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 SEPTEMBER 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITES 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, PHOENIX, ARIZONA 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 of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value, 17,603,487 shares as of October 31, 2002.
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of
September 30, 2002 (unaudited) and December
31, 2001 3
B. Condensed Consolidated Statements of
Operations for the three month and nine month
periods ended September 30, 2002 and 2001
(unaudited) 4
C. Condensed Consolidated Statements of
Stockholders' Equity for the year ended
December 31, 2001 and nine months ended
September 30, 2002 (unaudited) 5
D. Condensed Consolidated Statements of Cash
Flows for the nine month periods ended
September 30, 2002 and 2001 (unaudited) 6
E. Notes to Condensed Consolidated Financial
Statements (unaudited) 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
Item 3. Quantitative and Qualitative Disclosure of
Market Risk 16
Item 4. Controls and Procedures 16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
FINANCIAL STATEMENT CERTIFICATION 20
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
----------- -----------
(Unaudited)
ASSETS:
Cash and cash equivalents $11,239,793 $ 7,676,760
Short term investments 750,000 --
Restricted cash 2,115,527 --
Accounts receivable, net 2,539,955 462,793
Fixed maturities, available-for-sale 6,574,889 --
Equity securities, available-for-sale 2,327,311 --
Notes and other receivables 2,288,631 309,408
Property and equipment, net 16,030,951 10,075,328
Investment in title plant 3,923,517 677,481
Intangible assets 18,504,692 205,237
Deposits and other assets 3,666,003 1,281,101
Deferred income taxes, net -- 337,276
----------- -----------
Total Assets $69,961,269 $21,025,384
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $14,680,572 $ 5,695,759
Reserve for title and escrow losses 4,220,344 524,010
Long-term debt 17,049,802 3,082,835
Deferred income taxes, net 986,385 --
Other liabilities 781,603 618,518
----------- -----------
Total Liabilities 37,718,706 9,921,122
Redeemable preferred stock, 8% cumulative dividend,
redeemable after 2023 for redemption value of $100
per share, $.001 par value, 10,000,000 shares authorized,
175,162 shares issued and outstanding in 2002 17,516,200 --
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000 shares
authorized, 17,603,487 and 17,065,381 shares issued
and outstanding in 2002 and 2001, respectively 17,604 17,065
Additional paid-in capital 11,814,204 10,911,469
Retained earnings 2,869,505 175,728
Accumulated other comprehensive income 25,050 --
----------- -----------
Total Stockholders' Equity 14,726,363 11,104,262
----------- -----------
Total Liabilities and Stockholders' Equity $69,961,269 $21,025,384
=========== ===========
See Notes to Condensed Consolidated Financial Statements
3
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUE:
Title insurance fees, net $19,900,034 $10,476,215 $44,759,719 $29,630,500
Escrow and related fees 10,681,626 5,336,999 24,559,580 14,688,022
Investment and other income 860,744 786,769 2,196,545 2,172,747
----------- ----------- ----------- -----------
Total Revenue 31,442,404 16,599,983 71,515,844 46,491,269
EXPENSES:
Personnel costs 19,632,773 9,795,162 45,118,562 27,950,086
Rent 2,103,952 1,055,120 5,019,402 3,066,849
Interest 88,301 66,830 217,879 212,018
Other operating expenses 7,231,045 3,879,591 15,708,328 10,856,529
----------- ----------- ----------- -----------
Total Expenses 29,056,071 14,796,703 66,064,171 42,085,482
Income before income taxes 2,386,333 1,803,280 5,451,673 4,405,787
----------- ----------- ----------- -----------
Income tax expense 976,374 351,000 2,276,411 351,000
----------- ----------- ----------- -----------
Net income 1,409,959 1,452,280 3,175,262 4,054,787
Dividends on preferred stock 49,909 -- 49,909 --
----------- ----------- ----------- -----------
Earnings attributable to common shares $ 1,360,050 $ 1,452,280 $ 3,125,353 $ 4,054,787
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.08 $ 0.08 $ 0.18 $ 0.24
=========== =========== =========== ===========
Diluted $ 0.08 $ 0.08 $ 0.17 $ 0.23
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 17,540,713 17,240,592 17,352,065 17,179,376
=========== =========== =========== ===========
Diluted 18,023,349 18,243,809 18,090,528 17,845,465
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements
4
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Retained Accumulated
Additional Earnings other
Number of Common paid in (Accumulated comprehensive
shares stock capital Deficit) income Total
----------- -------- ------------ ----------- ----------- ------------
Balances at December 31, 2000 17,392,849 $ 17,393 $ 11,105,436 $(4,392,556) $ -- $ 6,730,273
Shares issued in connection with 438,300 438 457,854 -- -- 458,292
options exercised
Shares cancelled in connection with
rescission of cost basis
investment and return of escrowed
shares from a 1998 acquisition (431,872) (432) (438,857) -- -- (439,289)
Shares repurchased and cancelled (333,896) (334) (212,964) (501,986) -- (715,284)
Comprehensive income:
Net income -- -- -- 5,070,270 -- 5,070,270
----------- -------- ------------ ----------- ----------- ------------
Balances at December 31, 2001 17,065,381 17,065 10,911,469 175,728 -- 11,104,262
Shares issued in connection with
options exercised 895,643 896 1,014,358 1,015,254
Warrants issued in connection with
acquisition of a subsidiary -- -- 213,000 -- -- 213,000
Shares repurchased and cancelled (357,537) (357) (324,623) (431,576) -- (756,556)
Dividends on preferred stock -- -- -- (49,909) (49,909)
Comprehensive income:
Net income -- -- -- 3,175,262 3,175,262
Change in unrealized gain on
investments available-for-sale,
net of tax effect of $12,905 -- -- -- -- 25,050 25,050
----------- -------- ------------ ----------- ----------- ------------
Balances at September 30, 2002 17,603,487 $ 17,604 $ 11,814,204 $ 2,869,505 $ 25,050 $ 14,726,363
=========== ======== ============ =========== =========== ============
See Notes to Condensed Consolidated Financial Statements
5
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
-------------------------------
2002 2001
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,175,262 $ 4,054,787
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,953,078 1,384,229
Increase (decrease) in cash resulting from changes in:
Accounts receivable 140,687 (120,996)
Notes and other receivables 668,037 (8,728)
Deposits and other assets 132,969 (450,977)
Accounts payable and accrued expenses (686,235) 2,747,596
Reserve for title and escrow losses 171,299 226,104
Other liabilities 199,183 (27,592)
------------ -----------
Net Cash Flows provided by Operating Activities 5,754,280 7,804,423
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection of notes receivable 48,018 2,573
Net additions to property and equipment (2,429,076) (1,275,825)
Proceeds from sale of building -- 1,749,055
Purchase of subsidiaries, net of acquired cash (13,946,472) --
Investment activity, net (89,382) --
------------ -----------
Net Cash Flows provided by (used in) Investing Activities (16,416,912) 475,803
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 1,015,254 378,100
Purchase of treasury stock (756,556) (205,175)
Borrowings 14,000,000 --
Repayment of debt (33,033) (1,921,058)
------------ -----------
Net Cash Flows provided by (used in) Financing Activities 14,225,665 (1,748,133)
------------ -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 3,563,033 6,532,093
CASH AND CASH EQUIVALENTS
AT THE BEGINNING OF THE PERIOD 7,676,760 775,586
------------ -----------
CASH AND CASH EQUIVALENTS
AT THE END OF THE PERIOD $ 11,239,793 $ 7,307,679
============ ===========
See Notes to Condensed Consolidated Financial Statements
6
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2002 and 2001
(Unaudited)
NOTE 1 - INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements of
Capital Title Group, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States of
America 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 accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting of only
normal recurring accruals and intercompany eliminations) necessary for a fair
presentation have been included. Operating results for the nine-month period
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make a number of 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. Such estimates
and assumptions affect the reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, management of the Company evaluates
estimates and assumptions based upon historical experience and various other
factors and circumstances. The Company believes its estimates and assumptions
are reasonable in the circumstances; however, actual results may differ from
these estimates under different future conditions.
Management believes that the estimates and assumptions that are most important
to the portrayal of the Company's financial condition and results of operations,
in that they require management's most difficult, subjective or complex
judgments, form the basis for the accounting policies deemed to be most critical
to the Company. These critical accounting policies relate to bad debts,
impairment of intangible assets and long lived assets, reserves related to
escrow and title policy losses, reserves related to self-funded insurance
programs, and contingencies and litigation. For further information, refer to
the consolidated financial statements and footnotes included in the Company's
Annual Report on Form 10-K as of and for the year ended December 31, 2001.
Management believes estimates and assumptions related to these critical
accounting policies are appropriate under the circumstances; however, should
future events or occurrences result in unanticipated consequences, there could
be a material impact on our future financial condition or results of operations.
In accordance with the Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," goodwill and intangible assets with
indefinite lives resulting from business combinations completed subsequent to
June 30, 2001 will not be amortized but instead will be tested for impairment at
least annually (more frequently if certain indicators are present). In the event
that management determines the value of goodwill or intangible assets with
indefinite lives has become impaired, the Company will incur an accounting
charge for the amount of impairment during the fiscal quarter in which the
determination is made.
During the three months ended September 30, 2002 the Company acquired Nations
Holding Group ("Nations") and applied the purchase method of accounting for the
acquisition. Under this method of accounting, the purchase price is allocated to
the assets acquired and liabilities assumed based on their estimated fair values
at the date of acquisition. Estimates of the fair values of Nations' assets
acquired and liabilities assumed in the transaction have been combined with
recorded values of the assets and liabilities of the Company's. However, changes
to the estimates of the fair values of Nations' assets acquired and liabilities
assumed may be necessary as evaluations of those assets and liabilities are
completed and as additional information becomes available.
7
Certain reclassifications have been made to the 2001 condensed consolidated
financial statements to conform to the 2002 presentation. In September 2002, the
Company acquired Nations Holding Group, a company which has significant title
insurance underwriting operations. As is customary with companies with
significant insurance operations, the Company's balance sheet presentation has
been changed to an unclassified presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which rescinds and amends the aforementioned FASB Statements and
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Statement No. 145 is effective for fiscal years beginning after May
15, 2002. Management is evaluating this accounting standard but does not believe
that adopting this Statement will have a material impact on the Company's
consolidated financial statements.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." Statement No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. Management is evaluating this accounting standard
but does not believe that adopting this Statement will have a material impact on
the Company's consolidated financial statements.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
common share ("EPS"):
Three months ended September 30,
------------------------------------------------------------------------------
2002 2001
-------------------------------------- --------------------------------------
Earnings Earnings
attributable attributable
to common Per share to common Per share
stocks Shares amount stocks Shares amount
---------- ---------- ----------- ---------- ---------- -----------
Basic EPS $1,360,050 17,540,713 $ 0.08 $1,452,280 17,240,592 $ 0.08
=========== ===========
Effect of Dilutive Securities:
Stock options -- 482,636 905,926
Warrants -- -- 97,291
----------- ---------- ---------- ----------
Diluted EPS $1,360,050 18,023,349 $ 0.08 $1,452,280 18,243,809 $ 0.08
========== ========== =========== ========== ========== ===========
Nine months ended September 30,
------------------------------------------------------------------------------
2002 2001
-------------------------------------- --------------------------------------
Earnings Earnings
attributable attributable
to common Per share to common Per share
stocks Shares amount stocks Shares amount
---------- ---------- ----------- ---------- ---------- -----------
Basic EPS $3,125,353 17,352,065 $ 0.18 $4,054,787 17,179,376 $ 0.24
=========== ===========
Effect of Dilutive Securities:
Stock options -- 738,463 631,095
Warrants -- -- 34,994
----------- ---------- ---------- ----------
Diluted EPS $3,125,353 18,090,528 $ 0.17 $4,054,787 17,845,465 $ 0.23
========== ========== =========== ========== ========== ===========
Outstanding warrants were excluded from the preceding presentation due to their
antidilutive nature.
NOTE 3 - ACQUISITIONS
In September 2001, the Company executed a definitive agreement to acquire
BridgeSpan Title Company's title and escrow operations for the northern
California counties of Santa Clara, San Mateo and Sacramento. The transaction
included five branch offices and ownership interest in joint title plants for
the counties. The agreement was granted regulatory approval in March 2002 from
the California Department of Insurance and the transaction closed April 1, 2002.
The results of the purchased branches have been included in the consolidated
financial statements since that date. The adjusted purchase price for the assets
was approximately $4.3 million in cash.
8
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2002 and 2001
(Unaudited)
The purchase price and direct acquisition costs were allocated to the assets
purchased based on their respective fair market values at the acquisition date.
The following table summarizes the estimated fair value of the assets acquired
at the date of purchase:
Assets Acquired:
Property and equipment $ 415,812
Investment in title plant 2,828,194
Deposits and other assets 68,722
Intangible assets 977,617
----------
Total $4,290,345
==========
In September 2002, the Company completed the acquisition of Nations Holding
Group ("Nations") pursuant to an Agreement and Plan of Merger (the "Merger
Agreement"). Nations, which is headquartered in Los Angeles, California, adds 43
new branches that provide title and escrow services to both the residential and
commercial real estate markets. Nations conducts its primary business under the
United Title Company brand in Los Angeles, Orange, Riverside, San Bernardino,
San Diego and Ventura Counties in southern California. Nations provides title
and escrow services as First California Title Company in Alameda and Contra
Costa Counties in northern California. The acquisition also provides the Company
with an entrance into title insurance underwriting with the addition of Nations'
subsidiary, United Title Insurance Company, which is licensed in Arizona,
California and Nevada.
Under the terms of the Merger Agreement, the stockholders of Nations exchanged
all of their outstanding shares of common stock for an allocation of the merger
proceeds, which consisted of $18.2 million in cash and $17.5 million in
preferred stock issued by the Company. The preferred stock includes an 8%
cumulative dividend, payable quarterly in cash; provided that the Company may,
in its discretion, pay the dividends in shares of common stock if the net income
before provision for income taxes of the Company for the immediately preceding
quarter is less than $1.0 million. After September 2023, the Company may be
required, upon notification by the preferred stockholder, to redeem the
preferred stock at a total redemption value of approximately $17.5 million.
In addition, the Company issued warrants to a major stockholder of Nations to
purchase up to 300,000 shares of common stock of the Company at an exercise
price of $2.27 per share. The warrants expire five years from the date of
issuance. As set forth in the Merger Agreement, the exercise price was set equal
to the average of the last reported sale or bid prices of the Company's common
stock for the 21 consecutive trading days ending on the trading day prior to the
closing of the transaction. The warrants had a fair market value of
approximately $213,000 at the date of the transaction. A seven-year term loan
obtained by the Company provided $14 million to assist in the financing of this
transaction. The term loan will incur interest at the prime rate or LIBOR plus
2.75% (as of September 30, 2002, the interest rate on this note was 4.58%). The
credit facility contains certain covenants and conditions normally included in
transactions of this nature.
The terms of the transaction, including the purchase price, were determined by
negotiations between the Company and Nations, and were approved by the
shareholders of Nations and the Company's Board of Directors.
The merger, which is being accounted for as a purchase closed September 18, 2002
after regulatory approval was granted on September 9, 2002 by the California
Department of Insurance. The operations of Nations have been included in the
financial statements of the Company from September 1, 2002, which was the
effective date of the transaction.
9
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2002 and 2001
(Unaudited)
The following table summarizes the total acquisition cost of Nations and the
components of proceeds paid to the former shareholders of Nations:
Cash $18,231,114
Preferred stock 17,516,200
Warrants for common Stock 213,000
-----------
35,960,314
Direct transaction costs 1,251,047
-----------
$37,211,361
===========
The purchase price and approximately $1.3 million of direct acquisition costs
were allocated to the assets purchased based on their respective fair values at
the acquisition date. However, changes to the estimates of the fair values of
Nations' assets acquired and liabilities assumed may be necessary as evaluations
of those assets and liabilities are completed and as additional information
becomes available. The following table summarizes the estimated fair value of
the allocation of the purchase price and direct acquisition costs to the assets
and liabilities acquired at the date of purchase:
Assets and (Liabilities) Acquired:
Cash $ 10,878,881
Receivables and other current assets 3,817,197
Property and equipment, net 5,063,813
Marketable securities, available-for-sale 8,787,768
Title plant 417,842
Notes receivable and other assets 4,010,924
Accounts payable and accrued expenses (7,823,094)
Reserves for title and escrow losses (3,525,035)
Notes and other payables (2,083,457)
Intangible assets 17,666,522
------------
Total $ 37,211,361
============
10
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2002 and 2001
(Unaudited)
Selected unaudited pro forma combined results of operations for the nine-month
periods ended September 30, 2002 and 2001, assuming the acquisition of
BridgeSpan Title Company's title and escrow operation in northern California and
Nations occurred on January 1, 2001, are as follows:
Nine months ended September 30,
-------------------------------
2002 2001
------------ -----------
Total revenue $121,075,700 $99,256,117
Income before income taxes 7,559,881 6,812,338
Net income 4,506,718 4,770,845
Earnings attributable to common shares 3,455,746 3,719,873
Net income per common share:
Basic $ 0.20 $ 0.22
Diluted $ 0.19 $ 0.21
Weighted average shares outstanding:
Basic 17,352,065 17,179,376
Diluted 18,293,400 18,043,713
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental cash flow information is provided with respect to
interest and tax payments, as well as certain non-cash activities.
Nine months ended
September 30,
-----------------------
2002 2001
----------- ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY:
Rescission of equity exchange $ -- $(424,448)
Issuance of preferred stock to acquire Nations 17,516,200 --
Issuance of warrants for common stock to acquire Nations 213,000 --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest 194,725 212,018
Cash paid during the period for taxes 2,240,000 77,500
In March 2001, the Company rescinded an equity exchange which took place in June
2000. This recission resulted in 424,488 shares of Capital Title Group Inc.
common stock issued to a third-party real estate organization being returned to
the Company and cancelled.
In September 2001, the Company's Board of Directors authorized a stock
repurchase program of up to one million shares of its outstanding common stock.
During the nine months ended September 30, 2002, a total of 357,537 shares were
repurchased under this program, of which 357,537 shares were cancelled. The
total number of shares repurchased under this program is 691,433.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The 2001 Form 10-K should be read in conjunction with the following discussion
since they contain important information for evaluating the Company's operating
results and financial condition.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make a number of 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. Such estimates
and assumptions affect the reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, management of the Company evaluates
estimates and assumptions based upon historical experience and various other
factors and circumstances. The Company believes its estimates and assumptions
are reasonable in the circumstances; however, actual results may differ from
these estimates under different future conditions.
Management believes that the estimates and assumptions that are most important
to the portrayal of the Company's financial condition and results of operations,
in that they require management's most difficult, subjective or complex
judgments, form the basis for the accounting policies deemed to be most critical
to the Company. These critical accounting policies relate to bad debts,
impairment of intangible assets and long lived assets, reserves related to
escrow and title policy losses, reserves related to self-funded insurance
programs, and contingencies and litigation. For further information, refer to
the consolidated financial statements and footnotes included in the Company's
Annual Report on Form 10-K as of and for the year ended December 31, 2001.
Management believes estimates and assumptions related to these critical
accounting policies are appropriate under the circumstances; however, should
future events or occurrences result in unanticipated consequences, there could
be a material impact on our future financial condition or results of operations.
In accordance with the Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," goodwill and intangible assets with
indefinite lives resulting from business combinations completed subsequent to
June 30, 2001 will not be amortized but instead will be tested for impairment at
least annually (more frequently if certain indicators are present). In the event
that management determines the value of goodwill or intangible assets with
indefinite lives has become impaired, the Company will incur an accounting
charge for the amount of impairment during the fiscal quarter in which the
determination is made.
During the three months ended September 30, 2002 the Company acquired Nations
Holding Group ("Nations") and applied the purchase method of accounting for the
acquisition. Under this method of accounting, the purchase price is allocated to
the assets acquired and liabilities assumed based on their estimated fair values
at the date of acquisition. Estimates of the fair values of Nations' assets
acquired and liabilities assumed in the transaction have been combined with
recorded values of the assets and liabilities of the Company's. However, changes
to the estimates of the fair values of Nations' assets acquired and liabilities
assumed may be necessary as evaluations of those assets and liabilities are
completed and as additional information becomes available.
SUMMARY OF RESULTS
The Company's primary business is providing title and escrow services in four
counties in Arizona and twelve counties in California. Operating results for the
third quarter reflect the acquisition of Nations Holding Group ("Nations"),
which was effective September 1, 2002. As a result of the acquisition of
Nations, the Company also issues title insurance policies in Arizona and
California.
The Company experienced revenue growth in the third quarter of 2002, primarily
fueled by the favorable residential mortgage refinancing environment as well as
the result of the inclusion of Nations' operating results for the month ended
September 2002. Certain expense categories grew as a percentage of revenue
compared to the same period in the prior year, reflecting the operations
acquired in northern California in April 2002. The acquired operations in
12
northern California are not yet producing the level of revenue that management
anticipates from these offices once they are fully established.
OPERATING REVENUE
Operating revenue increased by $14,842,421 or 89.4% for the three months ended
September 30, 2002 compared to the same period ended September 30, 2001.
Operating revenue increased by 53.8% for the nine month period ended September
30, 2002 compared to the same period of the prior year.
The Company experienced revenue growth as a result of the favorable residential
mortgage refinance and resale environment, fueled in part by the relatively low
mortgage interest rate environment during the three and nine months ended
September 30, 2002. In addition, the acquisition of offices in northern
California in April 2002 increased revenue by $1,052,000 and $1,790,000 for the
three and nine months ended September 30, 2002, respectively, compared to the
same periods in the prior year. The addition of offices resulting from the
acquisition of Nations increased revenue by $7,216,000 for both the three and
nine months ended September 30, 2002, compared to the same periods last year.
The following table presents information regarding the Company's operating
revenue:
Three months ended September 30,
---------------------------------------------------
2002 % of total 2001 % of total
----------- ---------- ----------- ----------
Title insurance fees, net $19,900,034 63.3% $10,476,215 63.1%
Escrow and related fees 10,681,626 34.0 5,336,999 32.2
Investment and other income 860,744 2.7 786,769 4.7
----------- --------- ----------- ---------
Total revenue $31,442,404 100.0% $16,599,983 100.0%
Opened orders 65,326 23,860
Closed orders 34,616 17,049
Average revenue per closed order $ 883 $ 928
Nine months ended September 30,
---------------------------------------------------
2002 % of total 2001 % of total
----------- ---------- ----------- ----------
Title insurance fees, net $44,759,719 62.6% $29,630,500 63.7%
Escrow and related fees 24,559,580 34.3 14,688,022 31.6
Investment and other income 2,196,545 3.1 2,172,747 4.7
----------- --------- ----------- ---------
Total revenue $71,515,844 100.0% $46,491,269 100.0%
Opened orders 121,316 75,865
Closed orders 76,033 48,962
Average revenue per closed order $ 912 $ 905
In the Company's Arizona and northern California operations, title and escrow
services are typically handled together and an opened/closed order includes the
fee for both services. In southern California, the escrow portion of a
transaction is often handled by a company different than the one handling the
title work, therefore each component part is counted as an opened/closed order,
resulting in a lower fee per closed order.
The increase in open orders for the three and nine months ended September 30,
2002 compared to the same periods in the prior year reflects the favorable
residential mortgage refinance and resale environment experienced during 2002 as
well as the result of including Nations' order counts for the month of September
2002. The Company experienced a decrease in the average fee per closed order for
the three months ended September 30, 2002 when compared to the same period in
the prior year due to an increase in the mix of business from the Company's
operations in California as well as the inclusion of Nations' order counts for
the month of September 2002, which are predominately related to the southern
California market and typically have a lower fee per closed order. The Company
experienced an increase in the average fee per closed order for the nine months
13
ended September 30, 2002 when compared to the same period in the prior year due
to increases in property values in the Company's markets and, to a lesser
extent, due to increases in fees charged for title and escrow services. This
increase was partially offset by the inclusion of Nations' closed orders for the
month of September 2002 as previously discussed.
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:
Three months ended September 30,
-------------------------------------------------------
2002 % of revenue 2001 % of revenue
----------- ------------ ----------- ------------
Personnel costs $19,632,773 62.4% $ 9,795,162 59.0%
Rent 2,103,952 6.7 1,055,120 6.3
Other operating expenses 7,231,045 23.0 3,879,591 23.4
Interest expense 88,301 0.3 66,830 0.4
----------- ---- ----------- ----
$29,056,071 92.4% $14,796,703 89.1%
Nine months ended September 30,
-------------------------------------------------------
2002 % of revenue 2001 % of revenue
----------- ------------ ----------- ------------
Personnel costs $45,118,562 63.1% $27,950,086 60.1%
Rent 5,019,402 7.0 3,066,849 6.6
Other operating expenses 15,708,328 22.0 10,856,529 23.4
Interest expense 217,879 0.3 212,018 0.4
----------- ---- ----------- ----
$66,064,171 92.4% $42,085,482 90.5%
Overall operating expenses have increased by $14,259,368 or 96.4% and
$23,978,689 or 57.0% for the three and nine month periods ended September 30,
2002 respectively, compared to the same periods in 2001, primarily the result of
expansion of the Company's operations. The addition of offices resulting from
the acquisition of Nations increased overall operating expenses by $6,445,000
for both the three and nine months ended September 30, 2002, compared to the
same periods last year. Operating expenses increased as a percentage of revenue
to 92.4% in the three months ended September 30, 2002 from 89.1% in the
comparable period in 2001. Operating expenses increased as a percentage of
revenue to 92.4% in the first nine months of 2002 from 90.5% in the comparable
period in 2001. These increases as a percent of revenue relates to unprofitable
operations in northern California that were acquired in April 2002. These
acquired operations in northern California had operating losses of approximately
$982,000 and $1,832,000 for the three and nine month periods ended September 30,
2002, respectively. Excluding the northern California operations acquired in
April 2002, operating expenses would have decreased as a percentage of revenue
to 88.9% and 89.6% in the three and nine months ended September 30, 2002,
respectively.
Personnel costs, including commissions and incentives, are the most significant
component of the Company's operating expenses. Personnel costs increased as a
percentage of revenue to 62.4% for the three months ended September 30, 2002
from 59.0% in the comparable period in 2001. The number of employees increased
to 1,542 as of September 30, 2002 compared to 642 as of September 30, 2001. The
increase is primarily due to the acquisition of Nations in September 2002.
Personnel costs increased as a percentage of revenue to 63.1% in the first nine
months of 2002 from 60.1% in the same period of 2001. The increase in personnel
costs as a percentage of revenue is the result of lower productivity in the
operations acquired in northern California in April 2002. These operations are
not yet producing the level of revenue that management anticipates from these
offices once they mature.
Rent expense increased as a percentage of revenue for the three months ended
September 30, 2002 to 6.7% from 6.3% for the comparable period in 2001. Rent
expense increased as a percentage of revenue for the nine months ended September
30, 2002 to 7.0% from 6.6% for the comparable period in 2001. This increase is
the result of office openings and due to the operations acquired in northern
California in April 2002, as previously discussed. During the nine months ended
14
September 30, 2002, there has been an increase of 57 offices, of which 5 were
acquired in the northern California acquisition, 43 were acquired in the Nations
acquisition and 9 offices were opened in existing operations.
The significant components of other operating expenses include supplies,
utilities, insurance, depreciation, title plant access, postage and professional
fees. Other operating expenses decreased as a percentage of total revenue to
23.0% for the three months ended September 30, 2002 from 23.4% in the comparable
period in 2001. Other operating expenses decreased as a percentage of total
revenue to 22.0% for the nine months ended September 30, 2002 from 23.4% in the
comparable period in 2001. These decreases were the result of cost containment
efforts and the relatively fixed nature of many of these expenses in relation to
the overall increase in revenue.
Interest expense has increased for the three and nine month periods ended
September 30, 2002 compared to the same periods in 2001, primarily as the result
of interest related to the $14.0 million borrowing in connection with the
acquisition of Nations. The seven year term loan incurs interest at prime or
LIBOR plus 2.75% (as of September 30, 2002 the interest rate on this note is
4.58%).
An income tax provision of $976,374 and $2,276,411 was recorded for the three
and nine month periods ended September 30, 2002 based on statutory tax rates. A
tax provision of $351,000 was recorded by the Company for the three and nine
month periods ended September 30, 2001, which was significantly lower than
statutory tax rates due to the availability of a federal net operating loss
carryforward in 2001. The Company used all available net operating loss
carryforwards during the third quarter 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company has two $3,000,000 revolving lines of credit, which bear interest on
any outstanding balance at the prime rate. At September 30, 2002, there were no
cash draws against either credit line. There is $75,000 committed against one
credit line for a standby letter of credit pursuant to an office lease. These
credit lines mature in June 2003.
Cash flows provided by operating activities were $5,754,280 for the nine months
ended September 30, 2002 compared to cash flows provided by operating activities
of $7,804,423 during the same period in 2001. The decrease in 2002 was primarily
the result of lower net income resulting from a higher tax provision for the
period ended September 30, 2002 and less of an increase in accrued expenses.
Cash flows used in investing activities were $16,416,912 for the nine months
ended September 30, 2002 compared to cash flows provided by investing activities
of $475,803 during the same period in 2001. The increase in cash flows used in
2002 is primarily due to the purchase of Nations and five branches from
BridgeSpan Title Company.
Cash flows provided by financing activities were $14,225,665 for the nine months
ended September 30, 2002 compared to cash flows used in financing activities of
$1,748,133 during the same period in 2001. The increase in cash flows in 2002 is
due to the increase in net borrowings and, to a lesser extent, an increase in
proceeds from the issuance of common stock.
The Company borrowed $14 million under a seven-year term loan with interest a
the prime rate or London Inter-Bank Offered Rate ("LIBOR") plus 2.75% to assist
with the financing of the acquisition of Nations. At September 30, 2002, the
interest rate on this note was 4.58%. The credit facility contains certain
covenants and conditions normally included in transactions of this nature.
In connection with the acquisition of Nations, the Company issued 175,162 shares
of preferred stock with a par value of $.001. The preferred stock is
non-convertible and is redeemable after September 2023 for $17,516,200. The
preferred stock includes an 8% cumulative dividend, payable quarterly in cash;
provided that the Company may, at its discretion, pay the dividends in shares of
common stock if the net income before provision for income taxes of the Company
for the immediately preceding quarter is less than $1.0 million.
15
The Company also granted warrants to purchase 300,000 shares of common stock as
part of the proceeds to acquire Nations. The warrants have a strike price of
$2.27 per share and based on a commonly utilized option pricing model, these
warrants had a fair market value of $213,000 at the grant date. The warrants
expire five years from the date of issuance. As set forth in the Merger
Agreement, the exercise price was set equal to the average of the last reported
sale or bid prices of the Company's common stock for the 21 consecutive trading
days ending on the trading day prior to the closing of the transaction. The
warrants were part of the purchase price of the Nations acquisition and were
recorded as an increase to additional paid-in capital.
Management believes that cash on hand, future cash receipts and borrowings
available under its credit lines and the Company's cash flows provided by
operating activities will be sufficient to meet the Company's expansion plans
and to pay all obligations as they become due for the next twelve months.
SAFE HARBOR STATEMENT
Certain statements contained in this report 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company's exposure to market risk is limited to interest rate risk on its
credit agreement and investment portfolio. At September 30, 2002, the carrying
amounts reported in the Company's unaudited Condensed Consolidated Balance
Sheets for cash and cash equivalents, accounts receivable, securities available
for sale, accounts payable and debt approximate fair value. The Company does not
believe it is subject to any market risks, which could reasonably be expected to
have a material impact on the fair value of these assets and liabilities as
reflected in the unaudited Condensed Consolidated Balance Sheets contained in
this report.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of our disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)). Based on that
evaluation, the CEO and CFO have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
Subsequent to the date of their evaluation, there were no significant changes in
the Company's internal controls or in other factors that could significantly
affect the disclosure controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various other claims and lawsuits in the ordinary
course of its business, none of which are currently considered material to the
Company's financial condition and results of operations. Except as set forth
above, there have been no material developments in any legal actions reported in
the Company's 2001 Form 10-K.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None.
b. Reports
During the quarter ended September 30, 2002, the Company filed the following
current Report on Form 8-K:
Current Report of Form 8-K dated September 23, 2002 - Pursuant to Item 2, the
Company reported the completion of the acquisition of Nations Holding Group
pursuant to an Agreement and Plan of Merger dated June 11, 2002, by and among
the Company, Nations Holding Group and CTG One Merger Corporation. Pursuant to
Item 7(a) of Form 8-K, all required historical financial statements will be
filed pursuant to an amendment to the Form 8-K dated September 23, 2002 as soon
as practicable following the filing of that report (but not later than 60 days
following the date on which that report was required to have been 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 thereunto duly authorized.
CAPITAL TITLE GROUP, INC.
By: /s/ DONALD R. HEAD Date: October 31, 2002
--------------------------------------------
Donald R. Head
Chairman of the Board, President and
Chief Executive Officer
By: /s/ MARK C. WALKER Date: October 31, 2002
--------------------------------------------
Mark C. Walker
Vice President, Chief Financial Officer,
Secretary and Treasurer
17
Certification of the Principal Executive Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Donald R. Head, the President and Chief Executive Officer of Capital Title
Group, Inc. (the "Company"), certify that:
(1) I have reviewed this quarterly report on Form 10-Q of the Company;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this
quarterly report;
(4) The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of Company's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's ability
to record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal
controls; and
(6) The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Donald R. Head
- -----------------------------
Donald R. Head
Capital Title Group, Inc.
President and Chief Executive Officer
October 31, 2002
18
Certification of the Principal Executive Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Mark C. Walker, Vice President and Chief Financial Officer of Capital Title
Group, Inc. (the "Company"), certify that:
(1) I have reviewed this quarterly report on Form 10-Q of the Company;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this
quarterly report;
(4) The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The Company's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of Company's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's ability
to record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal
controls; and
(6) The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Mark C. Walker
- -----------------------------
Mark C. Walker
Capital Title Group, Inc.
Vice President and Chief Financial Officer
October 31, 2002
19
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF TITLE 18,
UNITED STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of Title 18, United States Code), each of the
undersigned officers of Capital Title Group, Inc., a Delaware corporation (the
"Company"), does hereby certify with respect to the Quarterly Report of the
Company on Form 10-Q for the quarter ended September 30, 2002 as filed with the
Securities and Exchange Commission (the "10-Q Report") that, to each such
officer's knowledge:
(1) the 10-Q Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the 10-Q Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: October 31, 2002
/s/ DONALD R. HEAD
- --------------------------------------------------
Chairman of the Board, President and
Chief Executive Officer
Dated: October 31, 2002
/s/ MARK C. WALKER
- --------------------------------------------------
Vice President, Chief Financial Officer, Secretary
and Treasurer
20