the Board of Directors and advisory boards. Currently, 600,000 shares of Common Stock are authorized for issuance pursuant to the Directors Plan. As of December 31, 1999, 496,000 shares have been granted under the Directors Plan. All options granted have 5-year terms. Fifty percent of the options can be exercised after two years; the remaining shares can be exercised after three 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 Committees of which such non-employee director is a member in the preceding fiscal year.
A summary of the Company's stock option activity pursuant to its stock option plans, and related information for the years ended December 31, 1999 and 1998 is as follows:
1999 1998 ------------------- -------------------- Weighted Weighted Average Average Options Price Options Price ------- ----- ------- ----- Outstanding - beginning of year 2,778,150 $1.53 1,760,150 $1.10 Granted 929,950 2.75 1,104,600 2.25 Exercised (127,900) 1.00 (7,700) 1.00 Forfeited (355,800) 2.05 (78,900) 1.74 ---------- ---------- Outstanding - end of year 3,224,400 1.84 2,778,150 1.53 ========== ==========
Exercisable at end of year 1,271,100 1.06 569,500 1.00 ========== ========== Weighted - average fair value of options granted during the year $ 1.27 $ 1.01 ========== ==========
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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: risk-free interest rate of 4.5%; dividend yields of 0%; volatility factors of the expected market price of the Company's common stock for 1999 and 1998 of .49 and .44, respectively; and a weighted-average expected life of the option for 1999 and 1998 of 4 years and 5 years, respectively.
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, option 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. If the Company had accounted for its stock-based compensation plans using a fair value based method of accounting, the pro forma information would have been reported as follows:
Year ended December 31, ------------------------- 1999 1998 ----------- ---------- Pro forma net income (loss) $(2,639,686) $1,294,066 Pro forma net income (loss) per share-basic $ (0.16) $ 0.09 Pro forma net income (loss) per share-diluted $ (0.16) $ 0.08
14. SEGMENT INFORMATION:
The Company adopted Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS 131") in the fiscal year ended December 31, 1998. SFAS 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. To date, the Company has viewed its operations as principally one segment; services and one geographic region; the Southwestern United States.
ITEM 8.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item is incorporated by reference to the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders.
ITEM 10.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders.
ITEM 11.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders.
ITEM 12.
ITEM 12. 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 (1) 3.1 Certificate of Incorporation (1) 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 (1) 10.2 Underwriting Agreement between Capital Title Agency, Inc. and First American Title Insurance Company dated August 16, 1996 (1) 10.3 Image Service Agreement between Capital Title Agency, Inc. and Security Union Title Insurance Company dated June 5, 1996 (1) 10.4 Title Plant Service Agreement between Capital Title Agency, Inc. and Diversified Information Services Corporation dated March 1, 1996 (1) 10.5 Office Lease between Capital Title Agency, Inc. and 4808 Corporation dated June 7, 1996 (1) 10.6 Promissory Note between PWCC, Inc. and BankOne Arizona, NA dated January 5, 1996 (1) 10.7 Assumption Agreement between Capital Title Agency, Inc. and PWCC, Inc. dated January 5, 1996 (1) 10.8 Employment Agreement between Registrant and Donald R. Head dated June 1, 1996 (1) 10.9 Employment Agreement between Registrant and Andrew A. Johns dated June 1, 1996 (1) 10.10 Promissory Note between Capital Title Group, Inc. and Imperial Bank, dated November 15, 1996 (2) 10.11 Financial Advisor Agreement between Registrant and Miller Capital Corporation dated June 17, 1997 (2) 10.12 Employment Agreement between Capital Title Agency, Inc. and Milt Ferrantelli dated June 17, 1997 (2) 10.13 Underwriting Agreement between Capital Title Agency, Inc. and United General Insurance Company dated January 21, 1998. (2) 10.14 Credit Line Agreement between Registrant and Imperial Bank, dated November 17, 1997 (2) 10.15 Acquisition Consulting Agreement between Registrant and Miller Capital Corporation dated January 28, 1998. (2)
Exhibit Method of No. Description Filing - ------- ----------- ---------
10.16 Issuing Underwriting Agreement between Capital Title Agency, Inc. and Chicago Title Insurance Company dated April 1, 1998. (3) 10.17 Placement Agent Agreement between Registrant and Sanders Morris Mundy Inc. dated April 13, 1998. (3) 10.18 Title Plant Agreement between Registrant and Security Union Title Insurance Company dated April 29, 1998 (3) 10.19 Amendment to Acquisition Consulting Agreement between Registrant and Miller Capital Corporation dated June 12, 1998. (3) 10.20 Financial Advisor Agreement between Registrant and Miller Capital Corporation dated June 16, 1998. (3) 10.21 Purchase and Sale Agreement between Registrant and KDC-AZ, LLC dated July 1, 1998 (3) 10.22 Merger Agreement among Registrant, Northwestern Consolidated Corporation and related subsidiaries dated September 1, 1998. (4) 10.23 Credit Agreement between Registrant and Imperial Bank dated February 1, 1999. (3) 10.24 Access Agreement By and Between Security Union Title Insurance Company and New Century Title Company dated September 30, 1999. * 10.25 Title Plant Lease and Service Agreement by and between Security Union Title Insurance Company and Capital Title Agency Inc. dated May 19, 1999. * 10.26 Promissory Note between CTG Building Co. and GMAC Commercial Mortgage Corporation dated July 30, 1999. * 10.27 Amendment to Underwriting Agreement by and between Stewart Title Guaranty Company and New Century Title Company dated September 28, 1999. * 21 Subsidiaries * 23 Consent of Ernst & Young LLP * 27 Financial Data Schedule *
- ---------- * Filed herewith (1) Incorporated by reference to the Registrant's Form 10-QSB filed with the Securities and Exchange Commission on September 20, 1996. (2) Incorporated by reference to the Registrant's Form 10-KSB for the year ended December 31, 1997, filed with the Securities and Exchange Commission on March 25, 1998. (3) Incorporated by reference to the Registrant's Form 10-KSB for the year ended December 31,1998, filed with the Securities and Exchange Commission on March 23, 1999. (4) Incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on December 10, 1998.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended December 31, 1999.
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, 2000
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.