================================================================================
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 September 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.
----------------------------------------------
(Name of Small Business Issuer in its charter)
Delaware 87-0399785
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
14555 North Scottsdale Road, Suite 320, Scottsdale, Arizona 85254
- ----------------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (602) 483-8868
---------------
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 September 30, 1997.
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<PAGE>
FORM 10-QSB
For the Quarter ended September 30, 1997
TABLE OF CONTENTS
Part I: FINANCIAL INFORMATION Page Number
-----------
Item 1. Condensed Consolidated Financial Statements
A. Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 3
B. Consolidated Statements of Operations for the
three month and nine month periods ended
September 30, 1997 and 1996 4
C. Consolidated Statements of Cash Flows for the
nine month periods ended September 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 7 - 9
Part II: OTHER INFORMATION
Items 1,3, 4, and 5 of Part II have been omitted because
they are not applicable with respect to the current
reporting period.
Item 2. Changes in Securities 9
Item 6. Exhibits and Reports on Form 8-K 9
2
<PAGE>
PART 1: FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
------------- ------------
ASSETS
Current Assets:
Cash $ 118,410 $ 76,363
Accounts receivable, net 85,131 18,709
Income taxes receivable -- 25,796
Prepaid expenses 77,394 56,493
----------- -----------
Total Current Assets 280,935 177,361
Property and Equipment, net 1,391,128 953,403
Other Assets:
Investment in title plant 175,000 175,000
Deposits 85,982 58,699
Property held for sale 65,696 --
----------- -----------
Total Assets $ 1,998,741 $ 1,364,463
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable - current portion $ 183,822 $ 173,926
Accounts payable 382,397 549,566
Accrued expenses 131,801 71,210
----------- -----------
Total Current Liabilities 698,020 794,702
Long-Term Liabilities:
Notes Payable - long-term portion 558,102 404,650
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 (1,922,343) (1,602,551)
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,998,741 $ 1,364,463
=========== ===========
See Notes to
Consolidated Financial Statements
3
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1997 1996 1997 1996
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Title insurance premiums $ 1,545,632 $ 472,108 $ 3,661,888 $1,085,103
Escrow fees 603,300 214,883 1,500,276 512,755
Account servicing 85,267 82,774 247,856 241,346
Other fees and revenue 56,411 3,022 96,528 15,790
Interest income 61,045 25,327 157,984 66,117
----------- ---------- ----------- ----------
2,351,655 798,114 5,664,532 1,921,111
----------- ---------- ----------- ----------
EXPENSES:
Personnel costs 1,210,352 712,852 3,269,687 1,431,370
Other operating expenses 884,419 548,084 2,350,704 1,024,201
Acquisition costs -- -- -- 57,539
Escrow commissions 144,220 9,453 325,827 16,768
Reimbursable legal fees 4,341 -- 34,432 --
Interest expense 19,169 4,748 46,108 13,787
----------- ---------- ----------- ----------
2,262,501 1,275,137 6,026,758 2,543,665
----------- ---------- ----------- ----------
Income loss before provision
for income taxes 89,154 (477,023) (362,226) (622,554)
Income tax benefit -- -- 42,434 --
----------- ---------- ----------- ----------
Net income (loss) $ 89,154 $ (477,023) (319,792) $ (622,554)
=========== ========== =========== ==========
Income (loss) per share $ 0.01 $ (0.01) $ (0.03) $ (0.02)
=========== ========== =========== ==========
Weighted average shares
outstanding 11,231,029 9,812,403 11,039,839 9,311,304
=========== ========== =========== ==========
</TABLE>
See Notes to
Consolidated Financial Statements
4
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended September 30,
1997 1996
---------- -----------
Cash flows from operating activities:
Net income (loss) $(319,792) $ (508,500)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation 176,620 62,582
Changes in Assets and Liabilities:
Accounts receivable (66,422) (28,481)
Income taxes receivable 25,796 51,575
Prepaid expenses (20,901) (9,767)
Refundable deposits (27,283) (52,075)
Accounts payable (167,169) 197,552
Accrued expenses 60,591 6,090
Income taxes payable -- (10,513)
--------- ----------
Net cash provided (used) by operating
activities (338,560) (291,537)
--------- ----------
Cash flows for investing activities:
Purchase of property and equipment (585,628) (629,223)
Property held for sale (21,500) --
Capitalized acquisition costs -- (135,684)
--------- ----------
Net cash used by investing activities (607,128) (764,907)
--------- ----------
Cash flows from financing activities:
Borrowings 200,000 --
Debt service payments (109,565) (26,136)
Proceeds from the issuance of stock, net 897,300 1,107,000
--------- ----------
Net cash provided by financing activities 987,735 1,080,864
--------- ----------
Net increase in cash and cash equivalents 42,047 24,420
Cash at the beginning of the period 76,363 34,556
--------- ----------
Cash at the end of the period $ 118,410 $ 58,976
========= ==========
See Notes to
Consolidated Financial Statements
5
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
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 nine month period ended September 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 September 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 nine month period ended September 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")
6
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
with the presentation of basic and diluted EPS. Basic EPS excludes 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.
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
For the nine-month period ended September 30, 1997, Capital Title
reported operating revenue of $5,664,532 an increase of $3,743,421 or 194.9%
over the same period ended September 30, 1996. Operating revenue for the three
months ended September 30, 1997 was $2,351,655 an increase of $1,553,541 or
121.8% over the three months ended September 30, 1996. The revenue increase is
attributable to the Company's expansion into Maricopa County, Arizona, increased
market share in Maricopa County and Yavapai County, Arizona, and a favorable
real estate market.
The Company began operations in Yavapai County, Arizona in 1981. In
August 1996, the Company expanded operations into Maricopa County, Arizona. The
Company currently has six (6) branches in Yavapai County, six (6) branches in
Maricopa County, and two headquarters, one in each County. The following table
presents information regarding the approximate monthly revenue from escrow and
title operations, escrow openings, and escrow closings from Yavapai and Maricopa
operations:
Escrow Escrow
For the Month Ended Revenue Openings Closings
------------------- ------- -------- --------
January 31, 1997 392,000 706 456
February 28, 1997 376,000 873 410
March 31, 1997 522,000 949 609
April 30, 1997 526,000 966 629
May 31, 1997 581,000 893 620
June 30, 1997 616,000 976 621
July 31, 1997 648,000 1,188 658
August 31, 1997 704,000 1,278 723
September 31, 1997 797,000 1,197 923
Revenues from 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 and the Company's market share
7
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
increases in Maricopa and Yavapai Counties. The Company opened an additional
branch in Northwest Phoenix, and Prescott during the third quarter of 1997 and
anticipates opening a branch in North Scottsdale early in the fourth quarter of
1997. In addition to Maricopa County's Management and Title Department, there is
a Commercial and Residential Escrow Unit, the Company's Lenders Division, and
Trustee Sales Division operating out of the Maricopa County headquarters.
Operating within Yavapai County's headquarters is a Residential and Commercial
Escrow Department, the Company's Account Servicing Department and the Yavapai
County Title Department.
EXPENSES
Personnel costs, including commissions, are the most significant
component of the Company's operating expenses. On September 30, 1996 the Company
had 110 employees. Due to the Company's expansion, the number of employees has
increased to 155 as of September 30, 1997. For the nine month period ended
September 30, 1997, personnel costs including commissions equaled $3,595,514 or
63.5% of total revenue. For the three month period ended September 30, 1997,
personnel costs including commissions equaled $1,354,572 or 57.6% of total
revenue. Escrow and title revenues are not recognized until escrow closes;
therefore, revenues usually lag behind the expenses incurred 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.
The Company opened a new branch in each of the first and third quarters of 1997
and a new branch opening is scheduled in the first part of the fourth quarter.
The Company did not open any new branches in the second quarter. Additionally,
in the third quarter of 1997, the Company hired several experienced escrow
officers and placed them in existing offices 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 $1,024,201 or 53.3% of total revenue to $2,350,704 or
41.5% of total revenue for the nine month period ended September 30, 1997
compared to the same time period in 1996. Other operating expenses increased
$124,733 for the three months ended September 30, 1997 compared to the three
months ended June 30, 1997. However, other operating expenses as a percent of
revenue decreased from 40.6% to 37.6% for the three months ended September 30,
1997 compared to the three months ended June 30, 1997. Other operating expenses
increased due to the increase in escrow orders, and the fixed costs associated
with opening additional branches in the first and third quarter of 1997.
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 together were calculated as benefiting the
Company's 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 $987,735 in cash from financing activities in the nine
month period ended September 30, 1997 compared to $1,080,864 in the same period
8
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARY
of 1996. During the nine month periods ended September 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 $42,047 and $24,420,
respectively.
Management expects the cash provided from operations to adequately fund
operations and the opening of one additional branch in the fourth 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 September 30, 1997.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the nine month period ended September 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 nine month period ended September 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 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.)
9
<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: October 28, 1997
By: /s/ Michael J. Benjamin
-------------------------
Michael J. Benjamin
Vice President
(Principal Finance and Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 118,410
<SECURITIES> 0
<RECEIVABLES> 85,131
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 280,935
<PP&E> 2,016,932
<DEPRECIATION> 625,804
<TOTAL-ASSETS> 1,993,741
<CURRENT-LIABILITIES> 698,020
<BONDS> 741,924
0
0
<COMMON> 11,231
<OTHER-SE> 726,388
<TOTAL-LIABILITY-AND-EQUITY> 1,993,741
<SALES> 0
<TOTAL-REVENUES> 5,664,532
<CGS> 0
<TOTAL-COSTS> 5,946,218
<OTHER-EXPENSES> 34,432
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,180
<INCOME-PRETAX> (362,226)
<INCOME-TAX> 42,434
<INCOME-CONTINUING> (319,792)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (319,792)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
