================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 25, 1998
CAPITAL TITLE GROUP, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 1-9396 87-0399785
- ------------------------------ ----------- -------------------
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File No.) Identification No.)
14555 North Scottsdale Rd. Suite 320, Scottsdale, Arizona 85254
- --------------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 483-8868
--------------
================================================================================
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Pursuant to a Merger Agreement dated September 1, 1998, (the "Agreement")
among Registrant, New Century Title Company of Northern California (the "Merger
Sub"), a California corporation, which is a wholly-owned subsidiary of
Registrant, Northwestern Consolidated Corporation, a California corporation
("NCC"), and Northwestern Title Company of Alameda County, Northwestern Title
Security Company, Northwestern Accommodation Company, NW Service Corporation,
Nave Corporation, Northwestern Title Insurance Company and Recon Services
Corporation, which are all wholly-owned subsidiaries of NCC, NCC became a
wholly-owned subsidiary of Registrant by merger of NCC with and into Merger Sub.
As a result of the merger, the shareholders of NCC holding less than 2,000
shares of common stock of NCC will be entitled to receive cash in an amount
equal to $11.00 per share of NCC common stock and the shareholders of NCC
holding 2,000 or more shares of NCC common stock will be entitled to receive a
combination of cash and common stock of the Registrant. Total consideration for
the merger is $3,293,926 in cash and 659,075 restricted shares of the
Registrant's common stock.
NCC, through its subsidiaries, provides title, escrow and related real
estate services in Sonoma, Contra Costa and Alameda Counties in the San
Francisco, California region. NCC had total assets of approximately $6,436,763
at December 31, 1997. For the year ended December 31, 1997, NCC had revenue of
$9,623,722 and had a net loss of $78,667. For the nine months ended September
30, 1998, NCC had revenue of $7,394,943 and had net income of $862,910.
The merger, which is being accounted for as a purchase, was effective
November 1, 1998 but was subject to regulatory approval and filings with the
California Secretary of State. The approval and filing requirements were
completed on November 25, 1998.
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
Pursuant to Item 7 (a) (4) of Form 8-K, all required historical financial
statements of NCC and all required pro forma financial statements are being
filed in this Amendment No. 1.
The unaudited pro forma consolidated financial information of the Company,
included in Item 7(b) of this Form 8-K/A, is based on and should be read in
conjunction with the audited financial statements and notes thereto appearing in
the Company's annual report on Form 10-KSB for the year ended December 31, 1997
and the unaudited financial statements and notes thereto appearing in the
Company's Form 10-QSB for the nine month period ended September 30, 1998. The
unaudited pro forma condensed combining balance sheet of the Company as of
September 30, 1998 reflects the financial position of the Company after giving
effect to the acquisition of NCC and assumes the acquisition took place on
September 30, 1998. The unaudited pro forma condensed combining statements of
operations for the fiscal year ended December 31, 1997 and the nine months ended
September 30, 1998 assume that the acquisition occurred on January 1, 1997.
The unaudited pro forma condensed combining financial statements have been
prepared by the Company based upon available information and certain assumptions
that management believes are reasonable in the circumstances. The unaudited pro
forma information presented herein is shown for illustrative purposes only and
is not necessarily indicative of the future financial position or future results
of operations of the Company, or the financial position or results of operations
of the Company that would have actually occurred had the acquisition been in
effect as of the date or for the periods presented. The Company's financial
statements will reflect the acquisition only from November 1, 1998.
(a) Financial Statements of Business Acquired.
Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2
Consolidated Statements of Operations and Retained Earnings
for the Year Ended December 31, 1997 and the Fifteen Month
Period Ended December 31, 1996 F-3
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1997 and the Fifteen Month Period Ended
December 31, 1996 F-4-5
Notes to Consolidated Financial Statements F-6-18
Consolidated Balance Sheet as of September 30, 1998 F-19
Consolidated Statements of Operations for the Nine Months
ended September 30, 1998 and 1997 F-20
Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1998 and 1997 F-21
Notes to Consolidated Financial Statements F-22
3
<PAGE>
(b) Pro Forma Financial Information.
Unaudited Pro Forma Condensed Combining Statement of
Operations for the Year Ended December 31, 1997 F-23
Unaudited Pro Forma Condensed Combining Statement of
Operations for the Nine Months Ended September 30, 1998 F-24
Unaudited Pro Forma Condensed Balance Sheets as of
September 30, 1998 F-25
Notes to Unaudited Pro Forma Condensed Combining
Financial Statements F-26
(c) Exhibits.
10. * Merger Agreement among the Registrant, Northwestern Consolidated
Corporation and related subsidiaries.
23. Consent of Pisenti & Brinker LLP
* Previously filed.
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 hereunto duly authorized.
CAPITAL TITLE GROUP, INC.
By: /s/ Mark C. Walker Dated: February 3, 1999
------------------------------------------
Mark C. Walker
Vice President and Chief Financial Officer
4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Northwestern Consolidated Corporation
Santa Rosa, California
We have audited the accompanying consolidated balance sheets of NORTHWESTERN
CONSOLIDATED CORPORATION AND SUBSIDIARIES as of December 31, 1997 and 1996, and
the related consolidated statements of operations and retained earnings, and
cash flows for the year ended December 31, 1997 and the fifteen month period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NORTHWESTERN
CONSOLIDATED CORPORATION AND SUBSIDIARIES as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for the
periods then ended in conformity with generally accepted accounting principles.
/s/ Pisenti & Brinker LLP
Santa Rosa, California
March 13, 1998
F-1
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $1,056,211 $ 657,830
Interest-bearing time deposits 821,506 819,984
Accounts receivable, net of allowance
for doubtful accounts of $21,500
and $26,100, respectively 79,093 84,754
Notes and other receivables 202,352 318,466
Prepaid expenses and other assets 34,649 33,537
- --------------------------------------------------------------------------------
Total current assets 2,193,811 1,914,571
- --------------------------------------------------------------------------------
Notes receivable 148,881 236,475
Other assets 168,425 152,168
Rental and investment properties 692,773 716,449
Property and equipment 3,163,551 3,394,239
Property under capital leases 69,322 26,987
- --------------------------------------------------------------------------------
$6,436,763 $6,440,889
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 178,318 $ 6,790
Accounts payable and accrued expenses 493,045 650,924
Current portion of long-term debt 166,171 192,504
Current obligations under capital lease 14,983 4,516
- --------------------------------------------------------------------------------
Total current liabilities 852,517 854,734
- --------------------------------------------------------------------------------
Lease deposits 22,608 10,231
Long-term debt 1,559,969 1,540,973
Obligations under capital leases 70,164 24,779
- --------------------------------------------------------------------------------
Total liabilities 2,505,258 2,430,717
- --------------------------------------------------------------------------------
Stockholders' equity
Common stock, $1.08 stated value; authorized
1,000,000 shares, issued and outstanding
539,075 shares 582,201 582,201
Additional paid-in capital 1,766 1,766
Retained earnings 3,347,538 3,426,205
- --------------------------------------------------------------------------------
Total stockholders' equity 3,931,505 4,010,172
================================================================================
$6,436,763 $6,440,889
================================================================================
See accompanying Notes to Consolidated Financial Statements
F-2
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------
REVENUE
Title insurance premiums $4,239,044 $ 4,912,729
Escrow, recording and conveyance fees 4,915,230 5,550,623
Reports 14,656 30,122
Net rental and other income 422,074 643,574
Accommodation fees 32,718 37,458
- --------------------------------------------------------------------------------
9,623,722 11,174,506
- --------------------------------------------------------------------------------
COSTS AND EXPENSES
Salaries and other personnel costs 4,317,213 5,513,803
Recording and underwriting fees 3,165,836 3,437,008
Other operating expenses 1,571,425 1,957,656
Escrow and title losses 27,968 82,980
Depreciation and amortization 186,013 276,840
Rent 271,032 454,325
Interest 156,502 225,742
- --------------------------------------------------------------------------------
9,695,989 11,948,354
- --------------------------------------------------------------------------------
Loss before income taxes (72,267) (773,848)
INCOME TAX (EXPENSE) BENEFIT (6,400) 7,600
- --------------------------------------------------------------------------------
NET LOSS (78,667) (766,248)
RETAINED EARNINGS AT BEGINNING OF PERIOD $3,426,205 $ 4,192,453
- --------------------------------------------------------------------------------
RETAINED EARNINGS AT END OF PERIOD $3,347,538 $ 3,426,205
================================================================================
NET LOSS PER SHARE OF COMMON STOCK $ (.15) $ (1.42)
================================================================================
See accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (78,667) $(766,248)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 209,689 303,243
Loss (gain) on dispositions of property
and equipment 48,735 (160,718)
Loss on reduction of carrying value of
note receivable -- 25,000
Deferred income taxes -- (20,500)
Bad debt expense 23,377 --
Changes in assets and liabilities affecting
operating activities:
(Increase) decrease in assets:
Accounts receivable 10,260 (84,754)
Income tax refund receivable -- 402,800
Prepaid expenses and other assets (3,396) 39,320
Other receivables (67,140) 109,838
Increase (decrease) in liabilities:
Accounts payables and accrued expenses (151,212) 63,646
- --------------------------------------------------------------------------------
Net cash used in operating activities (8,354) (88,373)
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in interest-bearing time
deposits (net) (1,522) 147,260
Increase in cash value of officers' life insurance (13,973) (613)
Advances on notes receivable -- (4,108)
Payments on notes receivable 242,872 92,579
Proceeds from sale of property and equipment 27,730 1,200
Purchase of property and equipment (13,064) (37,961)
Purchase of improvements for rental properties -- (82,321)
- --------------------------------------------------------------------------------
Net cash provided by investing activities 242,043 116,036
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash overdraft 171,528 (47,894)
Lease deposits received 12,377 10,231
Proceeds from note payable 36,000 73,385
Payments on notes payable (50,004) (85,853)
Payments on obligations under capital lease (5,209) (691)
Dividends paid -- --
- --------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 164,692 (50,822)
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 398,381 (23,159)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 657,830 680,989
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,056,211 $ 657,830
================================================================================
See accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
================================================================================
PERIODS ENDED DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 6,400 $ 12,800
================================================================================
Interest $169,232 $215,382
================================================================================
NONCASH INVESTING AND FINANCING TRANSACTIONS
Acquisition of office equipment under capital
lease obligation $ 61,061 $ 29,986
================================================================================
Transfer of accounts payable to long-term debt $ 6,667 $ --
================================================================================
A building with a net book value of $296,478 was
transferred during the period ended December 31,
1996 to a corporation as payment in full on a note
payable of $420,125 and accrued interest of
$35,973. The subsidiary recognized a gain of
$159,620 on this transaction
================================================================================
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE A. SUMMARY OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Northwestern Consolidated Corporation (the "Company") owns 100% of the
voting stock of Northwestern Title Company of Alameda County, Northwestern
Title Security Company, Northwestern Accommodation Company, and NW Service
Corporation. Two of the subsidiaries are underwritten title companies which
place title insurance and provide escrow services, one is a property
exchange accommodator, and the fourth is a service company which provides
data services to banks and leasing services to its affiliates. The Company
and subsidiaries provide services in Sonoma, Alameda and Contra Costa
counties.
The following is a summary of the Company's significant accounting policies
utilized in the preparation of the accompanying consolidated financial
statements.
CONSOLIDATION
The consolidated financial statements include the accounts of the parent
company and its wholly-owned subsidiaries after elimination of all
significant intercompany accounts and transactions.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using both straight-line and accelerated methods at varying rates
reflecting estimated useful lives as follows:
Buildings and improvements 4 to 45 years
Office furniture, fixtures and equipment 5 to 8 years
Automotive equipment 3 to 5 years
TRUST AND ESCROW ASSETS AND LIABILITIES
Assets and liabilities of trusts and escrows being administered by two of
the Company's subsidiaries have not been included in the consolidated
financial statements in accordance with the reporting practices of the title
abstract industry. These assets and liabilities as of December 31, 1997 and
1996 were approximately $5,925,300 and $5,932,100, respectively.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in
the consolidated financial statements and consist of taxes currently due
plus deferred taxes related primarily to differences between the basis of
property and equipment, accrued escrow losses and accrued vacation for
financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are
recovered or settled.
F-6
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE A. SUMMARY OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
(continued)
PROPERTY ACQUISITIONS
Cash held by a Company subsidiary for property acquisitions has not been
reflected in the consolidated financial statements. This cash represents
amounts held in the capacity of a property exchange accommodator. The funds
are restricted for acquisition of property for the subsidiary's customers.
These assets and liabilities as of December 31, 1997 and 1996 were
approximately $3,078,200 and $162,700, respectively.
REVENUE
Revenue from title insurance premiums and escrow services are recognized
upon the close of escrow.
CASH EQUIVALENTS
The Company considers all savings time deposits with an original maturity of
three months or less to be cash equivalents.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was $8,383,
and $5,305 for the periods ended December 31, 1997 and 1996, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Due to their prospective nature, actual results could
differ from those estimates.
F-7
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE B. CHANGE IN FISCAL YEAR
The Department of Insurance has required all California based underwritten
title companies to change from fiscal year ends to a calendar year end
beginning December 31, 1996. In accordance with this change, the statements
of operations and retained earnings and cash flows for the period ended
December 31, 1996 cover a period of fifteen months, whereas the statements
at December 31, 1997 cover a period of twelve months. The results of
operations and cash flows for the fifteen months ended December 31, 1996 are
not indicative of the results of operations and cash flows that may be
expected for a twelve month period.
NOTE C. NOTES AND OTHER RECEIVABLES
1997 1996
-------------------
Notes receivable, individuals, primarily secured by
deeds of trust to real property, bearing interest
rates ranging from 6% to 12% per annum, due
at various dates through April 2012 $ 49,881 $206,503
Note receivable, limited partnerships, secured by a
deed of trust to real property bearing interest
at 7% 100,000 100,000
Note receivable, unsecured, interest rate 8% per
annum, due August 1998 86,250 172,500
Due from escrow earnings 1,526 2,310
Other receivables 113,576 73,628
----------------------------------------------------------------------------
351,233 554,941
Less current portion 202,352 318,466
----------------------------------------------------------------------------
$148,881 $236,475
============================================================================
A subsidiary company holds a note receivable, individual, which was
refinanced during March 1997. The subsidiary received $150,544 on the
existing note and agreed to take a second deed of trust on the remaining
$48,881, with payments of interest only at 7% per annum, due April 2012.
F-8
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE C. NOTES AND OTHER RECEIVABLES (continued)
The note receivable, limited partnerships was due in March 1992. During the
year ended December 31, 1994, the deed of trust securing the note was
withdrawn. The subsidiary pursued legal action and in December 1996 entered
into a Mutual Release and Settlement Agreement with the partnerships.
Subject to the conditions of this agreement, $40,000, plus interest at 7% or
a lesser amount is due upon the sale of the property securing the note. The
amount is contingent upon the net sale proceeds. The remaining $60,000 is
secured by a deed of trust, bearing interest at 7% and due December 31,
1999. An additional $25,000 was written off during the period ended December
31, 1996. It is management's belief that the entire $100,000 is fully
collectible.
NOTE D. RENTAL AND INVESTMENT PROPERTIES AND OTHER INCOME
1997 1996
-------------------
Rental properties, at cost:
Land $155,715 $155,715
Buildings and improvements 814,991 815,692
-------------------------------------------------------------------------
970,706 971,407
Less accumulated depreciation 373,507 350,532
-------------------------------------------------------------------------
597,199 620,875
Investment property, at cost:
Land 95,574 95,574
-------------------------------------------------------------------------
$692,773 $716,449
=========================================================================
Net rental and other income consists of the following:
1997 1996
-------------------
Rental income $278,768 $184,040
Rental expenses:
Sublease rental expense 136,088 47,466
Depreciation (computed principally by
straight-line method over estimated
useful lives ranging from 5 to 40 years) 23,676 26,403
Interest 11,493 16,055
Taxes 18,823 22,084
Other rental expenses 55,639 40,365
-------------------------------------------------------------------------
245,719 152,373
=========================================================================
Net rental income $ 33,049 $ 31,667
=========================================================================
F-9
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE D. RENTAL AND INVESTMENT PROPERTIES (continued)
1997 1996
--------------------
Net rental income $ 33,049 $ 31,667
Interest income 140,094 160,643
Parking income 18,698 30,054
Data service fees 263,940 260,492
(Loss) gain on dispositions of
property and equipment (48,735) 160,718
Other income 15,028 --
--------------------------------------------------------------------------
Net rental and other income $422,074 $643,574
==========================================================================
Minimum future rentals to be received on non-cancelable leases as of
December 31, 1997 for each of the next four years and in the aggregate are:
Year ending December 31,
1998 $256,672
1999 241,226
2000 229,567
2001 15,220
2002 12,000
Thereafter 39,000
--------------------------------------------------------------
$793,685
==============================================================
As of May 1, 1997, the Company's subsidiary entered into a sublease rental
agreement for the Walnut Creek office space. The terms of the sublease
include incremental rent adjustments through October 1999. The Company's
subsidiary also holds an existing sublease on the Pleasanton location under
a similar arrangement. For the periods ended December 31, 1997 and 1996,
rental payments included in operating expenses of the subsidiary were
$86,352 and $27,918, respectively.
F-10
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE E. PROPERTY AND EQUIPMENT
1997 1996
-----------------------
Land $ 972,845 $ 972,845
Buildings and improvements 2,305,732 2,384,746
Office furniture, fixtures and equipment 2,122,262 2,495,531
Automotive equipment 231,298 295,743
Title plant 279,229 279,229
------------------------------------------------------------------------
5,911,366 6,428,094
Less accumulated depreciation and amortization 2,747,815 3,033,855
------------------------------------------------------------------------
$3,163,551 $3,394,239
========================================================================
Depreciation and amortization expense for the periods ended December 31,
1997 and 1996 was $167,287 and $273,841, respectively.
During the period ended December 31, 1996 the cost and accumulated
depreciation of certain property were reclassified to rental properties.
NOTE F. PROPERTY UNDER CAPITAL LEASES
1997 1996
--------------------
Office equipment $91,047 $29,986
Less accumulated amortization 21,725 2,999
---------------------------------------------------------------------
$69,322 $26,987
=====================================================================
Amortization expense for the periods ended December 31, 1997 and 1996 was
$18,726 and $2,999, respectively.
F-11
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE F. PROPERTY UNDER CAPITAL LEASES (continued)
The future minimum lease payments under capital leases, together with the
present value of the net minimum lease payments as of December 31, 1997, are
as follows:
Year ending December 31,
1998 $ 26,600
1999 26,600
2000 26,600
2001 25,074
2002 12,132
------------------------------------------------------------------
Total minimum lease payments 117,006
Less amount representing interest 31,859
------------------------------------------------------------------
Present value of net minimum lease payments 85,147
Less current portion 14,983
------------------------------------------------------------------
$ 70,164
==================================================================
NOTE G. NOTES PAYABLE
1997 1996
-----------------------
Note payable, bank, secured by deed of trust
to real property with book value of
$2,451,977, monthly principal payments of
$1,417 plus accrued interest at prime
rate plus 1%, but not less than 8.0%
(9.50% at December 31, 1997), due
February 1, 1999 $1,540,973 $1,557,977
Note payable, bank, guaranteed by parent
Company with monthly interest only
payments at prime rate plus 1% (9.50%
at December 31, 1997) principal due
October 30, 1999 36,000 --
------------------------------------------------------------------------
Subtotal $1,576,973 $1,557,977
F-12
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE G. NOTES PAYABLE (continued)
1997 1996
-----------------------
Subtotal $1,576,973 $1,557,977
Note payable, bank, secured by deed of trust to
rental and ther real property with a book value
of $212,247, monthly principal payments of
$1,500 plus interest at the prime rate less 1%
(7.50% at December 31, 1997), due October
1998 142,500 160,500
Note payable, bank, unsecured, monthly
principal payments of $2,500 plus accrued
interest at prime rate less 1% (7.25% at
December 31, 1996), due June 15, 1997 -- 15,000
Note payable, bank, unsecured monthly principal
payments of $3,333 due February 15, 1998
with interest at 10% on default only 6,667 --
--------------------------------------------------------------------------
1,726,140 1,733,477
Less current portion 166,171 192,504
--------------------------------------------------------------------------
$1,559,969 $1,540,973
==========================================================================
Maturities of notes payable are as follows at December 31, 1997:
Year ending December 31,
1998 $ 166,171
1999 1,559,969
---------------------------------------------------------------
NOTE H. LEASE COMMITMENTS
The Company and its subsidiaries conduct a portion of their operations in
leased premises under agreements expiring at various dates through 2002.
Certain lease agreements provide for annual increases based on increases in
the Consumer Price Index.
F-13
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE H. LEASE COMMITMENTS (continued)
Minimum future rental payments under all noncancelable operating leases as
of December 31, 1997, are as follows:
Year ending December 31,
1998 $ 395,379
1999 336,327
2000 260,805
2001 39,483
2002 15,744
-----------------------------------------------------------------
$1,047,738
=================================================================
Total minimum future rental payments have not been reduced by $472,440 of
sublease rentals to be received in the future under non-cancelable
subleases.
Rental expense for the periods ended December 31, 1997 and 1996 was $271,032
and $454,327, respectively.
NOTE I. INCOME TAXES
The Company and its subsidiaries file consolidated Federal and combined
California income tax returns.
The provision for income taxes is comprised of current and deferred
components. The current component represents the amount of federal and state
income taxes which are currently reportable to the respective tax
authorities and is measured by applying statutory rates to the Company's
taxable income as reported in its consolidated income tax returns.
Deferred income taxes are provided for the temporary differences between the
carrying values of the Company's assets and liabilities for financial
reporting purposes and their corresponding income tax bases. These temporary
differences are primarily attributable to depreciation, accrued vacation,
escrow losses, and California income tax and California net operating loss
carryforwards which, due to income tax laws and regulations, become taxable
or deductible in different fiscal years than their corresponding treatment
for financial reporting purposes. The temporary differences give rise to
either a deferred tax asset or liability in the consolidated financial
statements, which is computed by applying current statutory tax rates to
taxable and deductible temporary differences based upon the classification
(i.e., current or noncurrent) of the asset or liability in the financial
statements which relates to the particular temporary difference. Deferred
taxes related to differences which are not attributable to a specific asset
or liability are classified in accordance with the future period in which
they are expected to reverse and be recognized for income tax purposes.
F-14
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE I. INCOME TAXES (continued)
The provision for income taxes is comprised of the following components:
1997 1996
-----------------------
Current expense:
Federal $ -- $ --
State (6,400) (12,800)
----------------------------------------------------------------
(6,400) (12,800)
Deferred (expense) benefit:
Federal -- 61,100
State -- (40,700)
----------------------------------------------------------------
-- 20,400
----------------------------------------------------------------
Total income tax (expense) benefit $(6,400) $ 7,600
================================================================
FASB 109 requires that a valuation allowance be established for deferred tax
assets when it is likely that they will not be realized. The assessment of
realization is to be based upon the weight of the evidence at the balance
sheet date. The valuation accounts reduce the amount of gross deferred tax
assets to their estimated recoverable amounts.
Since it is unlikely that in the near future the Company will make profits
large enough to fully utilize the net operating loss carryforwards generated
in prior years the valuation allowance reduces the deferred tax assets as of
December 31, 1997 and 1996.
F-15
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE I. INCOME TAXES (continued)
Valuation
Current Noncurrent Allowance Total
---------------------------------------------------------------------------
DECEMBER 31, 1997
Deferred tax assets:
Federal $50,900 $314,400 $(212,700) $152,600
State 9,800 82,900 (59,200) 33,500
---------------------------------------------------------------------------
60,700 397,300 (271,900) 186,100
---------------------------------------------------------------------------
Deferred tax liabilities:
Federal 31,300 121,300 -- 152,600
State -- 33,500 -- 33,500
---------------------------------------------------------------------------
31,300 154,800 -- 186,100
---------------------------------------------------------------------------
Net deferred tax asset
(liability) $29,400 $242,500 $(271,900) $ --
===========================================================================
Valuation
Current Noncurrent Allowance Total
---------------------------------------------------------------------------
DECEMBER 31, 1996
Deferred tax assets:
Federal $61,300 $306,000 $(231,000) $136,300
State 13,100 98,600 (78,700) 33,000
---------------------------------------------------------------------------
74,400 404,600 (309,700) 169,300
---------------------------------------------------------------------------
Deferred tax liabilities:
Federal 42,700 93,600 -- 136,300
State 1,300 31,700 -- 33,000
---------------------------------------------------------------------------
44,000 125,300 -- 169,300
---------------------------------------------------------------------------
Net deferred tax asset
(liability) $30,400 $279,300 $(309,700) $ --
===========================================================================
F-16
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE I. INCOME TAXES (continued)
The approximate federal and state net operating loss carryforwards available
to offset future taxable income expire as follows:
Federal
2009 $ 92,900
2010 38,700
2011 610,400
2012 182,800
--------------------------------------------------------------
$924,800
==============================================================
State
1998 $ 30,200
1999 552,300
2000 24,800
2001 311,800
2002 68,200
--------------------------------------------------------------
$987,300
==============================================================
NOTE J. RETIREMENT PLANS
During the period ended December 31, 1996 the Company terminated their
defined contribution pension plan and amended the profit sharing plan. With
the transfer of retirement funds from the defined contribution plan all
participants will "vest" 100% in their account balances. Employees of the
Company may now participate in a salary deferral plan under Section 401(k)
of the Internal Revenue Code, whereby the employees may elect to make
contributions pursuant to a salary reduction agreement upon meeting age and
length of service requirements. The Company did not make any matching
contributions during the period ended December 31, 1997 or 1996.
NOTE K. CASH IN EXCESS OF INSURED LIMITS
The Company and its subsidiaries maintain cash and cash equivalents in
financial institutions insured by the Federal Depository Insurance
Corporation (FDIC) wherein the balances often exceed the insurance
limitations. At December 31, 1997, the Company and subsidiaries had accounts
with approximately $963,770 in excess of the maximum insured limitation of
$100,000.
F-17
<PAGE>
NORTHWESTERN CONSOLIDATED
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PERIODS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE L. CONTINGENCIES
The Company's subsidiary is engaged in legal actions arising from the normal
course of business. Pending litigation involves claims against the Company's
subsidiary of approximately $300,000. With respect to such litigation, the
Company's General Counsel believes the possibility of incurring a loss is
both remote and inestimable. Therefore no loss has been accrued for the year
ended December 31, 1997.
NOTE M. RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 financial statements to
conform to the classifications adopted for the 1997 financial statements.
There is no affect on net loss as reported for the fifteen month period
ended December 31, 1996.
F-18
<PAGE>
NORTHWESTERN CONSOLIDATED CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
ASSETS
Current Assets:
Cash $2,660,433 $1,877,717
Notes and other receivables, net 274,736 281,445
Prepaid expenses and other assets 64,666 34,649
---------- ----------
Total Current Assets 2,999,835 2,193,811
Property and Equipment, net 3,373,039 3,646,417
Other Assets:
Investment in title plant 279,229 279,229
Deposits and other assets 455,572 317,306
---------- ----------
Total Assets $7,107,675 $6,436,763
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable - current portion $1,581,340 $ 181,154
Accounts payable and accrued expenses 680,677 671,363
---------- ----------
Total Current Liabilities 2,262,017 852,517
Notes Payable and other liabilities 51,243 1,652,741
Stockholders' Equity:
Common stock, $1.08 par value, 1,000,000
shares authorized, 539,075 shares issued
and outstanding 582,201 582,201
Additional paid-in capital 1,766 1,766
Retained earnings 4,210,448 3,347,538
---------- ----------
Total Stockholders' Equity 4,794,415 3,931,505
---------- ----------
Total Liabilities and Stockholders' Equity $7,107,675 $6,436,763
========== ==========
See Notes to Condensed Consolidated Financial Statements
F-19
<PAGE>
NORTHWESTERN CONSOLIDATED CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended September 30,
1998 1997
---------- -----------
REVENUE:
Title insurance premiums $4,219,891 $ 3,083,838
Escrow fees 2,167,561 1,449,609
Interest and other income 1,007,491 549,286
---------- -----------
7,394,943 5,082,733
---------- -----------
EXPENSES:
Personnel costs 3,848,618 3,257,986
Other operating expenses 2,544,625 1,908,292
Interest expense 138,790 127,472
---------- -----------
6,532,033 5,293,750
---------- -----------
Income (loss) before provision
for income taxes 862,910 (211,017)
Provision for income taxes -- --
---------- -----------
Net income (loss) $ 862,910 $ (211,017)
========== ===========
Net income (loss) per share $ 1.60 $ (0.41)
========== ===========
See Notes to Condensed Consolidated Financial Statements
F-20
<PAGE>
NORTHWESTERN CONSOLIDATED CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
1998 1997
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES:
Net income (loss) $ 862,910 $ (211,017)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 194,940 194,630
Gain on sale of fixed assets (282,747) --
Changes in Assets and Liabilities:
Notes and other accounts receivable 56,469 (7,853)
Prepaid expenses and other assets (18,040) (18,057)
Accounts payable and accrued expenses (13,294) 19,930
----------- -----------
Net Cash flows - Operating Activities 800,238 (22,367)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES:
Payments on notes receivable -- 229,541
Sale of property 152,742 --
Purchase of property and equipment (127,057) (49,715)
----------- -----------
Net Cash Flows - Investing Activities 25,685 179,826
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES:
Repayment of debt (43,207) (35,982)
----------- -----------
Net Cash Flows - Financing Activities (43,207) (35,982)
----------- -----------
NET CHANGE IN CASH 782,716 121,477
----------- -----------
CASH AT THE BEGINNING OF THE PERIOD 1,877,717 1,477,814
----------- -----------
CASH AT THE END OF THE PERIOD $ 2,660,433 $ 1,599,291
=========== ===========
See Notes to Condensed Consolidated Financial Statements
F-21
<PAGE>
NORTHWESTERN CONSOLIDATED CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1 - INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements of
Northwestern Consolidated Corporation and Subsidiaries (the Company) have been
prepared in accordance with generally accepted accounting principles for interim
financial information. 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.
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 - SUBSEQUENT EVENT
In November 1998, the Company was acquired by merger by Capital Title
Group, Inc. The purchase price was $11.00 per share for each of the Company's
539,075 shares issued and outstanding.
F-22
<PAGE>
CAPITAL TITLE GROUP, INC. AND NORTHWESTERN CONSOLIDATED CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
Actual Pro forma
--------------------------- ---------------------
Northwestern
Capital Title Consolidated
Group, Inc. Corporation Adjustments Combined
----------- ----------- ----------- --------
(In thousands, except per share data)
REVENUE:
Title insurance premiums $ 5,359 $ 4,239 $ -- $ 9,598
Escrow fees 2,191 4,915 7,106
Interest and other income 799 470 1,269
-------- ------- -------- --------
8,349 9,624 -- 17,973
EXPENSES:
Personnel costs 5,170 4,317 9,487
Operating expenses 3,394 5,222 35 8,651
Interest expense 72 157 229
-------- ------- -------- --------
8,636 9,696 35 18,367
-------- ------- -------- --------
Loss before income taxes (287) (72) (35)(3) (394)
Income tax (provision) benefit 42 (6) 36
-------- ------- -------- --------
Net loss $ (245) $ (78) $ (35) $ (358)
======== ======= ======== ========
Net loss per common share -
diluted $ (0.02) $ (0.14) $ (0.03)
======== ======= ========
Weighted average shares
outstanding 11,088 539 11,747
======== ======= ========
See accompanying Notes to Unaudited Pro Forma
Condensed Combining Financial Statements.
As set forth in the accompanying Notes, this unaudited pro forma
statement of operations reflects the exchange of all Northwestern
Consolidated Corporation stock for Capital Title Group, Inc. stock.
F-23
<PAGE>
CAPITAL TITLE GROUP, INC. AND NORTHWESTERN CONSOLIDATED CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Actual Pro forma
--------------------------- ---------------------
Northwestern
Capital Title Consolidated
Group, Inc. Corporation Adjustments Combined
----------- ----------- ----------- --------
(In thousands, except per share data)
REVENUE:
Title insurance premiums $ 9,244 $4,220 $13,464
Escrow fees 3,758 2,168 5,926
Interest and other income 1,704 1,007 2,711
------- ------ ----- -------
14,706 7,395 -- 22,101
EXPENSES:
Personnel costs 8,513 3,848 12,361
Operating expenses 4,948 2,545 26(3) 7,519
Interest expense 74 139 213
------- ------ ----- -------
13,535 6,532 26 20,093
------- ------ ----- -------
Income before income taxes 1,171 863 (26) 2,008
Provision for income taxes 62 -- 62
======= ====== ===== =======
Net income $ 1,109 $ 863 $ (26) $ 1,946
======= ====== ===== =======
Net income per common share -
diluted $ 0.07 $ 1.60 $ 0.12
======= ====== =======
Weighted average shares
outstanding 15,802 539 16,461
======= ====== =======
See accompanying Notes to Unaudited Pro Forma
Condensed Combining Financial Statements.
As set forth in the accompanying Notes, this unaudited pro forma
statement of operations reflects the exchange of all Northwestern
Consolidated Corporation stock for Capital Title Group, Inc. stock.
F-24
<PAGE>
CAPITAL TITLE GROUP, INC.AND NORTHWESTERN CONSOLIDATED CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Actual Pro forma
--------------------------- ------------------------
Northwestern
Capital Title Consolidated
Group, Inc. Corporation Adjustments Combined
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash $ 4,741 $2,660 $(3,494)(1,2) $ 3,907
Notes and other receivables 300 275 575
Prepaid expenses and other
assets 118 65 183
-------- ------ ------- --------
Total Current Assets 5,159 3,000 (3,494) 4,665
Property and Equipment 4,357 3,373 696 (3) 8,426
Other Assets
Deposits and other assets 509 456 965
Investment in title plant 225 279 504
-------- ------ ------- --------
Total Assets $ 10,250 $7,108 $(2,798) $ 14,560
======== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable - current portion $ 477 $1,581 $ 2,058
Accounts payable and accrued
expenses 1,141 681 1,822
-------- ------ ------- --------
Total Current Liabilities 1,618 2,262 -- 3,880
Notes Payable and Other Liabilities 559 51 610
STOCKHOLDERS' EQUITY
Common stock 16 582 (581)(1) 17
Additional paid in capital 8,795 2 1,994 (1) 10,791
Retained earnings (738) 4,211 (4,211) (738)
-------- ------ ------- --------
Total Stockholders' Equity 8,073 4,795 (2,798) 10,070
-------- ------ ------- --------
Total Liabilities and Stockholders'
Equity $ 10,250 $7,108 $(2,798) $ 14,560
======== ====== ======= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma
Condensed Combining Financial Statements.
As set forth in the accompanying Notes, this unaudited pro forma
statement of operations reflects the exchange of all Northwestern
Consolidated Corporation stock for Capital Title Group, Inc. stock.
F-25
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING
FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements reflect the
Merger of Northwestern Consolidated Corporation into a wholly owned subsidiary
of Capital Title Group, Inc. and have been prepared under the purchase method of
accounting. Adjustments reflected in these pro forma financial statements
include the following:
1. The issuance of 659,075 shares of Capital Title Group, Inc. Common Shares
and $3,293,926 cash for all outstanding Northwestern consolidated Company
Common Stock of which there are 539,075 shares issued and outstanding. The
purchase price is calculated at $11 per share of Northwestern Consolidated
Company Common Stock, payable in cash, or cash and Capital Title Group,
Inc. Common Stock.
2. Financial advisory fees, legal and accounting expensed and other direct
transaction costs are estimated to be $200,000. In addition, 6,572 shares
of Capital Title Group, Inc. Common Shares were issued in connection with
financial advisory services. These amounts will be included in the total
purchase price.
3. The estimated total purchase price, including transaction costs, is
$5,490,867 assuming the value of Capital Title Group, Inc. stock to be
$3.00 per share. A pro forma adjustment in the amount of $696,000 is
reflected as a purchase accounting adjustment to increase certain property
acquired to its fair market value. The amount reflected as a pro forma
adjustment on the Unaudited Pro Forma Condensed Combining Statement of
Operations as additional operating expense relates to depreciation on the
increase in value for property.
F-26
February 4, 1999
Securities and Exchange Commission
Washington, D.C. 20549
Dear Sir or Madam:
We hereby consent to the inclusion of our report dated March 13, 1998, relating
to the financial statements of Northwestern Consolidated Corporation as of
December 31, 1997 and December 31, 1996 and for the year ended December 31, 1997
and the fifteen month period ended December 31, 1996, included in the Amendment
to the Current Report on Form 8-K/A of Capital Title Group, Inc., pages F1-F22,
dated November 25, 1998, pursuant to section 13 or 15(D) of the Securities
Exchange Act of 1934.
Very truly yours
PISENTI & BRINKER LLP
/s/ Raymond Pounds
Raymond Pounds
Partner
