UNITED STATES
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, 1999
[ ] 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 registrant as specified in its charter)
Delaware 87-0399785
- ------------------------------- -------------------
(State or other jurisdiction of IRS Employer
incorporation or organization) Identification No.)
2901 East Camelback Road 85016
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(602) 954-0600
---------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes [X] No [ ].
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value 17,088,691 shares as of November 10, 1999.
<PAGE>
FORM 10-QSB
For the Quarter ended September 30, 1999
TABLE OF CONTENTS
Part I: FINANCIAL INFORMATION Page Number
-----------
Item 1. Condensed Consolidated Financial Statements
A. Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 ............................... 3
B. Consolidated Statements of Operations for the three
month and nine month periods ended September 30,
1999 and 1998 ....................................... 4
C. Consolidated Statements of Cash Flows for the nine
month periods ended September, 1999 and 1998 ........ 5
D. Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 11
Part II: OTHER INFORMATION
Items 1 - 5 of Part II have been omitted because they are not
applicable with respect to the current reporting period.
Item 6. Exhibits and Reports on Form 8-K ...................... 11
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
------------ ------------
ASSETS (unaudited)
Current Assets:
Cash $ 2,348,434 $ 4,833,826
Accounts receivable, net 123,392 364,725
Notes and other receivables 360,879 406,028
Other current assets 399,749 575,875
------------ ------------
Total Current Assets 3,232,454 6,180,454
Property and equipment, net 10,982,422 8,863,133
Other Assets:
Notes receivable 164,369 231,531
Investment in title plant 521,278 520,249
Deposits and other assets 404,431 312,693
Property held for investment 65,696 161,270
Goodwill 249,573 259,024
------------ ------------
Total Assets $ 15,620,223 $ 16,528,354
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 194,414 $ 532,346
Accounts payable 275,410 664,737
Accrued expenses 1,183,046 2,656,572
------------ ------------
Total Current Liabilities 1,652,870 3,853,655
Long-Term Debt 3,256,368 1,766,815
Other Liabilities 116,705 117,905
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000
shares authorized, 17,080,691 and 16,926,791
shares issued and outstanding in 1999 and
1998, respectively 17,081 16,927
Paid-in capital 11,093,396 10,944,294
Accumulated deficit (516,197) (171,242)
------------ ------------
Total Stockholders' Equity 10,594,280 10,789,979
------------ ------------
Total Liabilities and Stockholders' Equity $ 15,620,223 $ 16,528,354
============ ============
See Notes to Consolidated Financial Statements
3
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUE:
Title insurance premiums $ 5,708,713 $ 3,589,493 $ 17,660,123 $ 9,244,306
Escrow and related fees 2,913,685 1,555,861 8,876,367 4,087,079
Interest and other income 450,445 491,982 1,344,506 1,374,826
------------ ----------- ------------ -----------
9,072,843 5,637,336 27,880,996 14,706,211
------------ ----------- ------------ -----------
EXPENSES:
Personnel costs 5,152,247 2,709,037 15,479,792 6,968,595
Escrow commissions 786,811 641,558 2,258,367 1,544,747
Title remittance fees 559,170 345,136 1,679,914 932,481
Rent 587,620 345,230 1,534,342 837,042
Other operating expenses 2,584,237 1,384,408 7,084,437 3,177,893
Interest expense 105,209 27,914 189,099 74,063
------------ ----------- ------------ -----------
9,775,294 5,453,283 28,225,951 13,534,821
------------ ----------- ------------ -----------
Income (loss) before income taxes (702,451) 184,053 (344,955) 1,171,390
Provision (benefit) for income tax (142,997) -- -- 62,000
------------ ----------- ------------ -----------
Net income (loss) $ (559,454) $ 184,053 $ (344,955) $ 1,109,390
============ =========== ============ ===========
Net income (loss) per common share:
Basic $ (0.03) 0.01 $ (0.02) $ 0.08
============ =========== ============ ===========
Diluted $ (0.03) 0.01 $ (0.02) $ 0.07
============ =========== ============ ===========
Weighted average shares outstanding:
Basic 17,032,137 15,886,882 16,989,667 14,056,518
============ =========== ============ ===========
Diluted 17,032,137 18,228,878 16,989,667 15,802,019
============ =========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the nine months ended
September 30,
---------------------------
1999 1998
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income (loss) $ (344,955) $ 1,109,390
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 1,022,609 372,559
Changes in assets and liabilities:
Accounts receivable 168,893 (136,706)
Account receivable - other 119,286 --
Interest receivable (177,431) (16,165)
Prepaid expenses (251,827) (101,468)
Deposits and other assets (65,645) (114,113)
Marketable securities 426,631 --
Accounts payable (340,721) 33,488
Accrued expenses (1,474,726) 640,801
----------- -----------
Net Cash Flows - Operating Activities (917,886) 1,787,786
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES:
Purchase of property and equipment (2,602,760) (2,494,927)
Cash received from sale of fixed assets 1,156,982 --
Disbursements from loans receivable (170,035) (67,500)
Collection of loans receivable 286,562 --
Other investing activities 94,545 (50,000)
----------- -----------
Net Cash Flows - Investing Activities (1,234,706) (2,612,427)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 130,112 5,708,859
Borrowings -- 125,000
Repayment of debt (462,912) (466,695)
----------- -----------
Net Cash Flows - Financing Activities (332,800) 5,367,164
----------- -----------
NET INCREASE (DECREASE) IN CASH (2,485,392) 4,542,523
CASH AT THE BEGINNING OF THE PERIOD 4,833,826 198,903
----------- -----------
CASH AT THE END OF THE PERIOD $ 2,348,434 $ 4,741,426
=========== ===========
See Notes to Consolidated Financial Statements
5
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
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, 1998.
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 - 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 September 30,
-------------------------------------------------------------------
1999 1998
--------------------------------- --------------------------------
Per share Net Per share
Net Loss Shares amount income Shares amount
---------- ---------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $(559,454) 17,032,137 $ (0.03) $184,053 15,886,882 $ 0.01
======= ======
Effect of Dilutive Securities:
Stock options -- -- 1,674,521
Warrants -- -- 354,975
--------- ---------- -------- ----------
Diluted EPS $(559,454) 17,032,137 $ (0.03) $184,053 17,916,378 $ .01
========= ========== ======= ======== ========== ======
For the nine month period ended September 30,
-------------------------------------------------------------------
1999 1998
--------------------------------- --------------------------------
Per share Net Per share
Net Loss Shares amount income Shares amount
---------- ---------- --------- ---------- ---------- ---------
Basic EPS $(344,955) 16,989,667 $ (0.02) $1,109,390 14,056,518 $ 0.08
======= ======
Effect of Dilutive Securities:
Stock options -- -- 1,280,551
Warrants -- -- 160,005
--------- ---------- ---------- ----------
Diluted EPS $(344,955) 16,989,667 $ (0.02) $1,109,390 15,497,074 $ .07
========= ========== ======= ========== ========== ======
</TABLE>
6
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
For the nine months
ended September 30,
-----------------------
1999 1998
---------- ----------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY:
Building and equipment purchased through debt $3,130,000 $ 322,369
Debt paid from sale of building 1,515,467 --
Property purchased through private placement -- 346,848
Stock issued for California Coast Title Company -- 90,000
Long term liability acquired in purchase
of California Coast Title Company -- 78,000
Sale of New Century Insurance Company 25,156 --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 189,099 $ 74,063
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
The 1998 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 $3,435,507 or 60.9% for the three months ended
September 30, 1999 and revenue increased by $13,174,785 or 89.6% for the nine
months ended September 30, 1999 compared to the same periods ended September 30,
1998, respectively. Approximately $2,570,000 of the revenue increase for the
quarter is related to the Company's investment in its California expansion by
way of acquisitions and startup operations, with the remainder attributed
primarily to the expansion of the Company's operations in Maricopa County,
Arizona.
The following table presents information regarding the Company's operating
revenue:
For the three months ended September 30,
-------------------------------------------------
1999 % of total 1998 % of total
----------- ---------- ----------- ----------
Title insurance premiums $ 5,708,713 62.9% $ 3,589,493 63.7%
Escrow and related fees 2,913,685 32.1 1,555,861 27.6
Interest and other income 450,445 5.0 491,982 8.7
----------- ---------- ----------- ----------
Total revenue $ 9,072,843 100.0% $ 5,637,336 100.0%
----------- ---------- ----------- ----------
For the nine months ended September 30,
-------------------------------------------------
1999 % of total 1998 % of total
----------- ---------- ----------- ----------
Title insurance premiums $17,660,123 63.4% $ 9,244,306 62.9%
Escrow and related fees 8,876,367 31.8 4,087,079 27.8
Interest and other income 1,344,506 4.8 1,374,826 9.3
----------- ---------- ----------- ----------
Total revenue $27,880,996 100.0% $14,706,211 100.0%
----------- ---------- ----------- ----------
The Company's primary business is providing title and escrow services in
three counties in Arizona and four counties in California. Approximately 49% of
total revenue for the quarter ended September 30, 1999 is attributable to
Maricopa County where the Company currently operates 21 branches. The September
1999 SYKES Report places Capital Title as the 3rd largest of the 25 title
companies in Maricopa County with approximately 7.5% market share, compared to a
market share of 5.6% for the same period of the prior year. Approximately 11% of
total revenue for the quarter is attributable to Yavapai County where the
Company has 7 locations and ranks first in overall market share. The Company
expanded its operations into San Diego County, California in June 1998, Mohave
County, Arizona in July 1998 and in November 1998 purchased a nine branch escrow
and title operation in northern California. The California operations accounted
for approximately 33% of total revenue for the quarter ended September 30, 1999.
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 September 30,
-----------------------------------------------------
1999 % of revenue 1998 % of revenue
----------- ------------ ----------- ------------
Personnel costs $ 5,152,247 56.8% $ 2,709,037 48.1%
Escrow commissions 786,811 8.7 641,558 11.4
Title remittance fees 559,170 6.1 345,136 6.1
Rent 587,620 6.5 345,230 6.1
Other operating expenses 2,584,237 28.5 1,384,408 24.6
Interest expense 105,209 1.1 27,914 0.5
----------- ------------ ----------- ------------
$ 9,775,294 107.7% $ 5,453,283 96.8%
For the nine months ended September 30,
-----------------------------------------------------
1999 % of revenue 1998 % of revenue
----------- ------------ ----------- ------------
Personnel costs $15,479,792 55.5% $ 6,968,595 47.4%
Escrow commissions 2,258,367 8.1 1,544,747 10.5
Title remittance fees 1,679,914 6.0 932,481 6.3
Rent 1,534,342 5.5 837,042 5.7
Other operating expenses 7,084,437 25.4 3,177,893 21.6
Interest expense 189,099 0.7 74,063 0.5
----------- ------------ ----------- ------------
$28,225,951 101.2% $13,534,821 92.0%
Overall operating expenses have increased by $4,322,011 and $14,691,130 for
the three and nine-month periods ended September 30, 1999, respectively,
compared to the same periods ended September 30, 1998. This increase resulted
from the Company's commitment to internal expansion of its regional operations.
In the three months ended September 30, 1999, operating expenses increased as a
percentage of revenue to 107.7% from 96.8% in the comparable period in 1998.
Operating expenses increased as a percentage of revenue to 101.2% in the first
nine months of 1999 from 92.0% in the same period of 1998. These increases in
operating costs as a percent of revenue were primarily the result of 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. In addition, the
California operations historically have had a high percentage of their business
dependent on refinance markets, but are transitioning their mix of business to
the more stable and profitable residential resale market. The volume of
refinance business has decreased significantly and as a result, the Company's
California operations lost approximately $886,000 during the quarter ended
September 30, 1999 compared to a loss of approximately $295,000 for the
corresponding quarter of the prior year. The Company's recent placement of new
executive management and professionals in its California operations is part of
its continuing efforts to replace the decrease in refinance business and focus
on the resale market.
9
<PAGE>
Personnel costs, including commissions, are the most significant component
of the Company's operating expenses. Personnel costs, including commissions,
increased as a percentage of revenue to 65.5% in the three months ended
September 30, 1999 from 59.5% in the comparable period in 1998. Personnel costs
including commissions increased as a percentage of revenue to 63.6% in the first
nine months of 1999 from 57.9% in the same period of 1998. These increases were
the result of higher personnel costs in California relative to revenue as
discussed above.
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 remained relatively unchanged as a percent of
revenue at approximately 6.0% for the three and nine months ended September 30,
1999 as compared to the same periods in 1998.
Rent expense as a percent of revenue also remained relatively unchanged for
the three and nine months ended September 30, 1999 as compared to the same
periods in 1998.
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 28.5% in the three months ended September 30, 1999 from 24.6%
in the comparable period in 1998. Other operating expenses increased as a
percentage of revenue to 25.4% in the first nine months of 1999 from 21.6% in
the same period of 1998. These increases were the result of costs associated
with opening eleven new offices during the nine months ended September 30, 1999,
coupled with the relatively fixed nature of many of these costs relative to the
level of revenue in the California operations.
An income tax benefit in the amount of $143,000 was recorded in the quarter
ended September 30, 1999 based on the estimated annual effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had current assets totaling $3,232,454
compared to current liabilities which totaled $1,652,870. Management believes
that cash on hand, future cash receipts and its credit facility will be
sufficient to pay all obligations as they become due.
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. No amounts are
currently drawn against this credit facility; however, $150,000 was committed
for a standby letter of credit required pursuant to an office lease.
During the quarter ended September 30, 1999, the Company purchased a
building for $4,309,000. This purchase was financed with a ten year $3,130,000
loan which bears interest at 8.32% per annum and requires monthly payments of
$23,940. Also during the quarter, the Company sold a building which provided
approximately 1,157,000 in cash and retired $1,515,000 in debt.
YEAR 2000 ISSUE
Many older computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by the year 2000.
The Company has examined its operating systems and believes that its
operations are substantially year 2000 compliant. The computer systems and
programs currently used by the nine offices the Company acquired from
Northwestern Consolidated Corporation have been upgraded at a cost of
approximately $25,000 to be year 2000 compliant; however, it is still the
Company's intention to replace these systems with technology and programs
similar to those used in its other operations. It is estimated that the costs
associated with purchasing and installing this technology will be approximately
$620,000. These costs, consisting primarily of hardware and software purchased
and installed by third party vendors, will be capitalized and will have a
nominal impact on results of operations.
10
<PAGE>
The Company has initiated formal communications with all of its significant
suppliers, larger customers and other parties of which the Company
electronically interacts to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own year 2000 issues. The Company is not aware of any significant impact
on its operations that would result from third party year 2000 issues based on
presently available information. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems.
The Company's business and financial transactions are processed on local
area networks comprised of relatively new personal computers and servers. As a
contingency plan, in the event of any unforseen problems related to
communications or third party interface, the Company could input, process and
store data on stand-alone networks until such problems could be remedied. This
contingency plan would, however, be negatively impacted in the event of a
catastrophic failure in banking systems and the failure of systems related to
county recorders.
SAFE HARBOR STATEMENT
Certain statements contained in this discussion and analysis with respect
to factors which may affect future earnings, including management's beliefs and
assumptions based on information currently available, are forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements that are not
historical facts involve risks and uncertainties, and results could vary
materially from the descriptions contained herein. For more details on risk
factors, see the Company's annual reports on Form 10-K and other filings with
the Securities and Exchange Commission.
PART II. OTHER INFORMATION
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 September 30, 1999.
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: November 10, 1999
------------------------------
Donald R. Head
Chairman of the Board,
Chief Executive Officer
By: /s/ Mark C. Walker Date: November 10, 1999
------------------------------
Mark C. Walker
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,348,434
<SECURITIES> 0
<RECEIVABLES> 123,392
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,232,454
<PP&E> 15,674,284
<DEPRECIATION> (4,691,862)
<TOTAL-ASSETS> 15,620,223
<CURRENT-LIABILITIES> 1,652,870
<BONDS> 3,256,368
0
0
<COMMON> 17,081
<OTHER-SE> 10,577,199
<TOTAL-LIABILITY-AND-EQUITY> 15,620,223
<SALES> 0
<TOTAL-REVENUES> 27,880,996
<CGS> 0
<TOTAL-COSTS> 28,036,852
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189,099
<INCOME-PRETAX> (344,955)
<INCOME-TAX> 0
<INCOME-CONTINUING> (344,955)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (344,955)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
