UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 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.)
14555 North Scottsdale Road, Suite 320, Scottsdale , Arizona 85254
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(480) 483-8868
---------------------------------------------------
(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 16,970,391 shares as of May 11, 1999.
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
INDEX
Part I. FINANCIAL INFORMATION Page Number
-----------
Item 1. Condensed Consolidated Financial Statements
A. Consolidated Balance Sheets as of
March 31, 1999 (unaudited) and
December 31, 1998 3
B. Consolidated Statements of Operations
for the three month periods ended
March 31, 1999 and 1998 (unaudited) 4
C. Consolidated Statements of Cash Flows
for the three month periods ended
March 31, 1999 and 1998 (unaudited) 5
D. Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
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 10
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.
By: /s/ Donald R. Head Date: May 11, 1999
----------------------------
Donald R. Head
Chairman of the Board,
Chief Executive Officer
By: /s/ Mark C. Walker Date: May 11, 1999
----------------------------
Mark C. Walker
Chief Financial Officer
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
----------- ------------
ASSETS (unaudited)
Current Assets:
Cash $ 4,504,297 $ 4,833,826
Accounts receivable, net 259,699 364,725
Notes and other receivables 403,443 406,028
Other current assets 207,062 575,875
------------ ------------
Total Current Assets 5,374,501 6,180,454
Property and equipment, net 8,836,634 8,863,133
Other Assets:
Notes receivable 202,633 231,531
Investment in title plant 525,216 520,249
Deposits and other assets 205,859 312,693
Property held for investment 161,270 161,270
Goodwill 256,080 259,024
============ ============
Total Assets 15,562,193 $ 16,528,354
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 432,015 $ 532,346
Accounts payable 378,372 664,737
Accrued expenses 1,988,776 2,656,572
------------ ------------
Total Current Liabilities 2,799,163 3,853,655
Long-Term Debt: 1,746,849 1,766,815
Other Liabilities 78,000 117,905
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000
shares authorized, 16,969,791 and 16,926,791
shares issued and outstanding in 1999 and
1998, respectively 16,970 16,927
Paid-in capital 10,987,251 10,944,294
Accumulated earnings (deficit) (66,040) (171,242)
------------ ------------
Total Stockholders' Equity 10,938,181 10,789,979
------------ ------------
Total Liabilities and Stockholders' Equity 15,562,193 $ 16,528,354
============ ============
See Notes to Consolidated Financial Statements
3
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three month period ended
March 31,
----------------------------
1999 1998
----------- -----------
REVENUE:
Title insurance premiums $ 5,539,369 $ 2,489,047
Escrow and related fees 2,799,740 1,261,981
Account servicing 115,790 104,272
Other income 121,508 56,377
Interest income 376,534 105,389
----------- -----------
8,952,941 4,017,066
----------- -----------
EXPENSES:
Personnel costs 5,006,310 1,816,603
Escrow commissions 710,854 343,847
Title remittance fees 539,395 256,995
Rent 446,752 215,752
Other operating expenses 2,035,892 854,693
Interest expense 38,536 25,675
----------- -----------
8,777,739 3,513,565
----------- -----------
Income before income taxes 175,202 503,501
Income tax provision 70,000 --
----------- -----------
Net income $ 105,202 $ 503,501
=========== ===========
Net income per common share:
Basic $ 0.01 $ 0.04
=========== ===========
Diluted $ 0.01 $ 0.04
=========== ===========
Weighted average shares outstanding:
Basic 16,947,680 11,554,196
=========== ===========
Diluted 18,755,328 12,716,807
=========== ===========
See Notes to Consolidated Financial Statements
4
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income $ 105,202 $ 503,501
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 301,173 70,186
Changes in assets and liabilities:
Accounts receivable 105,026 (9,898)
Interest and other receivables 5,184 (6,325)
Prepaid expenses (57,818) (9,045)
Marketable securities 426,631 --
Deposits 106,834 (10,915)
Accounts payable (286,365) (24,176)
Accrued expenses (707,701) 221,263
----------- -----------
Net Cash Flows - Operating Activities (1,834) 734,591
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES:
Collection of notes receivable 26,299 --
Purchase of property and equipment (276,697) (400,342)
----------- -----------
Net Cash Flows - Investing Activities (250,398) (400,342)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 43,000 1,261,963
Borrowings -- 225,000
Repayment of debt (120,297) (409,743)
----------- -----------
Net Cash Flows - Financing Activities (77,297) 1,077,220
----------- -----------
NET INCREASE (DECREASE) IN CASH (329,529) 1,411,469
CASH AT THE BEGINNING OF THE PERIOD 4,833,826 198,903
----------- -----------
CASH AT THE END OF THE PERIOD $ 4,504,297 $ 1,610,372
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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. Certain reclassifications have been made to the prior period
financial statements to conform to the current period presentation
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 March 31,
----------------------------------------------------------------------
1999 1998
---------------------------------- ---------------------------------
Per share Net Per share
Net income Shares amount income Shares amount
---------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $105,202 16,947,680 $ 0.01 $503,501 11,554,196 $ 0.04
====== ======
Effect of Dilutive
Securities:
Convertible debentures -- -- 8,325 289,583
Stock options -- 1,524,909 -- 873,028
Warrants -- 282,739 -- --
-------- ---------- -------- ----------
Diluted EPS $105,202 18,755,328 $ 0.01 $511,826 12,716,807 $ 0.04
======== ========== ====== ======== ========== ======
</TABLE>
NOTE 3 - NEW CENTURY INSURANCE SERVICES, INC.
New Century Insurance Services, Inc. ("NCIS") was formed in January 1998 as
a wholly owned subsidiary of the Company. NCIS began operation in April 1998 as
an independent property and casualty insurance agency. Effective in January
1999, the Company decided to exit the property and casualty insurance market and
accordingly, sold an 80% interest in NCIS to NCIS's president. The Company
recorded a note receivable in the amount of the book value of the portion of the
business sold.
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
For the three months ended March 31
-----------------------------------
1999 1998
---- ----
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY:
Equipment purchased through debt $ -- $71,065
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest 38,536 25,675
Cash paid during the period for taxes 43,000 --
6
<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
Operating revenue increased by $4,935,875 or 122.9% for the three months
ended March 31, 1999 compared to the same period ended March 31, 1998.
Approximately $2,993,000 of the revenue increase is related to acquisitions and
start-up operations, with the remainder attributable to a favorable real estate
market and the expansion of the Company's operations in Maricopa County and
Yavapai County, Arizona.
The following table presents information regarding the Company's operating
revenue:
For the three months ended March 31,
---------------------------------------------------
1999 % of total 1998 % of total
---------- ---------- ---------- ----------
Title insurance premiums $5,539,369 61.9% $2,489,047 62.0%
Escrow and related fees 2,799,740 31.3 1,261,981 31.4
Account servicing 115,790 1.3 104,272 2.6
Other fees 121,508 1.3 56,377 1.4
Interest income 376,534 4.2 105,389 2.6
---------- ----- ---------- -----
Total revenue $8,952,941 100.0% $4,017,066 100.0%
---------- ----- ---------- -----
The Company's primary business is providing title and escrow services in
three counties in Arizona and four counties in California. Approximately 50% of
total revenue for the quarter ended March 31, 1999 is attributable to Maricopa
County where the Company currently operates 18 locations. The March 1999 SYKES
REPORT shows Capital Title as the 3rd largest of the 24 title companies in
Maricopa County with approximately 8% market share, compared to a market share
of less than 5% for the same period of the prior year. Approximately 12% 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 32% of total revenue for the quarter ended March 31, 1999.
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 periods:
For the three months ended March 31,
-----------------------------------------------
% of % of
1999 revenue 1998 revenue
---------- ------- ---------- -------
Personnel costs $5,006,310 55.9% $1,816,603 45.2%
Escrow commissions 710,854 7.9 343,847 8.6
Title remittance fees 539,395 6.0 256,995 6.4
Rent 446,752 5.0 215,752 5.4
Other operating expenses 2,035,892 22.8 854,693 21.3
Interest expense 38,536 0.4 25,675 0.6
---------- ---- ---------- ----
$8,777,739 98.0% $3,513,565 87.5%
Overall operating expenses have increased by $5,264,174 for the three
months ended March 31, 1999 compared to the same period in 1998 as a result of
expansion of the Company's operations. Operating expenses also increased as a
percentage of revenue to 98.0% in the three months ended March 31, 1999 from
87.5% in the comparable period in 1998 due to the Company building its operating
base in California. The costs required to expand its infrastructure and branch
offices in California have increased the Company's operating costs as a percent
of revenue, compared to its more mature operations in Arizona. The Company's
overall operating costs in its Maricopa and Yavapai operations have continued to
decrease as a percentage of revenue, and were approximately 81% during the
quarter ended March 31, 1999. The Company anticipates a decrease in the
percentage consolidated operating expenses bear to total revenue, as revenue
levels increase in its California operations.
Personnel costs, including commissions, are the most significant component
of the Company's operating expenses. Due to the Company's expansion, the number
of employees has increased to 520 as of March 31, 1999 compared to 221 as of
March 31, 1998. Personnel costs including commissions increased as a percentage
of revenue to 63.8% in the three months ended March 31, 1999 from 53.8% in the
comparable period in 1998. This increase is primarily due to the Company's
California operations. In an attempt to expand its operations, personnel have
been hired but have not yet begun to generate revenue at levels experienced in
the Company's Arizona operations.
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 as a percentage of revenue have remained
relatively unchanged when comparing 1999 results with comparable periods in
1998.
Rent expense decreased as a percentage of revenue in the three months ended
March 31, 1999 to 5.0% from 5.4% for the comparable period in 1998. This
decrease was the result of the fixed nature of these costs in relation to the
increase in revenue.
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 22.8% in the three months ended March 31, 1999 from 21.3% in
the comparable period in 1998 as a result of expenses related to the new
operations discussed above.
During 1998, the Company fully utilized its Federal net operating loss
carryforward. Therefore, an income tax provision was recorded in the quarter
ended March 31, 1999 based on the estimated annual effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 the company had current assets totaling $5,374,501
compared to current liabilities which totaled $2,799,163. Management believes
that cash on hand and future cash receipts 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 have been
drawn against this credit facility; however, $150,000 was committed for a
standby letter of credit required pursuant to an office lease.
8
<PAGE>
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, with the exception of
nine offices recently acquired in Northern California, believes that its
operations are currently year 2000 compliant. The computer systems and programs
currently used by the nine offices the Company acquired from Northwestern
Consolidated Corporation are not year 2000 compliant; however, it was the
Company's intentions at the time of the acquisition to replace these systems
prior to December 1999 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.
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.
9
<PAGE>
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 March 31, 1999.
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,504,297
<SECURITIES> 0
<RECEIVABLES> 287,820
<ALLOWANCES> (28,121)
<INVENTORY> 0
<CURRENT-ASSETS> 5,374,501
<PP&E> 13,630,014
<DEPRECIATION> (4,793,380)
<TOTAL-ASSETS> 15,562,193
<CURRENT-LIABILITIES> 2,799,163
<BONDS> 1,746,849
0
0
<COMMON> 16,970
<OTHER-SE> 10,921,211
<TOTAL-LIABILITY-AND-EQUITY> 15,562,193
<SALES> 0
<TOTAL-REVENUES> 8,952,941
<CGS> 0
<TOTAL-COSTS> 8,739,203
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,536
<INCOME-PRETAX> 175,202
<INCOME-TAX> 70,000
<INCOME-CONTINUING> 105,202
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105,202
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
