================================================================================
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, 1998
[ ] 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, AZ 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 15,871,732 shares as of June 30, 1998.
================================================================================
<PAGE>
FORM 10-QSB
For the Quarter ended June 30, 1998
TABLE OF CONTENTS
Part I: FINANCIAL INFORMATION Page Number
-----------
Item 1. Condensed Consolidated Financial Statements
A. Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 3
B. Consolidated Statements of Operations
for the three month and six month periods
ended June 30, 1998 and 1997 4
C. Consolidated Statements of Cash Flows
for the six month periods ended
June 30, 1998 and 1997 5
D. Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 10
Part II: OTHER INFORMATION
Items 1 - 3, and 5 of Part II have been omitted because
they are not applicable with respect to the current
reporting period.
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
<PAGE>
Part I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
---- ----
(unaudited)
ASSETS
Current Assets:
Cash $ 5,654,967 $ 198,903
Accounts receivable, net 157,545 109,906
Interest receivable 54,796 36,287
Prepaid expenses 133,695 16,554
----------- -----------
Total Current Assets 6,001,003 361,650
Property and Equipment, net 2,820,968 1,560,655
Other Assets:
Investment in title plant 175,000 175,000
Deposits and other assets 417,655 90,823
Property held for sale 65,696 65,696
----------- -----------
Total Assets $ 9,480,322 $ 2,253,824
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable - current portion $ 437,132 $ 553,119
Accounts payable 187,422 317,003
Accrued expenses 717,513 150,647
----------- -----------
Total Current Liabilities 1,342,067 1,020,769
Long-Term Liabilities:
Notes Payable - long-term portion 476,659 415,362
Other liabilities 78,000 --
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000 shares
authorized, 15,871,732 and 11,231,029 shares issued
and outstanding in 1998 and 1997, respectively 15,872 11,231
Additional paid-in capital 8,489,656 2,653,731
Accumulated deficit (921,932) (1,847,269)
----------- -----------
Total Stockholders' Equity 7,583,596 817,693
----------- -----------
Total Liabilities and Stockholders' Equity $ 9,480,322 $ 2,253,824
=========== ===========
See Notes to Consolidated Financial Statements
3
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Title insurance premiums $ 3,165,766 $ 1,213,926 $ 5,654,813 $ 2,116,256
Escrow fees 1,297,488 508,706 2,313,932 896,976
Account servicing 113,014 80,862 217,286 162,589
Other fees 278,425 7,598 580,339 40,117
Interest income 197,116 57,895 302,505 96,939
----------- ----------- ----------- -----------
5,051,809 1,868,987 9,068,875 3,312,877
----------- ----------- ----------- -----------
EXPENSES:
Personnel costs 2,442,955 1,063,826 4,259,558 2,059,335
Escrow commissions 559,342 110,840 903,189 181,607
Title remittance fees 330,350 118,729 587,345 210,814
Rent 276,060 156,674 491,812 309,077
Other operating expenses 938,792 514,374 1,793,485 976,485
Interest expense 20,474 13,691 46,149 26,939
----------- ----------- ----------- -----------
4,567,973 1,978,134 8,081,538 3,764,257
----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes 483,836 (109,147) 987,337 (451,380)
Provision (benefit) for income taxes 62,000 (42,434) 62,000 (42,434)
----------- ----------- ----------- -----------
Net income (loss) $ 421,836 $ (66,713) $ 925,337 $ (408,946)
=========== =========== =========== ===========
Net income (loss) per share $ 0.03 $ (0.01) $ 0.07 $ (0.04)
=========== =========== =========== ===========
Weighted average shares
outstanding - basic 13,416,238 11,091,524 13,111,017 10,942,659
=========== =========== =========== ===========
Net income (loss) per share-
assuming dilution $ 0.03 $ (0.01) $ 0.06 $ (0.04)
=========== =========== =========== ===========
Weighted average shares
outstanding - assuming dilution 15,262,252 11,091,524 14,598,156 10,942,659
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the six months
ended June 30,
1998 1997
---- ----
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES:
Net income (loss) $ 925,337 $(408,946)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 174,120 112,120
Changes in Assets and Liabilities:
Accounts receivable (47,639) (37,445)
Income taxes receivable -- 25,796
Interest receivable (18,509) --
Prepaid expenses (117,141) (12,864)
Deposits and other assets (91,332) (14,121)
Accounts payable (129,581) (182,239)
Accrued expenses 566,866 54,837
----------- ---------
Net Cash flows - Operating Activities 1,262,121 (462,862)
----------- ---------
NET CASH USED BY INVESTING ACTIVITIES:
Purchase of property and equipment (1,235,254) (280,386)
Decrease in cash from purchase of
California Coast
Title Company (67,500) --
Property held for sale -- (21,500)
----------- ---------
Net Cash Flows - Investing Activities (1,302,754) (301,886)
----------- ---------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES:
Proceeds from the issuance of stock, net 5,750,566 897,300
Borrowings 125,000 175,000
Repayment of debt (378,869) (102,972)
----------- ---------
Net Cash Flows - Financing Activities 5,496,697 969,328
----------- ---------
NET INCREASE IN CASH 5,456,064 204,580
CASH AT THE BEGINNING OF THE PERIOD 198,903 76,363
----------- ---------
CASH AT THE END OF THE PERIOD $ 5,654,967 $ 280,943
=========== =========
See Notes to Consolidated Financial Statements
5
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NOTE 1 - INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements of Capital
Title Group, Inc. and Subsidiaries (the Company) have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation have been
included. For further information, refer to the consolidated financial
statements and footnotes hereto included in the Company's annual report on Form
10-KSB for the year ended December 31, 1997.
The preparation of 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 these
estimates.
NOTE 2 - PRIVATE PLACEMENT 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 $4.3 million are
expected to be used by the Company to support expansion of its business in
Arizona and California and for working capital and general corporate purposes.
NOTE 3 - ACQUISITION OF CALIFORNIA COAST TITLE COMPANY
On June 5, 1998 the Company finalized a transaction for the purchase of
100% of the outstanding stock of California Coast Title Company, a California
licensed title insurance agency conducting limited operations in the San Diego
area, for $17,500 in cash, up to 45,000 shares of its common stock and $50,000
in transaction costs. On the date of acquisition California Coast changed its
name to New Century Title Company. The acquisition was accounted for as a
purchase and, accordingly, the acquired tangible and identifiable intangible
assets and liabilities were recorded at their estimated fair values at the date
of acquisition. The operations of New Century Title Company have been included
in the consolidated operations of the Company from the date of acquisition.
The following table sets forth the allocation of the purchase price to
the assets acquired and liabilities assumed:
Deposits and other assets $ 235,500
Other liabilities $ 78,000
6
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH ENDED JUNE 30, 1998 AND 1997
NOTE 4 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):
<TABLE>
<CAPTION>
For the Three month period ended June 30,
----------------------------------------------------------------
1998 1997
--------------------------------- ------------------------------
Per share Per share
Net Income Shares amount Net loss Shares amount
---------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 421,836 13,416,238 $0.03 $(66,713) 11,091,524 $(0.01)
===== ======
Effect of Dilutive
Securities: 10,397 312,500 -- --
Convertible debentures
Stock options -- 1,358,156 -- --
Warrants -- 175,358 -- --
---------- ---------- -------- ----------
Diluted EPS $ 432,233 15,262,252 $0.03 $(66,713) 11,091,524 $(0.01)
========== ========== ===== ======== ========== ======
For the Six month period ended June 30,
----------------------------------------------------------------
1998 1997
--------------------------------- ------------------------------
Per share Per share
Net Income Shares amount Net loss Shares amount
---------- ------ ------ -------- ------ ------
Basic EPS $ 925,337 13,111,017 $0.07 $(408,946) 10,942,659 $(0.04)
========== ======
Effect of Dilutive
Securities: 18,723 301,105 -- --
Convertible debentures
Stock options -- 1,109,349 -- --
Warrants -- 76,685 -- --
----- --------- ---------- ------
Diluted EPS $ 944,060 14,598,156 $0.06 $(408,946) 10,942,659 $(0.04)
========== ========== ===== ========= ========== ======
</TABLE>
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
For the six months ended June 30,
1998 1997
---- ----
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY
Equipment purchased through debt $199,179 $ 153,542
Stock issued for California Coast Title Company 90,000 --
Property purchased through debt -- 44,196
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 46,149 $ 26,939
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULT OF OPERATIONS
The 1997 Form 10-KSB and the Annual Report should be read in
conjunction with the following discussion since they contain important
information for evaluating the Company's operating results and financial
condition.
OPERATING REVENUE
Revenue increased by $3,182,822 or 170.3% for the three months ended
June 30, 1998 compared to the same period ended June 30, 1997. Operating revenue
increased by $5,755,998 or 173.7% for the six months ended June 30, 1998
compared to the same period ended June 30, 1997. The revenue increase is
attributable to a favorable real estate market, the expansion of the Company's
operations in Maricopa County, Arizona and increased market share in Yavapai
County, Arizona.
The following table presents information regarding the Company's
operating revenue:
For the Three months ended June 30,
-----------------------------------
1998 % of total 1997 % of total
---- ---------- ---- ----------
Title insurance premiums $3,165,766 62.7% $1,213,926 65.0%
Escrow fees 1,297,488 25.7 508,706 27.2
Account servicing 113,014 2.2 80,862 4.3
Other fees 278,425 5.5 7,598 0.4
Interest income 197,116 3.9 57,895 3.1
---------- ----- ---------- -----
Total revenue $5,051,809 100.0% $1,868,987 100.0%
Orders closed 4,803 1,896
Average fee per order $ 929 $ 909
For the Six months ended June 30,
-----------------------------------
1998 % of total 1997 % of total
---- ---------- ---- ----------
Title insurance premiums $5,654,813 62.4% $2,116,256 63.9%
Escrow fees 2,313,932 25.5 896,976 27.1
Account servicing 217,286 2.4 162,589 4.9
Other fees 580,339 6.4 40,117 1.2
Interest income 302,505 3.3 96,939 2.9
---------- ----- ---------- -----
Total revenue $9,068,875 100.0% $3,312,877 100.0%
Orders closed 8,866 3,371
Average fee per order $ 899 $ 894
The Company's primary business is providing title and escrow services
in Maricopa and Yavapai Counties, Arizona. Approximately 73% of total revenue is
attributable to Maricopa County where the Company currently operates 12
locations. The June 1998 Sykes Report shows Capital Title as the 6th largest
title company in Maricopa County with 6.0% of the overall market share for the
quarter ended June 30, 1998, compared to a market share of 2.4% for the same
period of the prior year. The Company has 7 locations in Yavapai County where it
ranks first in overall market share. The Company expanded its operations into
San Diego County, California in June 1998 and Mohave County, Arizona in July
1998.
8
<PAGE>
OPERATING EXPENSES
The following table presents the components of the Company's expenses
and the percentage they bear to the total revenue for the respective period:
For the Three months ended June 30,
-----------------------------------
1998 % of revenue 1997 % of revenue
---- ------------ ---- ------------
Personnel costs $2,442,955 48.3% $1,063,826 56.9%
Escrow commissions 559,342 11.1 110,840 5.9
Title remittance fees 330,350 6.5 118,729 6.4
Rent 276,060 5.5 156,674 8.4
Other operating expenses 938,792 18.6 514,374 27.5
Interest expense 20,474 0.4 13,691 0.7
---------- ---- ---------- -----
$4,567,973 90.4% $1,978,134 105.8%
For the Six months ended June 30,
-----------------------------------
1998 % of revenue 1997 % of revenue
---- ------------ ---- ------------
Personnel costs $4,259,558 46.9% $2,059,335 62.2%
Escrow commissions 903,189 10.0 181,607 5.4
Title remittance fees 587,345 6.5 210,814 6.4
Rent 491,812 5.4 309,077 9.3
Other operating expenses 1,793,485 19.8 976,485 29.5
Interest expense 46,149 0.5 26,939 0.8
---------- ---- ---------- -----
$8,081,538 89.1% $3,764,257 113.6%
Overall operating expenses have increased by $2,589,839 and $4,317,281
for the three and six-month periods ended June 30, 1998, respectively, compared
to the same periods ended June 30, 1997. This increase resulted from the
expansion of the Company's operations although operating expenses decreased as a
percentage of revenue to 90.4% in the three months ended June 30, 1998 from
105.8% in the comparable period in 1997. Operating expenses decreased as a
percentage of revenue to 89.1% in the first six months of 1998 from 113.6% in
the same period of 1997. These decreases were the result of the relatively fixed
nature of many of these expenses in relation to the increase in revenue. In the
three and six-month periods ended June 30, 1998, there were approximately $
371,535 and $ 414,411, respectively, of operating expenses related to start up
costs for the Company's San Diego, California and Mohave County, Arizona title
insurance operations, and from costs associated with the Company's recently
formed property and casualty insurance agency. Excluding the startup costs (net
of revenue recognized) associated with the Company's new operations, income,
before income taxes, from existing operations in the first and second quarters
of 1998 would have been $546,377 and $ 824,762, respectively.
Personnel costs, including commissions, are the most significant
component of the Company's operating expenses. Personnel costs including
commissions decreased as a percentage of revenue to 59.4% in the three months
ended June 30, 1998 from 62.8% in the comparable period in 1997. Personnel costs
including commissions decreased as a percentage of revenue to 56.9% in the first
six months of 1998 from 67.6% in the same period of 1997. Those decreases were
the result of higher productivity and the somewhat fixed nature of these
expenses in relation to the increase in revenue.
9
<PAGE>
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 18.6% in the three months ended June 30, 1998
from 29.2% in the comparable period in 1997. Other operating expensed decreased
as a percentage of revenue to 19.8% in the first six months of 1998 from 29.5%
in the same period of 1997. These decreases were the result of the relatively
fixed nature of most of these expenses in relation to the increase in revenue.
An income tax provision in the amount of $62,000 was recorded in the
quarter ended June 30, 1998 based on the estimated annual effective tax rate
after giving consideration to the available net operating loss carryforward
which totaled approximately $1,350,000 at December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
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 $4.3 million are
expected to be used by the Company to support expansion of its business in
Arizona and California and for working capital and general corporate purposes.
At June 30, 1998, the Company had current assets totaling $6,001,003
compared to current liabilities which totaled $1,342,067. Management believes
that cash on hand and future cash receipts will be sufficient to meet the
Company's expansion plans and to pay all obligations as they become due.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 15, 1998. The
matters voted on at the Annual Meeting were as follows:
(a) Election of a slate of directors to serve a three year term.
(b) Ratification of Ernst & Young to serve as independent auditors for the
Company.
(c) Approval of an increase in the number of shares of common Stock
authorized for issuance under the Company's 1996 Option Plan to
2,400,000 shares.
(d) Approval of an increase in the number of shares of Common Stock
authorized for issuance under the Company's Non-employee Director
Option Plan to 370,000 shares.
All matters voted on at the Annual Meeting were approved by stockholders as
follows:
Votes Votes
Votes For Against Abstained
--------- ------- ---------
Board of Director nominees:
Donald R. Head 6,474,276 0 0
Theo F. Lamb 6,474,276 0 0
Michael D. Ferry * 6,474,276 0 0
Ratification of Ernst & Young 6,474,276 0 0
Amendment of 1996 Option Plan 6,474,276 0 0
Amendment of Non-Employee Director
Option Plan 6,474,276 0 0
* Mr. Ferry subsequently resigned as a director of the Company.
The Company's Board of Directors currently consists of eight members
and is divided into three classes, each with three year terms. The following are
board members with terms not expiring on the May 15, 1998 annual meeting: Jeff
Anderson, David Dewar, Andrew Johns, Robert Liverant and Ben Morris.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three
months ended June 30, 1998.
11
<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 Date: July 27, 1998
---------------------------------
Donald R. Head
Chairman of the Board,
Chief Executive Officer
By: /s/ Mark C. Walker Date: July 27, 1998
---------------------------------
Mark C. Walker
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR PURPOSES OF SECTION 11 OF THE
SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR
OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A
PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE, UNLESS
SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 5,654,967
<SECURITIES> 0
<RECEIVABLES> 171,295
<ALLOWANCES> (13,750)
<INVENTORY> 0
<CURRENT-ASSETS> 6,001,003
<PP&E> 3,740,506
<DEPRECIATION> (919,538)
<TOTAL-ASSETS> 9,480,322
<CURRENT-LIABILITIES> 1,342,067
<BONDS> 476,659
0
0
<COMMON> 15,872
<OTHER-SE> 7,567,724
<TOTAL-LIABILITY-AND-EQUITY> 9,480,322
<SALES> 0
<TOTAL-REVENUES> 9,068,875
<CGS> 0
<TOTAL-COSTS> 8,035,389
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,149
<INCOME-PRETAX> 987,337
<INCOME-TAX> 62,000
<INCOME-CONTINUING> 925,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 925,337
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.06
</TABLE>
