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Quarterly Report For Small Business Issuers Subject
to the 1934 Act Reporting Requirements
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended June 30, 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
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4808 N. 22nd Street, Phoenix, Arizona 85016
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (602) 954-0022
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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 [ ].
Number of shares outstanding for each of the issuer's classes of common
equity, as of the latest practicable date.
$.001 par value common stock 11,231,029 shares as of June 30, 1997.
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<PAGE>
FORM 10-QSB
For the Quarter ended June 30, 1997
TABLE OF CONTENTS
Part I: FINANCIAL INFORMATION Page Number
-----------
Item 1. Condensed Consolidated Financial Statements
A. Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996 3
B. Consolidated Statements of Operations for the
three month and six month periods ended
June 30, 1997 and 1996 4
C. Consolidated Statements of Cash Flows for the
six month periods ended June 30, 1997 and 1996 5
D. Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 9
Part II: OTHER INFORMATION
Items 1,3, and 4 of Part II have been omitted
because they are not applicable with respect
to the current reporting period.
Item 2. Changes in Securities 9 - 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
2
<PAGE>
PART 1: FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
---------- ----------
ASSETS
Current Assets:
Cash $ 280,943 $ 76,363
Accounts receivable, net 56,154 18,709
Income taxes receivable -- 25,796
Prepaid expenses 69,357 56,493
---------- ----------
Total Current Assets 406,454 177,361
Property and Equipment, net 1,164,002 953,403
Other Assets:
Investment in title plant 175,000 175,000
Deposits 72,820 58,699
Property held for sale 65,696 --
---------- ----------
Total Assets $1,883,972 $1,364,463
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable - current portion 183,822 173,926
Accounts payable 367,327 549,566
Accrued expenses 126,047 71,210
---------- ----------
Total Current Liabilities 677,196 794,702
Long-Term Liabilities:
Notes Payable - long-term portion 553,311 404,650
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000
shares authorized, 11,231,029 and 10,316,029
shares issued and outstanding, respectively 11,231 10,316
Additional paid-in capital 2,653,731 1,757,346
Accumulated deficit (2,011,497) 1,602,551)
---------- ----------
Total Liabilities and Stockholders' Equity $1,883,972 $1,364,463
========== ==========
See Notes to
Consolidated Financial Statements
3
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30, Six months ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
REVENUE:
Title insurance premiums $ 1,213,926 $ 334,916 $ 2,116,256 $ 612,995
Escrow fees 508,706 166,634 896,976 297,872
Account servicing 80,862 83,135 162,589 158,572
Other fees and revenue 7,598 8,178 40,117 12,768
Interest income 57,895 21,829 96,939 40,790
----------- ---------- ----------- ----------
1,868,987 614,692 3,312,877 1,122,997
=========== ========== =========== ==========
EXPENSES:
Personnel costs 1,063,826 378,344 2,059,335 718,518
Other operating expenses 759,686 242,142 1,466,285 476,117
Acquisition costs -- 57,539 -- 57,539
Escrow commissions 110,840 3,838 181,607 7,315
Reimbursable legal fees 30,091 -- 30,091 --
Interest expense 13,691 4,191 26,939 9,039
----------- ---------- ----------- ----------
1,978,134 686,054 3,764,257 1,268,528
=========== ========== =========== ==========
Loss before provision for
income taxes (109,147) (71,362) (451,380) (145,531)
Income tax benefit 42,434 -- 42,434 --
----------- ---------- ----------- ----------
Net loss $ (66,713) $ (71,362) (408,946) $ (145,531)
============ ========== =========== ==========
Loss per share $ (0.01) $ (0.01) $ (0.04) $ (0.02)
============ ========== =========== ==========
Weighted average shares
outstanding 11,091,524 9,011,029 10,942,659 9,011,029
=========== ========== =========== ==========
See Notes to
Consolidated Financial Statements
4
<PAGE>
CAPITAL TITLE GROUP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months
ended June 30,
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $(371,946) $(145,631)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation 112,120 24,365
Changes in Assets and Liabilities:
Accounts receivable (37,445) (4,613)
Income taxes receivable 25,796 51,575
Prepaid expenses (12,864) (71,724)
Refundable deposits (14,121) --
Accounts payable (182,239) (5,472)
Accrued expenses 17,837 5,432
Income taxes payable -- (10,513)
--------- ---------
Net cash provided (used) by operating activities (462,862) (156,581)
========= =========
Cash flows for investing activities:
Purchase of property and equipment (280,386) (14,582)
Property held for sale (21,500)
--------- ---------
Net cash used by investing activities (301,886) (14,582)
========= =========
Cash flows from financing activities:
Borrowings 175,000 --
Debt service payments (102,972) (13,778)
Proceeds from the issuance of stock, net 897,300 625,100
--------- ---------
Net cash provided by financing activities 969,328 611,322
--------- ---------
Net increase in cash and cash equivalents 204,580 440,159
Cash at the beginning of the period 76,363 34,556
--------- ---------
Cash at the end of the period $ 280,943 $ 474,715
========= =========
See Notes to
Consolidated Financial Statements
5
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1 - INTERIM FINANCIAL INFORMATION
The consolidated financial information included in this report has been
prepared in conformity with the accounting principles and practices reflected in
the Consolidated Financial Statements included in the Form 10-KSB for the fiscal
year ended October 31, 1996 filed with the Commission under the Securities
Exchange Act of 1934. This report should be read in conjunction with the
aforementioned Form 10-KSB. In the opinion of management, all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
this information have been made. The results of operations for the interim
periods are not necessarily indicative of results for a full year.
NOTE 2 - PRIVATE PLACEMENT OF COMMON STOCK
On March 11, 1997, the Company's Board of Directors ("The Board")
authorized the sale of up to 2,500,000 shares of the Company's common stock to
accredited investors at $1.00. During the six month period ended June 30, 1997,
the Company sold 915,000 shares of common stock which, after deducting
commissions and other offering expenses, resulted in net proceeds to the Company
of $897,300. Beginning in June 1, 1996 and continuing through June 30, 1997, the
Company sold an aggregate of 2,220,000 shares of common stock through private
placements to accredited investors.
NOTE 3 - CONVERTIBLE NOTE OBLIGATIONS
During the six month period ended June 30, 1997, the Company issued
convertible notes for the purpose of obtaining capital to open two new branches.
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.
NOTE 4 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("Statement 109"), "Accounting for Income
Taxes." Statement 109 provides that deferred tax assets and liabilities be
recognized for temporary differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities and expected benefits of
utilizing net operation loss and credit 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.
NOTE 5 - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No 128 - "Earnings per Share" ("SFAS
128") which specifies the computation, presentation and disclosure requirements
for EPS. SFAS 128 replaces the presentation of primary and fully diluted EPS
pursuant to Accounting Principles Board Opinion No. 15 - "Earnings per Share"
("APB 15") with the presentation of basic and diluted EPS. Basic EPS excludes
6
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
dilution and is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. The Company is required to adopt SFAS 128 with its
December 31, 1997 financial statements and restate all prior-period EPS data.
The Company will continue to account for EPS under APB 15 until that time. The
Company does not believe there will be a material change under the reporting
requirements of SFAS 128.
7
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
The 1996 Form 10-KSB and the Annual Report should be read in
conjunction with the following discussion since it contains important
information for evaluating the Company's operating results and financial
condition.
Operating Revenues
Operating revenues increased by $2,189,880 or 195% for the six month
period ended June 30, 1997 compared to the same period ended June 30, 1996.
Operating revenue increased $425,097 or 29.4% for the three months ended June
30, 1997 compared to the three months ended March 31, 1997. The revenue increase
is attributable to the company's expansion into Maricopa County, Arizona, and
increased market share in Yavapai County, Arizona.
The Company began operations in Maricopa County on August 1, 1996.
Since beginning operations in Maricopa County, the Company has opened Maricopa's
headquarters and five (5) branch sites. The June, 1997 Sykes Report listed
Capital Title as the 12th largest title company in Maricopa County with 3.51% of
the overall June, 1997 market share. The following table presents information
regarding the approximate monthly revenue, escrow openings, and escrow closings
from Maricopa operations:
Escrow Escrow
For the Month Ended Revenue Openings Closings
------------------- ------- -------- --------
December 31, 1996 $215,000 335 186
January 31, 1997 230,000 386 224
February 28, 1997 223,000 443 200
March 31, 1997 309,000 559 320
April 30, 1997 316,000 598 340
May 31, 1997 361,000 526 335
June 30, 1997 361,000 610 312
Revenues from Maricopa operations have been growing at a steady rate
since Maricopa operations began in August, 1996. Management expects the trend to
continue as additional branches are opened. Two additional branches, one in
Northwest Phoenix and one in North Scottsdale, are scheduled to open in the
third quarter of 1997.
Revenues from Yavapai operations increased approximately $269,675 or
24% for the six month period ended June 30, 1997 compared to the same period
ended June 30, 1996. The increase in revenue is due to an increase in the
Company's market share which went from approximately 20% in June, 1996 to 29.23%
in June, 1997. Since December, 1996, the Company's market share in Yavapai
County has increased from 23.01% to 29.23%.
8
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
Expenses
Personnel costs, including commissions, are the most significant
component of the Company's operating expenses. For the six months ended June 30,
1997, personnel costs including commissions equaled $2,240,942 or 67.6% of total
revenue. For the three month period ended June 30, 1997, personnel costs
including commissions equaled $1,174,666 or 62.9% of total revenue. Escrow and
title revenues are not recognized until escrow closes; therefore, revenues
usually lag behind the expenses to generate the revenue by 45 to 90 days. As a
result, personnel costs as a percent of revenue will increase during expansion
and return to normal two or three months later. During the first quarter in
1997, the Company opened a new branch and hired several experienced escrow
officers for Maricopa and Yavapai County operations. The Company did not open
any new branches in the second quarter. Management expects personnel costs to
rise as a percentage of revenue in the third quarter due to the Company's plan
to open two additional branches in Maricopa County.
The significant components of other operation expenses include rent,
supplies, utilities, insurance, title underwriting, depreciation, title plant
maintenance and access, and postage and delivery charges. Other operating
expenses increased from $467,117 or 42.4% of total revenue to $1,429,285 or
43.1% of total revenue for the six month period ended June 30, 1997 compared to
the same time period in 1996. Other operating expenses have increased $53,087
for the three months ended June 30, 1997 compared to the three months ended
March 31, 1997. However, other operating expenses as a percent of revenue
decreased from 48.9% to 38.7% for the three months ended June 30, 1997 compared
to the three months ended March 31, 1997. Other operating expenses increased due
to the increase in escrow orders, and the fixed costs associated with opening an
additional branch in the first quarter.
The Company has implemented cost control measures and capital budgeting
to reduce costs while maintaining the Company's high level of service and plans
for continued expansion.
Liquidity and Capital Resources
As the Company expanded into Maricopa County, Arizona, the Company's
liquidity requirements have also increased as a result of working capital needs.
The Company generated $969,328 in cash from financing activities in the six
month period ended June 30, 1997 compared to $611,322 in the same period of
1996. During the six month periods ended June 30, 1997 and 1996, the cash
generated from financing activities was used to pay for operations and purchase
equipment which resulted in net cash flows of $462,862 and $301,886,
respectively.
Management expects the cash provided from operations to adequately fund
operations and the opening of two additional branches in the third quarter of
1997. The short and long-term liquidity requirements of the Company and its
subsidiary are monitored regularly. Management believes the Company can meet
both its short and long-term capital needs as of June 30, 1997.
9
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the six month period ended June 30, 1997, the Company completed
a private placement to eighteen (18) accredited investors of 915,000 shares of
its Common Stock at a price of $1.00 per share. The Company received net
proceeds (after deducting commissions and other offering expenses) of
approximately $897,300. These shares were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933 and in
reliance on Rule 506 of Regulation D promulgated thereunder.
During the six month period ended June 30, 1997, the Company also
completed a private placement to two (2) accredited investors of $200,000 in
convertible debt securities. These convertible notes bear interest at a rate
equal to the prime rate (as in effect from time to time) plus two and one-half
percent (2 1/2%), and only interest is payable during the first eighteen (18)
months following issuance. At any time during such eighteen (18) month period,
the holder has the option of converting the outstanding obligation represented
by any convertible note into shares of Common Stock of the Company at a
conversion rate of $1.00 per share. These convertible notes were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 and in reliance on Regulation D and Regulation S
promulgated thereunder.
ITEM 5. OTHER INFORMATION
Effective June 17, 1997 the Company's Board of Directors accepted the
resignation of James R. Evans and Jeffrey P. Anderson. Mr. Evans and Mr.
Anderson resigned from the Board of Directors due to other business commitments.
On August 1, 1997 the Board of Directors elected David Dewar to the
Board of Directors for a term expiring on May 15, 1998. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
On December 12, 1996, the Registrant filed a Form 8-K reporting its
decision to change the Company's fiscal year end from October 31 to December 31.
On March 31, 1997, the Registrant filed a Form 8-K reporting the
decision of Semple & Cooper PLC, to resign as the Company's principal
accountants. (As previously reported in the first quarter 10-QSB, the Company's
Board of Directors appointed the accounting firm Ernst & Young, LLP as the
Company's principal accountants.)
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL TITLE GROUP, INC.
(Registrant)
By: /s/ Donald R. Head
------------------------------------------
Donald R. Head
Chairman of the Board,
Chief Executive Officer
Date: July 31, 1997
By: /s/ Michael J. Benjamin
------------------------------------------
Michael J. Benjamin
Vice President
(Principal Finance and Accounting Officer)
11
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