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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-21417
CAPITAL TITLE GROUP, INC.
(Name of Small Business Issuer in its charter)
Delaware 87-0399785
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2901 East Camelback Road 85016
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (602) 954-0600
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ].
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $44,483,000. This figure was
estimated based on the last business day of the registrant's most recently
completed second fiscal quarter which was June 28, 2002. The number of shares of
Common Stock outstanding on June 28, 2002 was 17,444,374.
Indicate by check mark if there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K,
or any amendment to this Form 10-K. [ ].
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of
Stockholders to be held on May 21, 2003 are incorporated by reference into Part
III hereof.
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PART I
ITEM 1. BUSINESS
COMPANY HISTORY
Capital Title Group, Inc. (the "Company"), a Delaware corporation, through
its subsidiaries, is engaged in the business of issuing title insurance policies
and performing other title-related services, such as escrow activities, in
connection with real estate transactions. The Company views its operations as
one operating business segment and is the parent company of the following
subsidiaries:
Capital Title Agency, Inc. ("Capital Title") is an Arizona corporation
which has operated under the authority of the Arizona State Banking
Commission since November 1981. Capital Title is an independent title
agency that provides escrow services and issues title insurance policies to
the real estate industry in Maricopa, Yavapai, Mohave and Pinal Counties in
Arizona. Capital Title currently operates 37 offices located throughout
Maricopa, Yavapai and Mohave Counties in Arizona.
New Century Title Company ("New Century"), a California corporation that
commenced operations in July 1998, is an independent title agency that
provides escrow and title services to the real estate industry in selected
California counties. New Century currently has 17 offices in southern
California where it is licensed to conduct business in San Diego, Orange,
Riverside, San Bernardino and Los Angeles Counties. New Century also has
operations in northern California, which it obtained by acquisition in
November 1998 and expanded through another acquisition in April 2002. New
Century has 20 offices in northern California, where it is licensed to
conduct business in Sonoma, Sacramento, Contra Costa, Alameda, San Mateo
and Santa Clara Counties.
Nations Holding Group ("Nations"), a California corporation, was acquired
in September 2002 and includes the following wholly-owned subsidiaries;
United Title Company ("United Title"), a California corporation that
commenced operations in 1978, is an independent title agency that
provides escrow and title services to the real estate industry in
Southern California. United Title currently has 35 offices serving Los
Angeles, Riverside, San Bernardino, Orange, San Diego, Ventura and
Santa Barbara Counties in California.
First California Title Company ("First California"), a California
corporation that commenced operations in 1964 and was acquired by
Nations in 1997, is an independent title agency serving the real
estate industry with escrow and title services from seven offices in
the northern California Counties of Alameda and Contra Costa.
United Title Insurance Company ("United Title Insurance"), a
California domiciled title insurance underwriter, was formed in 1991.
United Title Insurance is the predominant underwriter for both United
Title and First California and underwrites a portion of the title
insurance policies sold by Capital Title and New Century.
In January 2003, Nations acquired Land Title of Nevada, Inc. ("Land
Title"), an independent title agency operating five offices in Clark County,
Nevada, which comprises the metropolitan area of Las Vegas. Land Title was
established in 1978 and provides escrow and title services to the real estate
industry.
The Company plans to continue its growth in Arizona, California and Nevada
and as conditions merit, to expand into other states. The Company intends to
accomplish this planned expansion primarily through acquisitions and recruitment
of escrow officers and sales representatives with significant existing revenue
production based upon their relationships with real estate brokers, mortgage
lenders and other industry participants. The Company will attempt to attract
these significant producers through employment packages that include commissions
based on generated revenue.
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The executive offices of the Company are located at 2901 East Camelback
Road, Phoenix, Arizona 85016, the telephone number is (602) 954-0600 and the
website is www.capitaltitlegroup.com.
COMPANY OVERVIEW
The Company derives revenue by issuing title insurance policies and
providing escrow services to the real estate industry. In addition to issuing
title insurance underwritten by United Title Insurance, the Company may utilize
third party title insurance underwriters depending upon various factors. Those
factors vary, but may include customer preference, market concentration or the
size of the transaction may also dictate the use of third party underwriters as
well.
The Company's operations have been influenced by the markets in which it
operates. Arizona, California and Nevada rank high in relation to other states
in the nation in the rate of new job creation and population growth. The Company
operates in some of the largest single family housing markets in the nation
including the greater Los Angeles, San Diego, Oakland, San Jose, Las Vegas and
Phoenix metropolitan areas.
INDUSTRY OVERVIEW
The title insurance process has become accepted as the most efficient means
of determining ownership of, and the priority of interests in, real estate in
nearly all markets of the United States. Virtually all lenders require their
borrowers to obtain title insurance policies at the time mortgage loans are made
on real property.
The major expense of a title company is the search and examination function
in preparing preliminary title reports, commitments and title policies.
Companies have focused on advancing technology in order to reduce costs, improve
accuracy and respond to the continuing pressures within the real estate industry
for faster and more cost effective processing of transactions.
The Company possesses advanced title report generation and processing
technology that combines title information from multiple sources via electronic
data exchange. This technology facilitates expansion of the Company's operations
in existing markets, and management believes it provides a competitive advantage
compared to the technology of competing title companies.
TITLE POLICIES. Title insurance policies state the terms and conditions
upon which a title underwriter will insure title to real property. The
beneficiaries of title insurance policies are generally buyers of real property
or secured lenders.
Title insurance is different from other types of insurance because it relates to
past events that affect title to property at the time of closing and not
unforeseen future events. Prior to issuing policies, underwriters can
significantly reduce or eliminate future losses by accurately performing
searches and examinations. The premium for title insurance is due in full on the
closing date of the real estate transaction and is based upon the purchase price
of the property insured or the amount of the secured loan. Title insurance
policies are issued on the basis of a preliminary report or commitment. These
reports are prepared after a search of public records, maps and other relevant
documents to ascertain title ownership and the existence of easements,
restrictions, rights of way, conditions, encumbrances or other matters affecting
the title to, or use of, real property. A visual inspection of the property may
also be made prior to the issuance of certain title insurance policies.
To facilitate the preparation of preliminary reports without the necessity
of manually searching public records, copies of public records, maps and other
relevant historical documents are compiled and indexed in a title plant. Each
title plant relates to a particular county and is kept current on a daily or
other frequent basis by the addition of copies of recorded documents that affect
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rights in real property in the particular county. Title companies often
subscribe to independent title information services to assist in the preparation
of preliminary title reports.
The Company has entered into multi-year service agreements for title plant
access in the counties in which it operates. In certain counties, the Company
may be a partial owner in a title plant or own a title plant which contains data
prior to the time period covered by a third party title plant provider. The
Company believes it will be able to obtain access to title plants on terms and
conditions that are acceptable to it as the Company expands into other markets;
however there can be no assurance in this regard.
THE TITLE POLICY PROCESS. A brief description of the process of issuing a
title insurance policy is as follows:
(i) The customer, typically a real estate salesperson or broker, escrow
agent or lender, places an order for a title policy.
(ii) After the relevant historical data on the property is compiled, the
title officer prepares a preliminary report that documents (a) the
current status of title to the property, (b) any exemptions,
exceptions and/or limitations that might be attached to the policy
and (c) specific issues that need to be addressed and resolved by the
parties to the transaction before the title policy will be issued
(such as removal of prior tax liens and payment of prior loans on the
property). The preliminary report is circulated to all parties of the
transaction for satisfaction of any specific issues.
(iii) After all specific issues identified in the preliminary report are
satisfied, the escrow agent closes the transaction in accordance with
the instructions of the parties and the policy conditions.
(iv) Once the transaction is closed and all monies have been released, a
final policy is issued (a) to the owner and the lender on a sale
transaction or (b) to the lender only on a refinancing transaction.
DIRECT VS. AGENCY SALES. Preliminary reports and commitments to issue
policies are prepared by title underwriters (direct sales) or by independent
agents on behalf of the underwriters (agency sales). The terms and conditions
upon which the real property will be insured are determined in accordance with
the standard policies and procedures of the title underwriter. In direct sales,
the title underwriter issues the preliminary report and commitment and retains
the entire title premium paid in connection with the transaction. In agency
sales, the search and examination function is performed by the independent agent
and the vast majority of the premium collected is retained by the agent, with
the balance remitted to the title underwriter. The Company competes against both
title underwriters and independent title agencies.
LOSSES AND RESERVES. The maximum amount of liability under a title
insurance policy issued by a title insurance underwriter is usually the face
amount of the policy plus the cost of defending the insurer's title against an
adverse claim. The reserve for claim losses is based upon known claims as well
as losses the insurer expects to incur based on historical experience and other
factors, including industry averages, claims loss history, current legal
environment, geographic considerations and type of policy written.
ECONOMIC FACTORS AFFECTING INDUSTRY. Title insurance and escrow revenue is
related to the level of activity in the real estate market and the price of real
estate sales. Real estate sales are directly affected by the availability of
money to finance purchases. Other factors affecting real estate activity include
demand, mortgage interest rates, family income levels and general economic
conditions. Overall economic conditions in the states of Arizona and California
have been favorable to the real estate market the past few years. Dramatic
interest rate decreases, particularly during 2002, helped to fuel the
residential resale and refinance market, which in turn provided real estate
services like title and escrow services with high transaction volume. The
relatively low interest rate environment provided the entire title and escrow
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services industry with tremendous volume, however, due to the unpredictability
of the interest rate environment, it is impossible to predict the impact future
higher interest rates will have on the overall real estate market and title and
escrow services industry.
COMPANY STRATEGY
The Company's strategy is to pursue aggressive growth in the title
insurance industry. Essential elements of the Company's strategy are as follows:
COMMITMENT TO SERVICE. The Company is built on three basic entrepreneurial
premises: (1) every employee is a salesperson for the Company; (2) the Company's
services are a one-stop, computer-based contact point for complete real estate
transactions; and (3) success is achieved through a focus on an unequaled
quality of customer service. Because title insurance policies and escrow
functions are generally standardized, management believes the level of service
provided is the key differentiating factor among competitors in the title
industry. Through its commitment to customer service, the Company seeks to build
lasting relationships with its real estate industry clients.
MARKET FOCUS. While the Company serves all segments of the real estate
market, the Company's market focus is on real estate brokers, mortgage lenders
and developers as the existing residential re-sale market has historically been
more consistent and less prone to fluctuation than commercial real estate, new
home sales or refinancing segments of the market. To set itself apart as a
service company, the Company continues to enhance industry specific information
technology to better serve its clients in all segments of the industry.
MANAGEMENT. The Company recognizes that its growth plan calls for executive
management with extensive industry, operational and expansion experience. The
Company was co-founded by Donald R. Head, and he has served as Chairman of the
Board and Chief Executive Officer since inception in 1981. Mr. Head has
extensive experience as a real estate developer and entrepreneur within the real
estate industry and has over 20 years of experience in the title insurance
industry.
Milt Ferrantelli, President and CEO of Capital Title Agency, joined the
Company in 1997. Prior to joining the Company, Mr. Ferrantelli co-owned and
served as President and Chief Executive Officer of a large Phoenix, Arizona
based title insurance agency from 1986 until it was acquired in 1994 by Norwest
Financial. Mr. Ferrantelli has over 20 years of experience in the title and
escrow industry in the Arizona marketplace.
Mervyn L. Morris, President of New Century Title Company, joined New
Century in September 1999. Mr. Morris has over 25 years of experience in the
title and escrow industry. Prior to joining New Century, Mr. Morris was
Executive Vice President, Southern Division Manager for Old Republic Title
Company.
Jerome M. Smolar is President of Nations Holding Group and CEO of its
largest wholly-owned subsidiaries, United Title and United Title Insurance
Company. Mr. Smolar joined Nations in 1996, and previously served as Nation's
Vice President and Chief Financial Officer and as President and Chief Operating
Officer of United Title Company. Prior to joining Nations, Mr. Smolar served in
several capacities with Safeco Title Insurance Company, including Vice
President, Treasurer and Chief Financial Officer and as a Director. Mr. Smolar
has over 15 years of experience in the title and escrow industry and is also a
certified public accountant.
In addition, the Company employs managers that are seasoned in the title
and escrow and overall real estate industries to run the day-to-day operations
in the counties the Company operates.
COMPANY OPERATIONS
The Company reported revenue of $127.7 million for the year ended December
31, 2002 compared to $64.4 million for the year ended December 31, 2001. (See
Management's Discussion and Analysis of Financial Condition and Results of
Operations).
MARKETING. The Company believes that the primary source of its business is
from referrals from participants in the real estate industry such as real estate
brokers, mortgage lenders and developers. In addition to the referral market,
5
the Company markets its services directly to larger brokerages and real property
lenders. Marketing activities are performed by the escrow officers of the
Company and marketing representatives whose sole function is the solicitation of
business from major real estate brokers, developers, owners and lenders.
ESCROW SERVICE. The Company's escrow departments are responsible for
handling the consummation of real estate transactions.
The escrow officers and assistants typically prepare escrow documents
pursuant to the real estate contract. The escrow instructions provide guidance
to all concerned parties as to the conditions required for the real estate
transaction. The escrow officers then receive funds and disburse them pursuant
to the escrow instructions.
The escrow officers are held accountable by state governmental agencies for
strict compliance with their fiduciary responsibilities outlined by the escrow
instructions. The escrow officers must possess a high degree of skill,
professionalism and confidentiality in the handling, preparation, collecting and
recordation of all escrow matters between the buyer, seller, real estate brokers
and their agents, developers, lenders and investors.
TITLE DEPARTMENT. The primary function of the title department is the
accumulation and analysis of various documents from the many sources that make
up the public record and to prepare and issue a preliminary report showing the
present condition of title.
CLAIMS AND UNDERWRITING. The Company's title agencies provide title
insurance through United Title Insurance, a wholly-owned subsidiary. The
Company's title agencies also act as an independent agent of five other third
party title insurance companies. Services are provided pursuant to underwriting
agreements with each of the underwriters which state the conditions on which the
Company's title agencies are authorized to issue a title insurance policy on
behalf of the underwriter and prescribe the circumstances under which the
Company's title agencies may be liable to the underwriter if a policy loss is
attributable to errors made by the Company's title agencies.
Claims against title insurance policies normally arise out of human error.
During the process of accumulation and analysis of the public record, certain
inaccuracies and inconsistencies are encountered that sometimes result in a
situation in which interpretation of these documents could lead to a claim. The
exposure for the Company's title agencies is typically limited to a $5,000
deductible for any loss resulting from a title insurance claim. The Company's
title agencies assume the entire risk of losses incurred in errors made during
the escrow process; however, have secured insurance coverage up to $1 million,
subject to a deductible, to limit any significant losses.
Claims against the Company's wholly-owned title insurance underwriter,
United Title Insurance, are typically limited to $500,000 for any loss resulting
from a title insurance claim. Losses are limited as a result of a reinsurance
arrangement United Title Insurance has with a third party underwriter.
CUSTOMERS
The Company is not dependent upon any single customer or single group of
customers. The loss of any one customer would not have a material adverse effect
on the Company.
SEASONALITY
The title insurance business is closely related to overall levels of real
estate sales activity. Historically, real estate sales activity slows down in
the winter months with volumes showing significant improvements in the spring
and summer months. In addition, the title insurance business is cyclical due to
the effect of interest rate fluctuations on the level of real estate sales
activity. Periods of high interest rates adversely effect real estate activity
and therefore title and escrow revenues.
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COMPETITION
The title insurance business is highly competitive. Companies with
significant market share in Arizona, California and Nevada include First
American, Chicago Title, Old Republic, Stewart Title, Fidelity Title and
LandAmerica. The number and size of competing companies varies in different
geographic markets. In those markets where the Company operates and intends to
operate the Company will face competition from other independent agencies and
major national insurance underwriters, many of which have financial and other
resources significantly greater than those of the Company. The Company believes
that quality and timeliness of service are the key competitive factors in the
industry because parties to a real estate transaction are usually concerned with
time schedules and costs associated with delays in the closing of transactions.
REGULATION
The Company conducts its business under licenses granted by the State
Banking and Insurance Departments of the State of Arizona and the Departments of
Insurance in California and Nevada. The title insurance and escrow businesses
generally are subject to extensive regulation under applicable state laws,
including, in California, requirements to maintain minimum levels of net worth
and working capital. These laws establish supervisory agencies with broad
administrative powers relating to issuing and revoking licenses, regulating
trade practices, licensing agents, approving policy forms and approving rate
schedules. Failure to comply with these regulations or an inability to secure or
maintain any required licenses could materially adversely affect the Company's
business. The Company believes that it is in compliance with applicable laws and
regulations and that it will maintain and obtain all licenses required for the
conduct of its business.
Title insurance underwriters are also typically subject to a holding
company act in their state of domicile that regulates, among other issues,
payment of dividends and investment policies. As a condition to continue its
authority to underwrite title insurance policies in the states in which our
title insurance subsidiary conducts its business, it is required to pay certain
fees and file information regarding its officers, directors and financial
results and condition. Further, pursuant to statutory regulations, United Title
Insurance must defer a portion of underwriting premium as an unearned premium
reserve as well as maintain qualified assets in an amount set by statutory
requirements. The level of unearned premium reserve required to be maintained
any time is determined on a quarterly basis by statutory formula based on
several factors including the number, age and dollar amount of policies written.
At December 31, 2002, the statutory unearned premium reserve required and
reported by the Company's title insurance subsidiary was $6.8 million.
The Company's title insurance subsidiary had statutory capital and surplus
of $8.5 million at December 31, 2002. For the year ended December 31, 2002, the
Company's title insurance subsidiary also had statutory earnings of $1.7
million.
United Title Insurance is regulated by the California Department of
Insurance ("DOI"). Examinations by the DOI typically occur at three-year
intervals and an examination of United Title Insurance for the years ended
December 31, 1999, 2000 and 2001, concluded in late 2002. Although not final,
the DOI shared a preliminary report of their examination and the findings in the
report did not have a material impact to the statutory results of United Title
Insurance at December 31, 2002.
RATINGS
United Title Insurance is regularly reviewed and assigned ratings by
independent rating agencies designed to indicate its financial condition and/or
claims paying ability. Financial data and other similar information is supplied
to the rating agencies, as requested, and analysis is performed by agencies to
arrive at a particular rating. At December 31, 2002, United Title Insurance was
rated as noted below by the following rating agencies:
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Demotech, Inc. Lace Title Rating
(Financial stability rating) Corporation
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United Title Insurance Company "A-Exceptional" "A"
INVESTMENTS
The Company's subsidiary, United Title Insurance, derives a portion of its
income from investments. The Company's investment portfolio consists of
short-term investments, predominately certificates of deposit with maturities
greater than 90 days, but less than one year, and investments in fixed maturity
bonds and equity securities. The investment policy of United Title Insurance is
to maintain a diversified investment portfolio and to purchase investment grade
fixed maturity bonds and preferred and common stocks of large, seasoned and
well-managed companies. The investment policy is designed to maximize investment
income, maintain adequate cash flow and provide financial stability within a
limited risk tolerance. The carrying amount of all investments, which
approximates the fair value of the investments, was approximately $11.5 million
at December 31, 2002. During 2002, the Company's average yield on its investment
portfolio was approximately 4.6%.
The following table sets forth certain information regarding the investment
ratings of the Company's fixed maturity portfolio at December 31, 2002:
Amortized Estimated
Cost % of Total Fair Value % of Total
-------- ---------- ---------- ----------
Ratings (1) ($ in thousands)
AAA, AA, and A $ 6,036 85.0% $ 6,348 85.6%
BBB 966 13.6 967 13.0
B 97 1.4 101 1.4
-------- -------- -------- --------
$ 7,099 100.0% $ 7,416 100.0%
======== ======== ======== ========
(1) Ratings as assigned by Standard and Poor's.
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The following table sets forth contractual maturities at December 31, 2002,
which may differ from expected maturities because certain borrowers have the
right to call or prepay obligations with or without prepayment penalties:
Amortized Estimated
Maturity dates Cost fair value
-------------- -------- ----------
($ in thousands)
One year or less $ 100 $ 101
After one year through five years 3,345 3,500
After five years through ten years 1,318 1,394
After ten years 2,336 2,421
-------- --------
$ 7,099 $ 7,416
======== ========
Fixed maturity bonds with an amortized cost of $3.6 million and a fair
value of $3.8 million have provisions which give borrowers the right to call or
prepay their obligations with or without prepayment penalties.
Equity securities at December 31, 2002 consist of investments in the
following category:
Estimated
Cost Fair value
-------- ----------
($ in thousands)
Preferred and common stocks of banks,
trust and insurance companies $ 842 $ 904
Preferred stocks of public utilities 85 94
Preferred and common stocks of industrial
and miscellaneous companies 1,955 1,958
-------- --------
$ 2,882 $ 2,956
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EMPLOYEES
As of December 31, 2002, the Company had a total of 1,679 employees, of
which 412 were located in Arizona and 1,267 in California. In January 2003, the
Company acquired Land Title of Nevada, Inc, adding 94 employees. The Company
believes that its relations with its employees are excellent.
ITEM 2. PROPERTIES
The Company conducts its business operations primarily in leased office
space. The Company currently leases offices at 114 locations with remaining
lease periods ranging from one to eighty-four months. The Company's monthly
rental payments at the foregoing locations are approximately $0.8 million. The
Company owns a 24,000 square foot building in Phoenix, Arizona, which includes
its corporate headquarters, its Maricopa County administration and title
department, and two escrow branches. The Company also owns and occupies
approximately one-half of a 16,200 square foot building in Colton, California
which houses a title and escrow branch office of its wholly-owned subsidiary,
United Title.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal actions which arise in the normal
course of its title and escrow business. The Company believes, based on the
advice of legal counsel, that none of these claims are material to the Company,
either individually or in the aggregate, and the final outcome will not have a
material adverse affect on the Company's financial position, results of
operations or liquidity.
The Attorney General of the State of California filed suit on behalf of the
California Controller against a number of major title insurers operating in
California, alleging irregularities in billings for charges and violations of
title and escrow practices. The Company and its subsidiaries have not received
9
any communication from the Attorney General regarding this litigation and was
not named in the suit. Each of the defendants in the State of California lawsuit
has entered into a settlement with the State, which includes an injunction
prohibiting certain practices allegedly engaged in by those companies. A matter
raised in the State of California litigation has resulted in a separate lawsuit
brought by individuals purporting to act in a representative capacity for
consumers doing business with lenders and title companies in the State of
California. United Title has been named in this lawsuit, which seeks restitution
of alleged wrongful gains obtained through excessive recording fees and
reconveyance tracking fees, injunctive relief, and attorney fees. An initial
lawsuit was served on United Title in November 2001 and in that lawsuit, the
court dismissed the complaint. The recent litigation referred to above was
subsequently refiled in February 2003. The results of legal proceedings cannot
be predicted with certainty, but United Title intends to vigorously defend the
lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2002.
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on The Nasdaq SmallCap Market under
the symbol "CTGI".
The following table sets forth the high and low closing bid prices for the
Company's common stock.
Date High Low
---- ------ ------
2001 First Quarter $ 1.59 $ 0.94
Second Quarter 2.74 1.06
Third Quarter 2.90 1.95
Fourth Quarter 2.54 2.00
2002 First Quarter 2.30 1.85
Second Quarter 3.30 2.00
Third Quarter 2.50 1.50
Fourth Quarter 2.75 2.00
2003 First Quarter (through March 14) 3.06 2.04
As of December 31, 2002, the Company had issued and outstanding 17,923,968
shares of common stock. In addition, 4,900,000 shares are reserved for issuance
under the Company's 1996 Stock Option Plan and 600,000 shares are reserved for
issuance under the Company's Non-Employee Directors Plan. At December 31, 2002,
there were approximately 1,601 holders of record of the Company's common stock.
In March 1998, the Company issued 463,500 warrants in conjunction with a
private placement. Each warrant entitled the holder to purchase one share of the
Company's common stock at $2.50 until December 31, 2002. During 2002, 268,000
warrants were exercised with the balance of the warrants expiring. In April
1998, the Company issued 308,642 warrants to an investment banking firm that
acted as placement agent in connection with another private placement. Each
warrant entitled the holder to purchase one share of the Company's common stock
at $1.62 until May 1, 2002. Pursuant to terms of the warrant agreement, 125,793
shares of common stock were issued prior to the expiration date. In September
2002, the Company issued 300,000 warrants valued at $213,000 in conjunction with
an acquisition. Each warrant entitles the holder to purchase one share of the
Company's common stock at $2.27 until September 18, 2007. The Company utilized
the Black-Scholes model, a commonly used option pricing model, to determine the
fair value of these warrants.
The Company has never paid a dividend on its Common Stock. At this time,
the Company anticipates that its earnings, if any, will be retained to fund the
Company's working capital needs, debt repayment and the planned expansion of its
business. The payment of any dividends may be restricted by the covenants
contained in the Company's seven-year term loan agreement with Comerica Bank and
will be dependent upon the discretion of the Board of Directors. Furthermore,
under Delaware corporate law, in the absence of current or retained earnings,
the Company may be prohibited from paying dividends (whether in cash or
otherwise).
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ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data-Five Year Summary
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
For The Year: 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Title service revenue, net $ 81,239 $ 41,161 $ 22,628 $ 20,808 $ 13,175
Escrow and related fees 42,632 20,468 11,447 11,088 7,535
Other income 3,840 2,807 2,823 2,080 1,037
---------- ---------- ---------- ---------- ----------
Total revenue 127,711 64,436 36,898 33,976 21,747
Net income (loss) 7,282 5,070 (2,252) (1,969) 1,676
Earnings (loss) attributable to common shares 6,879 5,070 (2,252) (1,969) 1,676
Net cash flows provided by (used in)
operating activities 15,650 9,674 121 (2,075) 2,472
Net cash flows used in investing activities (17,885) (583) (1,369) (3,674) (3,080)
Net cash flows provided by (used in)
financing activities 14,173 (2,190) 140 2,799 5,243
Per share data:
Net income (loss) per common share - Diluted 0.38 0.28 (0.13) (0.12) 0.11
Weighted average shares outstanding - Diluted 18,121 18,031 17,158 16,868 15,938
At Year End:
Total assets $ 83,287 $ 21,025 $ 14,301 $ 15,199 $ 16,528
Long term debt 16,542 3,083 5,016 4,891 2,299
Preferred stock 17,516 -- -- -- --
Stockholders' equity 19,452 11,104 6,730 8,544 10,790
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion of the results of the operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
report. Historical results and percentage relationships among accounts are not
necessarily an indication of trends in operating results for any future period.
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 impairment
of intangible assets and long lived assets, reserves related to title insurance
and escrow losses, determination of fair values of fixed maturity bonds and
equity securities, and contingencies and litigation. Management performs a test
of each reporting unit for which goodwill is attributed to evaluate for any
impairment of intangible assets at least annually. This includes, among other
12
things, a review of events or circumstances which would indicate an impairment
of goodwill. Future losses from reporting units that goodwill is attributed to
may lead to an impairment charge in future periods. When evaluating title
insurance and escrow losses management estimates reserves for known claims as
well as a provision for incurred but not reported losses based on several
factors including, but not limited to, historical loss experience, and current
industry and legal environments. Management determines the fair value of fixed
maturity bonds and equity securities by obtaining quoted market prices.
Contingencies and litigation are reviewed by management on an ongoing basis and,
in conjunction with legal counsel, determinations are made as to the outcome of
any lawsuits and advice of claims. Based on this assessment, any required
reserves are reflected in the Company's financial statements. 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 the Company's future financial condition or results of operations.
OVERVIEW
The Company is engaged in the business of issuing title insurance policies
and performing other title-related services, such as escrow activities in
connection with real estate transactions. Operating results in 2002 reflect the
acquisition of Nations, effective September 1, 2002. As a result of the
acquisition of Nations, the Company also underwrites title insurance policies in
California and Arizona.
Capital Title Group, Inc. reported net income of $7.3 million and $5.1
million for the years ended December 31, 2002 and 2001, respectively, compared
to a net loss of $2.3 million for the year ended December 31, 2000. The
significant improvement in earnings was due in part to the acquisition of
Nations in September 2002, a strong housing market and a record level of
refinance transactions resulting from low mortgage interest rates.
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS
In April 2002, the Company increased its presence in northern California
with the acquisition of five branch offices that perform title and escrow
services in the counties of Santa Clara, San Mateo and Sacramento. The
acquisition also included ownership interest in joint title plants for these
counties and had a total purchase price of approximately $4.3 million. The
acquisition was accounted for using the purchase method and the operations of
these branch offices have been integrated into New Century Title Company, a
wholly-owned subsidiary of the Company.
In September 2002, the Company acquired Nations, including its wholly-owned
subsidiaries of United Title Company, First California Title Company and United
Title Insurance Company, among other subsidiaries. The purchase price, including
direct transaction costs was approximately $37.2 million and was accounted for
using the purchase method.
Included in the results of operations during 2002 was revenue of
approximately $35.7 million and pre-tax income of $1.0 million related to these
two acquisitions.
13
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components
of the Company's revenue and expenses along with the percentage they bear to
total revenue:
For The Years Ended December 31,
--------------------------------------------------------------------------------
2002 % 2001 % 2000 %
---------- ---------- ---------- ---------- ---------- ----------
($ in thousands, except revenue per order data)
Title service revenue, net $ 81,239 63.6% $ 41,161 63.9% $ 22,628 61.3%
Escrow and related fees 42,632 33.4 20,468 31.8 11,447 31.0
Other income 3,840 3.0 2,807 4.3 2,823 7.7
---------- ---------- ---------- ---------- ---------- ----------
$ 127,711 100.0% $ 64,436 100.0% $ 36,898 100.0%
========== ========== ========== ========== ========== ==========
Personnel costs $ 79,149 62.0% $ 38,976 60.4% $ 25,467 69.0%
Rent 7,936 6.2 4,226 6.6 3,298 8.9
Interest expense 443 0.4 277 0.4 335 0.9
Provision for title insurance
and escrow losses 3,176 2.4 540 0.9 105 0.4
Other operating expenses 24,724 19.4 14,579 22.6 9,978 27.0
---------- ---------- ---------- ---------- ---------- ----------
$ 115,428 90.4% $ 58,598 90.9% $ 39,183 106.2%
========== ========== ========== ========== ========== ==========
Opened orders 185,349 110,620 49,616
Closed orders 122,471 69,320 33,789
Average revenue per
closed order $ 1,011 $ 889 $ 1,008
FISCAL 2002 COMPARED TO FISCAL 2001
The Company's revenues increased by $63.3 million or 98.2% for the year
ended December 31, 2002 as compared to the year ended December 31, 2001. The
increase is primarily attributable to the acquisition of Nations in September
2002, a favorable real estate and refinance market, the Company's expansion and
increased market share.
On a proforma basis, assuming the Company had acquired Nations and the five
branch offices in northern California effective January 1, 2001, the Company's
revenues would have increased by $60.1 million or 51.3% to $177.3 million for
the year ended December 31, 2002 from $117.2 million for the year ended December
31, 2001.
The Company's revenue from title insurance and escrow fees is primarily
from three sources: residential resale, lender/refinance and commercial real
estate transactions. The Company's marketing plan is to have the majority of the
Company's title and escrow revenue be derived from the resale business and
lender transactions. Historically, the resale business has been more consistent
and less subject to fluctuations than commercial, new home sales, or refinancing
segments of the market. The commercial, new home sales and refinancing segments
tend to be more influenced by interest rates and other economic conditions.
The increase in open orders in 2002 compared to 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
final four months of 2002. The Company experienced an increase in the average
fee per closed order during 2002 when compared to 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.
Title service revenue is net of underwriting fees paid pursuant to title
insurance underwriting agreements the Company has with five national title
14
companies. Underwriting fees were approximately $5.4 million, $4.4 million and
$2.5 million for the years ended December 31, 2002, 2001 and 2000, respectively.
Other income decreased as a percentage of revenue in the year ended
December 31, 2002 to 3.0% from 4.3% in 2001. This decrease was the result of the
larger increase to revenue resulting from title service revenue and escrow and
related fees. The increase in other income overall was primarily due to
additional operations resulting from the acquisition of Nations.
Personnel costs, including commissions and incentives, are the most
significant component of the Company's operating expenses. The number of people
employed by the Company increased from 710 as of December 31, 2001 to 1,679 as
of December 31, 2002. The increase is primarily due to additional operations
resulting from the acquisition of Nations in September 2002. For the year ended
December 31, 2002, personnel costs including commissions and incentives were
62.0% of total revenue compared to 60.4% of total revenue for the year ended
December 31, 2001. The increase in personnel costs as a percentage of total
revenue is the result of an increase in the number of employees in geographic
markets that require higher compensation.
Rent expense decreased as a percentage of revenue in the year ended
December 31, 2002 to 6.2% from 6.6% in 2001. This decrease was the result of the
relatively fixed nature of these costs coupled with the increase in revenue. The
increase in rent expense overall is the result of the increase in offices from
58 as of December 31, 2001 to 116 in 2002, primarily due to additional
operations resulting from the acquisition of Nations.
Provision for title insurance and escrow losses increased as a percentage
of revenue in the year ended December 31, 2002 to 2.4% from 0.9% in 2001. This
increase was primarily a result of the inclusion of United Title Insurance
Company, a title insurance underwriter, in the 2002 operating results as a
result of the Nations acquisition. In addition, the Company experienced a $1
million loss resulting from providing title and escrow services to a developer
which later filed for bankruptcy protection.
The significant components of other operating expenses include supplies,
utilities, insurance, depreciation, title plant maintenance and access, postage
and professional fees. Other operating expenses decreased as a percentage of
total revenue to 19.4% in 2002 from 22.6% in 2001. While other operating
expenses grew in 2002, primarily due to additional operations resulting from the
Nations acquisition and other branch openings, the decrease in other operating
expenses as a percentage of total revenue was the result of the fixed components
of these costs coupled with the increase in revenue.
Interest expense increased to $0.4 million for 2002 compared to $0.3
million for 2001 primarily as a result of a $14.0 million term loan used to
partially fund the Nations acquisition.
Income tax expense of $5.0 million was recorded for the year ended December
31, 2002 at an effective tax rate of 40.7%, which closely approximates the
statutory income tax rate for corporations. Income tax expense for 2001 was $0.8
million, or an effective rate of 13.1%, resulting from the utilization of prior
year tax loss carryforwards.
FISCAL 2001 COMPARED TO FISCAL 2000
The Company's revenues increased by $27.5 million or 74.6% for the year
ended December 31, 2001 as compared to the year ended December 31, 2000. The
increase is primarily attributable to a favorable real estate and refinance
market, the Company's expansion and increased market share. The decrease during
2001 in the revenue per closed order resulted from an increase in the mix of
refinance orders, which have lower fee per order than the Company's residential
resale orders.
Title service revenue is net of underwriting fees paid pursuant to title
insurance underwriting agreements the Company has with five national title
companies. Underwriting fees were approximately $4.4 million, $2.5 million and
$2.2 million for the years ended December 31, 2001, 2000 and 1999, respectively.
15
Personnel costs, including commissions and incentives, are the most
significant component of the Company's operating expenses. The number of people
employed by the Company increased from 493 on December 31, 2000 to 710 on
December 31, 2001. For the year ended December 31, 2001, personnel costs
including commissions and incentives were 60.4% of total revenue compared to
69.0% of total revenue for the year ended December 31, 2000. This decrease was a
result of higher productivity coupled with the increase in revenue.
Rent expense decreased as a percentage of revenue in the year ended
December 31, 2001 to 6.6% from 8.9% in 2000. This decrease was the result of the
relatively fixed nature of these costs coupled with the increase in revenue.
Provision for title insurance and escrow losses increased as a percentage
of revenue in the year ended December 31, 2001 to 0.9% from 0.4% in 2000. This
increase was primarily a result in an increase in the mix of title insurance
business in relation to total 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 decreased as a percentage of
total revenue to 22.6% in 2001 from 27.0% in 2000. This decrease was the result
of cost containment efforts and the relatively fixed nature of many of these
expenses in relation to the overall increase in revenues.
An income tax provision of $0.8 million was recorded for the year ended
December 31, 2001. The availability of net operating loss carryforwards resulted
in a much lower tax provision in 2001 than would be expected based on statutory
income tax rates. No provision was recorded for 2000 as a result of the net loss
reported that year. As of December 31, 2001, the Company had fully utilized its
net operating loss carryforward.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to expand its geographical base, further
implement its market penetration program, recruit and train new personnel and
purchase additional property and equipment to implement its expansion program.
During the year ended December 31, 2002, the Company financed its operating and
business development activities through operating cash flows and through the use
of cash on hand. The Company funded its acquisition of Nations through a seven
year term loan, cash, issuance of preferred stock and issuance of warrants for
common stock.
The Company has two $3.0 million revolving lines of credit, which bear
interest on any outstanding balance at the prime rate (4.25% at December 31,
2002). (See Quantitative and Qualitative Disclosure About Market Risk). At
December 31, 2002, there were no cash draws against either of these credit
facilities. There is $75,000 committed against one of the credit lines for a
standby letter of credit pursuant to an office lease. These credit facilities
mature in May 2003, but the Company anticipates renewing these lines of credit
for an additional one-year term.
Cash flows provided by operating activities were $15.6 million for the year
ended December 31, 2002 compared to cash flows provided by operating activities
of $9.7 million in 2001. The increase in 2002 was primarily the result of an
improvement in operating results with net income of $7.3 million for the year
ended December 31, 2002 compared to net income of $5.1 million in the prior
year. Additionally, an increase in accounts payable and accrued expenses, and
non-cash items such as depreciation and increased loss reserves also increased
cash flow from operating activities compared to the prior year. The principal
non-operating uses of cash for the year ended December 31, 2002 were $14.1
million related to acquisitions and $3.8 million for property and equipment.
Other sources of non-operating cash for 2002 came from a seven year term loan of
$14.0 million which was utilized to partially fund the acquisition of Nations.
16
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 2002, a total of 362,637 shares were repurchased under this program, all
of which were cancelled. In total 696,533 shares have been repurchased under
this program at prices ranging from $1.97 to $2.30 per share.
The Company is the custodian of cash deposited by customers with specific
instructions as to its disbursement from active escrow, trust and account
servicing files. The balances in these accounts have not been included in these
consolidated financial statements. As of December 31, 2002, the accounts contain
balances of approximately $727.6 million. In the case of a loss in escrow
accounts, the Company has financial exposure for these balances.
The Company's future debt and lease obligations are summarized by year as
follows ($ in thousands):
Payments due by period
---------------------------------------------
less than more than
Contractual Obligations one year 1-3 years 3-5 years 5 years
- ----------------------- -------- --------- --------- -------
Debt maturities $ 2,032 $ 6,113 $ 8,397 $ --
Minimum lease
commitments 7,660 14,303 3,214 4,881
------- ------- ------- -------
Total $ 9,692 $20,416 $11,611 $ 4,881
======= ======= ======= =======
In addition, the Company has preferred stock which is redeemable after 2023
for $17.516 million. The preferred stock has an 8% cumulative dividend, paid
quarterly.
Management believes that cash on hand, anticipated future cash receipts and
borrowings available under its credit facilities will be sufficient to meet the
Company's expansion plans and to pay all obligations as they become due for the
next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, BUSINESS COMBINATIONS, and Statement No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS. Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also specifies criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142.
17
The following table presents prior period income and income per share as if
the nonamortization provisions of Statement 142 had been applied in the prior
period:
Year Ended December 31,
------------------------------------
2002 2001 2000
-------- -------- --------
(in thousands, except per share data)
Reported earnings attributable to common shares $ 6,879 $ 5,070 $ (2,252)
Add back goodwill amortization -- 13 13
-------- -------- --------
Adjusted earnings attributable to common shares $ 6,879 $ 5,083 $ (2,239)
Diluted income per share:
Reported income per share $ 0.38 $ 0.28 $ (0.13)
Add back goodwill amortization -- -- --
-------- -------- --------
Adjusted earnings attributable common shares $ 0.38 $ 0.28 $ (0.13)
======== ======== ========
The Company was required to adopt the provisions of Statement 141
immediately and Statement 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that is acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-Statement 142 accounting literature. As of
December 31, 2002, the Company had $18.8 million of goodwill, which has been
evaluated in accordance with Statement 142 and no impairment adjustment is
warranted at this time.
In June 2001, the FASB issued Statement No. 143, ASSET RETIREMENT
OBLIGATIONS, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. Statement No. 143 is effective for fiscal years
beginning after June 15, 2002, although earlier application is encouraged. The
adoption of this statement effective January 1, 2002 did not have any material
impact on the Company's financial position, results of operations or liquidity.
In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, it
retains many of the fundamental provisions of that Statement.
Statement No. 144 also supersedes the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business. However, it retains the requirement in Opinion No. 30 to report
separately discontinued operations and extends that reporting to a component of
an entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. By broadening the
presentation of discontinued operations to include more disposal transactions,
the FASB has enhanced management's ability to provide information that helps
financial statement users to assess the effects of a disposal transaction on the
ongoing operations of an entity. Statement No. 144 is effective for fiscal years
beginning after December 15, 2001 and the adoption of this statement on January
1, 2002 did not have any material impact on the Company's financial position,
results of operations or liquidity.
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.
18
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 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.
In October 2002, the FASB issued Statement No. 147, ACQUISITIONS OF CERTAIN
FINANCIAL INSTITUTIONS - AN AMENDMENT OF FASB STATEMENTS NO. 72 AND 144 AND FASB
INTERPRETATION NO. 9. Except for transactions between two or more mutual
enterprises, this Statement removes acquisitions of financial institutions from
the scope of both Statement No. 72 and Interpretation No. 9 and requires that
those transactions be accounted for in accordance with FASB Statements No. 141
and No. 142. Statement No. 147 is effective for acquisitions on or after October
1, 2002. Management has evaluated this accounting standard but does not believe
application of this standard would have a material impact on the Company's
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS, AND INTERPRETATION OF FASB STATEMENTS NO.
5, 57 AND 107 AND A RECISSION OF FASB INTERPRETATION NO. 43. This Interpretation
elaborated on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
financial statements. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 31, 2002.
In December 2002, the FASB issued Statement No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, AND AMENDMENT OF FASB
STATEMENT NO. 123. This Statement amends FASB Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, AND INTERPRETATION OF ARB NO. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For public enterprises with a variable interest
in a variable interest entity created before February 1, 2003, the
Interpretation applies to that enterprise no later than the beginning of the
first interim or annual reporting period beginning after June 15, 2003. The
application of this Interpretation requires certain disclosures in financial
statements issued after January 31, 2003 if it is reasonably possible that the
Company will consolidate or disclose information about variable interest
entities when the Interpretation becomes effective.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking
statements. The forward-looking statements contained herein are based on current
19
expectations that involve a number of risks and uncertainties. Among others,
these forward-looking statements are based on assumptions that (a) volume of
real estate transactions in the Company's market areas will remain at sufficient
levels to support the Company's business, (b) the Company will be able to
successfully integrate acquired businesses and the results of operations
therefrom will support the acquisition price, (c) the Company will be able to
retain, and when needed, add key personnel, (d) the Company's forecasts will
accurately anticipate market demand, (e) there will be no material adverse
changes in the Company's existing operations and (f) the Company will be able to
obtain sufficient equity or debt funding to increase its capital resources by
the amount needed for new business acquisitions, if any. Assumptions related to
the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are beyond the control of the Company. Although the Company believes
that the assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could prove inaccurate and, therefore, there can be no
assurance that the results contemplated in forward-looking statements will be
realized. In addition, the business and operations of the Company are subject to
substantial risks, which increase the uncertainty inherent in such
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by the Company, or any
other person, that the Company's plans or objectives will be achieved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's business is cyclical due to the effect of interest rate
fluctuations on the level of real estate activity. Periods of high interest
rates adversely effect real estate activity and therefore title and escrow
revenues. In addition, the amount of interest income derived from available cash
is subject to interest rate fluctuations. The Company's investment portfolio and
borrowings are subject to interest rate risk. An increase or decrease in
prevailing interest rates typically translate into a decrease or increase in
fair values of interest sensitive financial instruments.
At December 31, 2002, the carrying amounts reported in the Company's
consolidated balance sheets for cash and cash equivalents, short term
investments, fixed maturity bonds and equity securities, accounts receivable,
accounts payable and debt approximate fair value. Fair values of fixed maturity
bonds may be affected by the credit worthiness of the issuer, prepayment
options, relative values of alternative investments, the liquidity of the
security and other general market conditions. The Company's investments in
equity securities are based on quoted market prices by third party sources.
Market prices are subject to variability and as a result, the amount the Company
may realize from a sale of an equity security investment may ultimately be
significantly different than the reported market values. Variability in market
prices may occur as a result of changes in economic conditions, relative price
of similar, alternative investment choices and the market's perceived change in
the value of the security itself.
The Company's long-term debt is comprised of two term loans, one of which
provides for a variable interest rate. Had interest rates increased (decreased)
100 basis points, interest expense on outstanding debt would have increased
(decreased) approximately $40,600 for the year ended December 31, 2002.
20
ITEM 8. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Capital Title Group, Inc.:
We have audited the accompanying consolidated balance sheets of Capital
Title Group, Inc. and subsidiaries (the Company) as of December 31, 2002 and
2001, and the related consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2002 and 2001, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets" which changed the Company's method of accounting for goodwill
and other intangible assets effective January 1, 2002.
/s/ KPMG LLP
Phoenix, Arizona
March 3, 2003
21
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------
2002 2001
---------- ----------
($ in thousands)
ASSETS
Cash and cash equivalents $ 19,615 $ 7,677
Short term investments 1,150 --
Restricted cash 2,130 --
Fixed maturity bonds, available-for-sale 7,416 --
Equity securities, available-for-sale 2,956 --
---------- ----------
Cash and invested assets 33,267 7,677
Accounts receivable, net 3,998 463
Notes and other receivables 2,316 309
Property and equipment, net 16,279 10,075
Title plant 3,853 678
Goodwill 18,835 205
Deposits and other assets 4,739 1,281
Deferred income taxes, net -- 337
---------- ----------
Total Assets $ 83,287 $ 21,025
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 22,386 $ 5,696
Reserve for title insurance and escrow losses 6,450 524
Long-term debt 16,542 3,083
Deferred income taxes, net 253 --
Other liabilities 688 618
---------- ----------
Total Liabilities 46,319 9,921
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 --
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000 shares
authorized; 17,923,968 and 17,065,381 shares
issued and outstanding in 2002 and 2001, respectively 18 17
Additional paid-in capital 12,560 10,911
Retained earnings 6,616 176
Accumulated other comprehensive income 258 --
---------- ----------
Total Stockholders' Equity 19,452 11,104
---------- ----------
Total Liabilities and Stockholders' Equity $ 83,287 $ 21,025
========== ==========
The accompanying notes are an integral part
of the consolidated financial statements
22
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
($ in thousands, except per share data)
REVENUE:
Title service revenue, net $ 81,239 $ 41,161 $ 22,628
Escrow and related fees 42,632 20,468 11,447
Other income 3,840 2,807 2,823
------------ ------------ ------------
Total Revenue 127,711 64,436 36,898
------------ ------------ ------------
EXPENSES:
Personnel costs 79,149 38,976 25,467
Rent 7,936 4,226 3,298
Interest expense 443 277 335
Provision for title insurance and escrow losses 3,176 540 105
Other operating expenses 24,724 14,579 9,978
------------ ------------ ------------
Total Expenses 115,428 58,598 39,183
------------ ------------ ------------
Income (loss) before income taxes 12,283 5,838 (2,285)
Income tax expense (benefit) 5,001 768 (33)
------------ ------------ ------------
Net income (loss) 7,282 5,070 (2,252)
Dividends on preferred stock 403 -- --
------------ ------------ ------------
Earnings (loss) attributable to common shares $ 6,879 $ 5,070 $ (2,252)
============ ============ ============
Net income (loss) per common share:
Basic $ 0.39 $ 0.29 $ (0.13)
============ ============ ============
Diluted $ 0.38 $ 0.28 $ (0.13)
============ ============ ============
Weighted average shares outstanding:
Basic 17,417,061 17,230,950 17,158,414
============ ============ ============
Diluted 18,121,419 18,031,252 17,158,414
============ ============ ============
The accompanying notes are an integral part
of the consolidated financial statements
23
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Common Stock Retained Accumulated
--------------------------- Additional Earnings Other
Paid-in (Accumulated Comprehensive
Shares Par Value Capital Deficit) Income Total
------------ ------------ ------------ ------------ ------------ ------------
($ in thousands)
Balance at December 31, 1999 16,947,901 $ 17 $ 10,667 $ (2,140) $ -- 8,544
Shares issued in connection with
options exercised 20,500 -- 18 -- -- 18
Shares issued in connection with
a cost basis investment, net 424,448 -- 420 -- -- 420
Net loss -- -- -- (2,252) -- (2,252)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 17,392,849 17 11,105 (4,392) -- 6,730
Shares issued in connection with
options exercised 438,300 -- 458 -- -- 458
Shares cancelled in connection with
rescission of cost basis investment
and return of escrowed shares
from a 1998 acquisition (431,872) -- (439) -- -- (439)
Shares repurchased and cancelled (333,896) -- (213) (502) -- (715)
Net income -- -- -- 5,070 -- 5,070
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 17,065,381 17 10,911 176 -- 11,104
Shares issued in connection with
options and warrants 1,131,543 1 1,567 -- -- 1,568
Shares issued in connection with
acquisition of a subsidiary 89,681 -- 197 -- -- 197
Warrants issued in connection with
acquisition of a subsidiary -- -- 213 -- -- 213
Shares repurchased and cancelled (362,637) -- (328) (439) -- (767)
Dividends on preferred stock -- -- -- (403) -- (403)
Comprehensive income:
Net income -- -- -- 7,282 -- 7,282
Change in unrealized gain
on investments available-for-sale,
net of tax effect of $133 -- -- -- -- 258 258
------------
Comprehensive income: 7,540
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 17,923,968 $ 18 $ 12,560 $ 6,616 $ 258 $ 19,452
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part
of the consolidated financial statements
24
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
($ in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,282 $ 5,070 $ (2,252)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,073 1,982 1,679
Benefit for deferred income taxes (722) (337) (40)
Increase (decrease) in cash resulting from changes in:
Accounts receivable (1,317) (102) (250)
Notes and other receivables (1,005) 94 (62)
Deposits and other assets (1,086) (713) 217
Accounts payable and accrued expenses 6,929 3,420 861
Reserve for title insurance and escrow losses 2,401 287 57
Other liabilities 95 (27) (89)
---------- ---------- ----------
Net Cash Flows provided by Operating Activities 15,650 9,674 121
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property and equipment (3,796) (2,179) (1,417)
Proceeds from sale of property and equipment -- 1,749 --
Purchase of title plant -- (156) --
Purchase of subsidiaries, net of acquired cash (13,801) -- --
Purchase of investment securities (2,713) -- --
Sales of investment securities 732 -- --
Collection of notes receivable 1,693 3 48
---------- ---------- ----------
Net Cash Flows used in Investing Activities (17,885) (583) (1,369)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 14,000 (900) 400
Repayment of debt (541) (1,033) (274)
Proceeds from the issuance of common stock, net 1,765 458 14
Purchase of treasury stock (767) (715) --
Payment of preferred dividends (284) -- --
---------- ---------- ----------
Net Cash Flows provided by (used in) Financing Activities 14,173 (2,190) 140
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 11,938 6,901 (1,108)
CASH AND CASH EQUIVALENTS
AT THE BEGINNING OF THE YEAR 7,677 776 1,884
---------- ---------- ----------
CASH AND CASH EQUIVALENTS
AT THE END OF THE YEAR $ 19,615 $ 7,677 $ 776
========== ========== ==========
The accompanying notes are an integral part
of the consolidated financial statements
25
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS:
Capital Title Group, Inc. (the "Company"), a Delaware corporation, through its
subsidiaries, is engaged in the business of issuing title insurance policies and
performing other title-related services, such as escrow activities in connection
with real estate transactions. The Company is the parent holding company of the
following subsidiaries:
Capital Title Agency, Inc. ("Capital Title") is an Arizona corporation, which
has operated under the authority of the Arizona State Banking Commission since
November 1981. Capital Title is an independent title agency that provides escrow
services and issues title insurance policies to the real estate industry in
Maricopa, Yavapai, Mohave and Pinal Counties in Arizona. Capital Title currently
operates 37 offices located throughout Maricopa, Yavapai and Mohave Counties in
Arizona.
New Century Title Company ("New Century"), a California corporation that
commenced operations in July 1998, is an independent title agency that provides
escrow and title services to the real estate industry in selected California
counties. New Century currently has 17 offices in southern California where it
is licensed to conduct business in San Diego, Orange, Riverside, San Bernardino
and Los Angeles Counties. New Century also has operations in northern
California, which it obtained by acquisition in November 1998, and expanded
through another acquisition in April 2002. New Century has 20 offices in
northern California, where it is licensed to conduct business in Sonoma,
Sacramento, Contra Costa, Alameda, San Mateo and Santa Clara Counties.
Nations Holding Group ("Nations"), a California corporation, was acquired in
September 2002 and includes the following wholly-owned subsidiaries;
United Title Company ("United Title"), a California corporation that
commenced operations in 1978, is an independent title agency that provides
escrow and title services to the real estate industry in southern
California. United Title currently has 35 offices serving Los Angeles,
Riverside, San Bernardino, Orange, San Diego, Ventura and Santa Barbara
Counties in California.
First California Title Company ("First California"), a California
corporation that commenced operations in 1964 and was acquired by Nations
in 1997, is an independent title agency serving the real estate industry
with escrow and title services from seven offices in the northern
California Counties of Alameda and Contra Costa.
United Title Insurance Company ("United Title Insurance"), a California
domiciled title insurance underwriter, commenced operations in 1997. United
Title Insurance is the predominant underwriter for both United Title and
First California and underwrites a portion of the title insurance policies
sold by Capital Title and New Century.
In January 2003, Nations acquired Land Title of Nevada, Inc. ("Land Title"), an
independent title agency operating five offices in Clark County, Nevada, which
comprises the metropolitan area of Las Vegas. Land Title was established in 1978
and provides escrow and title services to the real estate industry.
26
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All inter-company accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES:
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 impairment of
intangible assets and long lived assets, reserves related to title insurance and
escrow losses, determination of fair values of fixed maturity bonds and equity
securities, and contingencies and litigation. 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.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include all highly liquid investments purchased with
an initial maturity of three months or less.
ACCOUNTS RECEIVABLE:
Accounts receivable are reported, net of an allowance for doubtful accounts. The
allowance is established based on management's estimate including a review of
individual accounts and the Company's collection history.
INVESTMENTS:
Short term investments consist of certificates of deposit with original
maturities of 91 days to one year.
Investments in fixed maturity bonds and equity securities are classified as
available-for-sale and, accordingly, are carried at fair value. Fair values of
fixed maturity bonds and equity securities are based on quoted market prices.
27
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Realized gains and losses on investments are determined using the specific
identification basis and are recognized on a trade-date basis. Unrealized gains
and losses on investments, net of deferred income tax expense (benefit), are
excluded from income and included as a separate component of stockholders'
equity. If unrealized losses on investments are determined to be other than
temporary during the reporting period, they are recognized as realized losses.
REVENUE RECOGNITION:
Title premiums earned and title and escrow fees are recognized as revenue at the
time of closing the related real estate transaction. The Company reports title
service revenue net of underwriting fees paid pursuant to agreements the Company
has with third party title insurance underwriters. Underwriting fees for the
years ended December 31, 2002, 2001 and 2000 were $5.4 million, $4.4 million and
$2.5 million, respectively. Revenue from account servicing and other fees are
recognized when the service is performed.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost and are being depreciated on a
straight-line basis over the estimated useful lives of the related assets, which
range from three to forty years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the lease term or the estimated useful
lives of such assets.
TITLE PLANT:
Title plants are recorded at the cost incurred to construct and organize
historical title information to the point it can be used to perform title
searches. Cost incurred to maintain, update and operate title plants are
expensed as incurred. Title plants are not amortized as they are considered to
have an indefinite life if maintained.
GOODWILL:
At December 31, 2002, goodwill consisted of cost in excess of net assets
acquired related to three acquisitions, two of which occurred in 2002. Prior to
2002, goodwill was amortized ratably over twenty years. Effective January 1,
2002, goodwill is no longer amortized, but impairment of goodwill is monitored
for recoverability based on guidance set forth by Financial Accounting Standards
Board ("FASB") Statement No. 142.
COMPREHENSIVE INCOME:
Comprehensive income consists of net income and net unrealized gains (losses) on
investments and is presented in the consolidated statements of stockholders'
equity and comprehensive income.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. As of December 31, 2002, management has
not identified any events or circumstances which indicate that any long-lived
assets are impaired.
28
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SELF INSURANCE:
The Company's subsidiaries, Capital Title and New Century, were partially
self-insured for their group health program for employees. Under this program,
which was funded by employee and Company contributions, the Company paid health
insurance claims for eligible employees up to $50,000 per employee and a $2
million aggregate limit. A provision for incurred but not reported claims was
recorded by monthly charges to the statements of operations based on enrollment
date, claims experience and pending claims. As of December 31, and 2001, the
Company had accrued $0.6 million and $0.4 million, respectively, for incurred
but not reported claims, which is included with accrued expenses on the
accompanying consolidated balance sheets. Effective January 1, 2003, the Company
no longer has a self-insurance component of its group health program for
employees.
RESERVE FOR TITLE INSURANCE AND ESCROW LOSSES:
The Company's reserve for title insurance losses includes known claims as well
as a provision of losses expected to be incurred, net of recoveries. Known
claims are reserved for, based on a review of the claim amount and estimated
costs associated with settling the claim. The Company also reserves for claims
arising from errors made during the escrow process. Reserves for claims which
are incurred, but not reported to the Company, are recorded based on several
factors including, but not limited to, historical loss experience, and current
industry and legal environments. The occurrence of a significant title or escrow
claim in any given period could have a material adverse effect on the Company's
financial condition and results of operations during that period.
The Company also operates under agency agreements with various third party title
insurance companies. In the event of a title insurance policy loss, under these
agreements, the Company is generally responsible for the first $5,000 of loss. A
provision for future title losses is maintained by periodic charges to the
statements of operations based on historical title loss experience. The
acquisition of Nations provided an increase to the reserve for title and escrow
losses particularly due to the addition of United Title Insurance.
REINSURANCE:
In the ordinary course of business, the Company reinsures certain title
insurance risks with another insurer for the purpose of limiting its maximum
loss exposure. The Company cedes a portion of certain policy liabilities under
an excess loss reinsurance agreement. Reinsurance agreements provide that in the
event of loss (including costs, attorneys' fees and expenses) exceeding the
retained amounts, the reinsurer is liable for the excess amount assumed.
However, the ceding company remains primarily liable in the event the reinsurer
does not meet its contractual obligations. Ceded premiums, expense
reimbursements, and benefits are accounted for on a basis consistent with those
used in accounting for the original policies issued and the terms of the
reinsurance contracts. Premiums ceded have been reported as reduction of title
service revenue.
INCOME TAXES:
The Company and its subsidiaries file consolidated federal and state income tax
returns. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis, net of valuation allowances.
29
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
STOCK OPTION PLAN:
The Company applies the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations including FASB Interpretation No. 44,
ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AND
INTERPRETATION OF APB NO. 25, issued in March 2000, to account for its
fixed-plan stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has elected to continue to apply
the intrinsic-value-based method of accounting described above, and has adopted
only the disclosure requirements of SFAS No. 123. The following table
illustrates the effect on the net income of the fair-value-based method had been
applied to all outstanding and unvested awards in each period.
2002 2001 2000
-------- -------- --------
Earnings attributable to common shares $ 6,879 $ 5,070 $ (2,252)
Deduct pro forma total stock-based employee
compensation determined under fair-value-based method
for all rewards, net of tax (402) (354) (686)
-------- -------- --------
Pro forma earnings attributable to common shares $ 6,477 $ 4,716 $ (2,938)
======== ======== ========
Pro forma earnings attributable to common shares per
share - basic $ 0.37 $ 0.27 $ (0.17)
Pro forma earnings attributable to common shares per
share - diluted $ 0.36 $ 0.26 $ (0.17)
Although not applicable in these financial statements, in accordance with the
disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, these
amounts only indicate awards granted, modified or settled in fiscal periods
beginning after December 15, 1994.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of that statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions: risk-free interest rate of 1.6% for
2002, 2.0% for 2001 and 4.5% for 2000; dividend yields of 0% for all years;
volatility factors of the expected market price of the Company's common stock
was 67% for 2002, 118% for 2001 and 49% for 2000; and a weighted-average
expected life of the options for 2002, 2001 and 2000 of four years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
30
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
SEGMENT REPORTING:
The Company views its operations as one operating business segment, issuing
title insurance policies and performing other title-related services.
EARNINGS PER SHARE:
Basic earnings (loss) per share ("EPS") is computed by dividing earnings (loss)
available to stockholders by the weighted-average number of shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or contracts to issue common stock were exercised or
converted to stock or resulted in the issuance of stock that then shared in the
earnings or loss of the Company. The assumed exercise of outstanding stock
options and warrants have been excluded from the calculations of diluted net
loss per share as their effect is antidilutive.
The following table sets forth the computation of basic and diluted EPS:
Years ended December 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
($ in thousands, except per share data)
Earnings (loss) attributable to common stock $ 6,879 $ 5,070 $ (2,252)
============ ============ ============
Basic EPS - weighted average shares outstanding 17,417,061 17,230,950 17,158,414
============ ============ ============
Basic earnings per share $ 0.39 $ 0.29 $ (0.13)
============ ============ ============
Basic EPS - weighted average shares outstanding 17,417,061 17,230,950 17,158,414
Effect of dilutive securities 704,358 800,302 --
------------ ------------ ------------
Dilutive EPS - weighted average shares outstanding 18,121,419 18,031,252 17,158,414
============ ============ ============
Diluted earnings per share $ 0.38 $ 0.28 $ (0.13)
============ ============ ============
Stock options not included in diluted EPS since
antidilutive 1,568,200 1,301,850 2,298,100
============ ============ ============
Stock warrants not included in diluted EPS since
antidilutive -- 463,500 772,142
============ ============ ============
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company discloses fair value information about financial instruments where
it is practicable to estimate their value. The Company estimates that the
carrying value of its financial instruments, consisting of cash and cash
equivalents, short term investments, notes receivable, accounts payable and
accrued expenses approximate their fair values at December 31, 2002 and 2001 due
to the short term nature of these items. Fixed maturity bonds and equity
securities are classified as available-for-sale and accordingly, are carried at
fair value. The terms of one of the Company's long term debt instruments has a
variable interest rate tied to a market index, while the other component is a
fixed rate loan. Both are comparable to what they could be replaced for in the
current market, therefore the carrying value approximates their fair value at
December 31, 2002 and 2001.
31
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NEW ACCOUNTING PRONOUNCEMENTS:
In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and
Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Statement 141 also specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for separately.
Statement 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with FASB No. 144, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
The following table presents prior period income and income per share as if the
nonamortization provisions of Statement 142 had been applied in the prior
period:
Year Ended December 31,
----------------------------------
2002 2001 2000
-------- -------- --------
Reported earnings attributable to
common shares $ 6,879 $ 5,070 $ (2,252)
Add back goodwill amortization -- 13 13
-------- -------- --------
Adjusted earnings attributable to
common shares $ 6,879 $ 5,083 $ (2,239)
Diluted income per share:
Reported income per share $ 0.38 $ 0.28 $ (0.13)
Add back goodwill amortization -- -- --
-------- -------- --------
Adjusted earnings attributable to
common shares $ 0.38 $ 0.28 $ (0.13)
======== ======== ========
The Company was required to adopt the provisions of Statement 141 immediately
and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that were acquired
in a purchase business combination completed after June 30, 2001 have not been
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature.
Statement 141 requires that the Company evaluate its existing intangible assets
and goodwill that were acquired in a prior purchase business combination, and to
make any necessary reclassifications in order to conform with the new criteria
in Statement 141 for recognition apart from goodwill. The Company was required
to reassess the useful lives and residual values of all intangible assets
acquired in purchase business combinations, and make any necessary amortization
period adjustments by the end of the first interim period after adoption. In
addition, to the extent an intangible asset was identified as having an
indefinite useful life, the Company was required to test the intangible asset
for impairment in accordance with the provisions of Statement 142 within the
first interim period. Any impairment loss would have been measured as of the
date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period. However, the Company
determined through assessments conducted at the end of the first interim period
after adoption that no adjustments were necessary.
32
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In connection with the transitional goodwill impairment evaluation, Statement
142 required the Company to perform an assessment of whether there was an
indication that goodwill was impaired as of the date of adoption. Any
transitional impairment loss would have been recognized as the cumulative effect
of a change in accounting principle in the Company's statements of operations.
However, there was no indication that goodwill was impaired as of the date of
adoption.
The adoption of Statement No. 142 had no material impact on the Company as of
January 1, 2002, except that the Company's goodwill and intangible assets with
indefinite useful lives will no longer be amortized, but instead tested for
impairment at least annually.
Statement 142 requires the Company test each of its reporting units, as defined
by Statement 142, for an indicator of goodwill impairment at least annually.
Management performed its required test for impairment in the fourth quarter of
2002. Management believes that no events or circumstances were present to
indicate an impairment of goodwill may exist at December 31, 2002.
In June 2001, the FASB issued Statement No. 143, ASSET RETIREMENT OBLIGATIONS,
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. Statement No. 143 is effective for fiscal years beginning
after June 15, 2002, although earlier application is encouraged. The adoption of
this statement effective January 1, 2002 did not have any material impact on the
Company's financial position, results of operations or liquidity.
In October 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, it
retains many of the fundamental provisions of that Statement.
Statement No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.
However, it retains the requirement in Opinion No. 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. By broadening the presentation of
discontinued operations to include more disposal transactions, the FASB has
enhanced management's ability to provide information that helps financial
statement users to assess the effects of a disposal transaction on the ongoing
operations of an entity. Statement No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company adopted Statement No. 144 and it
did not have a material impact on the Company's consolidated financial
statements.
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 adoption of this Statement will have a material impact on the Company's
consolidated financial statements.
33
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Restructuring)." Statement No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. The Company adopted Statement No. 146 and it did
not have a material impact on the Company's consolidated financial statements.
In October 2002, the FASB issued Statement No. 147, ACQUISITIONS OF CERTAIN
FINANCIAL INSTITUTIONS - AN AMENDMENT OF FASB STATEMENTS NO. 72 AND 144 AND FASB
INTERPRETATION NO. 9. Except for transactions between two or more mutual
enterprises, this Statement removes acquisitions of financial institutions from
the scope of both Statement No. 72 and Interpretation No. 9 and requires that
those transactions be accounted for in accordance with FASB Statements No. 141
and No. 142. Statement No. 147 is effective for acquisitions on or after October
1, 2002. Management has evaluated this accounting standard but does not believe
application of this standard would have a material impact on the Company's
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S ACCOUNTING
AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS TO OTHERS, AND INTERPRETATION OF FASB STATEMENTS NO. 5, 57 AND 107
AND A RECISSION OF FASB INTERPRETATION NO. 43. This Interpretation elaborated on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on the company's financial statements. The
disclosure requirements are effective for financial statements of interim and
annual periods ending after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE, AND AMENDMENT OF FASB STATEMENT NO.
123. This Statement amends FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, AND INTERPRETATION OF ARB NO. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For public enterprises with a variable interest
in a variable interest entity created before February 1, 2003, the
Interpretation applies to that enterprise no later than the beginning of the
first interim or annual reporting period beginning after June 15, 2003. The
application of this Interpretation requires certain disclosures in financial
statements issued after January 31, 2003 if its is reasonably possible that the
Company will consolidate or disclose information about variable interest
entities when the Interpretation becomes effective.
34
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
RECLASSIFICATIONS:
Certain reclassifications have been made to the 2000 and 2001 consolidated
financial statements to conform to the 2002 presentation. In September 2002,
with the acquisition of Nations, the Company's balance sheet presentation has
been changed to an unclassified presentation, which is more customary to other
companies in the industry.
2. CASH HELD AS A FIDUCIARY:
The Company is the custodian of cash deposited by customers with specific
instructions as to its disbursement from active escrow, trust and account
servicing files. The balances in these accounts have not been included in the
consolidated financial statements. As of December 31, 2002 and 2001, the
accounts contain balances of approximately $727.6 million and $254.8 million,
respectively. As a result of holding these deposits in escrow, the Company is
involved in programs for realizing economic benefit during the year through
favorable borrowing and vendor arrangements with the various financial
institutions where the deposits are held.
3. CONCENTRATION OF CREDIT RISK:
The Company maintains cash and cash equivalents with various financial
institutions. Deposits which exceed $100,000 at each institution are not insured
by the Federal Deposit Insurance Corporation. At December 31, 2002, the Company
had uninsured cash and cash equivalents of approximately $18.6 million.
The Company's revenue is generated solely from activities in the states of
Arizona and California, and accounts receivable are typically not
collateralized. The Company is not dependent upon any single customer or single
group of customers. The loss of any one customer would not have a material
adverse effect on the Company.
4. ACQUISITIONS:
In April 2002, the Company completed the acquisition of a five branch title and
escrow operation in the northern California counties of Santa Clara, San Mateo
and Sacramento. This transaction was accounted for as a purchase, and
accordingly the financial statements of the Company include the operating
results of these branch offices beginning April 1, 2002.
The purchase price and direct acquisition costs were allocated to the assets
purchased based on their respective fair market values at the acquisition date.
The following table summarizes the estimated fair value of the assets acquired
at the date of purchase ($ in thousands):
Assets Acquired:
Property and equipment $ 416
Title plant 2,828
Goodwill 1,110
--------
Total $ 4,354
========
In September 2002, the Company completed the acquisition of Nations pursuant to
an Agreement and Plan of Merger (the "Merger Agreement"). This transaction was
accounted for as a purchase, and accordingly the financial statements of the
Company include the operating results of Nations beginning September 1, 2002.
35
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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, which expire five years from the date of
issuance, had a fair market value of approximately $0.2 million at the date of
the transaction. The Company utilized the Black-Scholes Model, a commonly used
option pricing model, to determine the fair value of these warrants. A
seven-year term loan obtained by the Company provided $14 million to assist in
the financing of this transaction. The term loan will incur interest at the
prime rate or LIBOR plus 2.75% (as of December 31, 2002, the interest rate on
this note was 4.16%).
The following table summarizes the total acquisition cost of Nations and the
components of proceeds paid to the former shareholders of Nations ($ in
thousands):
Cash $ 18,231
Preferred stock 17,516
Warrants for common Stock 213
--------
35,960
Direct transaction costs 1,271
--------
$ 37,231
========
The purchase price and direct acquisition costs were allocated to the assets
purchased based on their respective fair values at the acquisition date. 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 ($ in thousands):
Assets and (Liabilities) Acquired:
Cash and cash equivalents $ 10,879
Receivables and other current assets 3,817
Property and equipment, net 4,972
Marketable securities, available-for-sale 8,532
Title plant 417
Notes receivable and other assets 4,011
Accounts payable and accrued expenses (7,823)
Reserves for title and escrow losses (3,525)
Other liabilities (2,083)
Goodwill 17,520
Intangible assets 514
--------
Total $ 37,231
========
36
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Selected unaudited pro forma combined results of operations for the years ended
December 31, 2002 and 2001, assuming the acquisitions discussed above occurred
on January 1, 2001, are as follows:
Year ended December 31,
-------------------------------
2002 2001
----------- -----------
($ in thousands, except per share data)
Total revenue $ 177,777 $ 137,429
Income before income taxes 14,976 9,907
Net income 8,952 7,233
Earnings attributable to common shares 7,548 5,831
Net income per common share:
Basic $ 0.43 $ 0.34
=========== ===========
Diluted $ 0.42 $ 0.32
=========== ===========
Weighted average shares outstanding:
Basic 17,417,061 17,230,950
Diluted 18,134,651 18,041,456
5. INVESTMENTS:
Under FASB Statement No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES, securities are generally classified as available-for-sale,
held-to-maturity, or trading. The Company has classified its entire fixed
maturity bonds and equity securities portfolios as available-for-sale.
Securities classified as available-for-sale are reported at fair value in the
consolidated statements of financial position with the related unrealized
holding gains and losses on such available-for-sale securities reported as a
separate component of equity after adjustments for related changes in deferred
income taxes. The cost, gross unrealized gains and losses and fair value of
fixed maturity bonds available-for-sale as of December 31, 2002, are as follows
($ in thousands):
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
-------- -------- -------- ----------
U.S. government and agencies $ 2,370 $ 64 $ -- $ 2,434
State and political subdivisions 1,878 84 -- 1,962
Corporate securities 2,851 193 (24) 3,020
-------- -------- -------- --------
$ 7,099 $ 341 $ (24) $ 7,416
======== ======== ======== ========
37
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Contractual maturities at December 31, 2002, which may differ from expected
maturities because certain borrowers have the right to call or prepay
obligations with or without prepayment penalties, are as follows ($ in
thousands):
Amortized Estimated
Maturity dates Cost fair value
-------------- -------- ----------
2003 $ 100 $ 101
2004-2008 3,345 3,500
2009-2013 1,318 1,394
After 2013 2,336 2,421
-------- --------
$ 7,099 $ 7,416
======== ========
Fixed maturity bonds with an amortized cost of $3.6 million and a fair value of
$3.8 million have provisions which give borrowers the right to call or prepay
their obligations with or without prepayment penalties.
Investment in equity securities at December 31, 2002 consists of investments in
the following ($ in thousands):
Estimated
Cost fair value
-------- ----------
Preferred and common stock of banks, trust
and insurance companies $ 842 $ 904
Preferred stock of public utilities 85 94
Preferred and common stock of industrial
and miscellaneous companies 1,955 1,958
-------- --------
$ 2,882 $ 2,956
======== ========
The Company's investment portfolio originated as a result of the acquisition of
Nations and its title insurance subsidiary, United Title Insurance. As a result,
sales of investments and net investment income related to the investment
portfolio reflects activity from September 2002, the date of acquisition.
Gross realized gains on sales of fixed maturity bonds, available-for-sale were
$58,000; and there were no gross realized losses; for the year ended December
31, 2002. Gross realized gains on sales of equity securities, available-for-sale
were $5,000; and there were no gross realized losses; for the year ended
December 31, 2002.
Other income includes net investment income related to the Company's investment
portfolio of approximately $0.2 million.
38
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
Useful Lives 2002 2001
------------ -------- --------
($ in thousands)
Land N/A $ 325 $ 108
Buildings and leasehold improvements 3-40 years 7,522 5,842
Office equipment and software 3-7 years 12,095 8,391
Furniture and fixtures 7 years 4,941 1,349
Vehicles 5 years 90 62
-------- --------
24,973 15,752
Less: Accumulated depreciation
and amortization (8,694) (5,677)
-------- --------
$ 16,279 $ 10,075
======== ========
7. INCOME TAXES:
The income tax expense (benefit) consists of the following:
Year Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
($ in thousands)
Current:
Federal $ 4,660 $ 918 $ --
State 1,063 187 7
Deferred:
Federal (623) (283) (40)
State (99) (54) --
-------- -------- --------
$ 5,001 $ 768 $ (33)
======== ======== ========
Total current income tax payable was $2.4 million and $0.4 million at December
31, 2002 and 2001, respectively, which are included in accrued expenses on the
accompanying consolidated balance sheets.
39
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets/liabilities as of December 31, 2002 and 2001
are as follows:
2002 2001
-------- --------
($ in thousands)
Deferred tax assets:
Accounts receivable $ 197 $ 78
Alternative minimum credit -- 77
Reserve for losses 1,186 234
Deferred gain on sales-leaseback 191 222
Accrued vacation 459 178
Other 137 84
-------- --------
Total deferred tax assets 2,170 873
Deferred tax liabilities:
Property and equipment (781) (536)
Unearned premium reserves (592) --
Investments (971) --
Other (79) --
-------- --------
Total deferred tax liabilities (2,423) (536)
-------- --------
Net deferred tax assets/(liabilities) $ (253) $ 337
======== ========
The reconciliation of the provision for income taxes with the expected income
taxes based on the statutory federal income tax rate is as follows:
Year Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
($ in thousands)
Expected income tax expense (benefit) at
the federal statutory rate $ 4,176 $ 2,044 $ (799)
State income taxes net of federal benefit 636 71 5
Other 189 158 (39)
Change in valuation reserve, net of state
change in valuation reserve -- (1,505) 800
-------- -------- --------
Income tax expense (benefit) $ 5,001 $ 768 $ (33)
======== ======== ========
8. SUMMARY OF RESERVE FOR TITLE INSURANCE AND ESCROW LOSSES:
Year Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
($ in thousands)
Beginning balance $ 524 $ 237 $ 180
Provision for claim losses 3,176 540 105
Reserves acquired 3,525 -- --
Claims paid, net of recoveries (775) (253) (48)
-------- -------- --------
Ending balance $ 6,450 $ 524 $ 237
======== ======== ========
40
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. LONG TERM DEBT:
Long term debt consists of the following:
Years Ended December 31,
------------------------
2002 2001
-------- --------
($ in thousands)
Seven year term loan with Comerica Bank, with
interest at the prime rate or London Inter-Bank
Offered Rate ("LIBOR") plus 2.75%, with quarterly
installments of principal and interest, due
September 2009. At December 31, 2002, the
interest rate was 4.16%. $ 13,500 $ --
8.32% term loan with GMAC Commercial Mortgage,
with monthly installments of $23,940 including
principal and interest, due August 2009; secured
by a building. 3,042 3,071
Capital lease obligations, with varying rates of
9% to 13%, duein 2002; secured by equipment. -- 12
-------- --------
$ 16,542 $ 3,083
======== ========
The Company has two $3 million revolving lines of credit, which bear interest on
any outstanding balance at the prime rate. As of December 31, 2002, there were
no cash draws against either credit line. There is $75,000 committed against one
credit line for a standby letter of credit required pursuant to an office lease.
The Company's lines of credit and term loan agreements are secured by
substantially all of the Company's assets and contain certain provisions which
may restrict the Company's ability to incur additional debt, make acquisitions
or dispose of significant assets, as well as certain covenants related to the
Company's financial position and operating results.
The maturities of long-term debt after December 31, 2002 were as follows ($ in
thousands):
2003 $ 2,032
2004 2,034
2005 2,038
2006 2,041
2007 2,044
Thereafter 6,353
--------
$ 16,542
========
In January 2001, the Company sold an office building in Santa Rosa, California
under a sale-leaseback arrangement, which provided approximately $0.8 million in
cash and retired $1.0 million in debt related to the building. This transaction
resulted in a gain of approximately $0.6 million, which is being amortized over
the 10 year leaseback term.
41
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. OPERATING LEASE COMMITMENTS:
The Company leases office equipment and offices at 114 locations. These lease
periods range from one month to 84 months with renewal options of up to ten
years. In addition, the Company has a 50 year ground lease, through December
2047, for its corporate office with annual payments of approximately $115,000,
subject to adjustments based on the consumer price index. For the years ended
December 31, 2002, 2001 and 2000 rental expense was $7.9 million, $4.2 million
and $3.3 million, respectively.
The Company's future minimum lease commitments after December 31, 2002 were as
follows ($ in thousands):
2003 $ 7,660
2004 6,430
2005 4,479
2006 3,394
2007 2,524
Thereafter 5,571
--------
$ 30,058
========
11. COMMITMENTS AND CONTINGENCIES:
In the ordinary course of business, the Company's title insurance subsidiaries
are subject to claims and are named as defendants in litigation relating to
policies of insurance or other related services performed on behalf of insured
policyholders and other customers. While the results of insurance claims and
litigation cannot be predicted with certainty, management believes, based on the
advice of legal counsel, that the final outcome of such lawsuits and claims will
not have a material adverse effect on the Company's financial position, results
of operations, or liquidity.
The Attorney General of the State of California filed suit on behalf of the
California Controller against a number of major title insurers operating in
California, alleging irregularities in billings for charges and violations of
title and escrow practices. The Company and its subsidiaries have not received
any communication from the Attorney General regarding this litigation and was
not named in the suit. Each of the defendants in the State of California lawsuit
has entered into a settlement with the State, which includes an injunction
prohibiting certain practices allegedly engaged in by those companies. A matter
raised in the State of California litigation has resulted in a separate lawsuit
brought by individuals purporting to act in a representative capacity for
consumers dong business with lenders and title companies in the State of
California. United Title has been named in this lawsuit, which seeks restitution
of alleged wrongful gains obtained through excessive recording fees and
reconveyance tracking fees, injunctive relief, and attorney fees. An initial
lawsuit lawsuit was served on United Title in November 2001 and in that lawsuit,
the court dismissed the complaint. The recent litigation referred to above was
subsequently refiled in February 2003. The results of legal proceeding cannot be
predicted with certainty, but United Title intends to vigorously defend the
lawsuit.
42
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. RESTRICTED CASH:
As of December 31, 2002, the Company had $2.1 million held as restricted cash
pending the final resolution on an indemnification matter related to the sale in
1995 of a wholly-owned subsidiary of Nations.
13. SUPPLEMENTAL CASH FLOW INFORMATION:
The following supplemental cash flow information is provided with respect to
interest and tax payments, as well as certain non-cash investing and financing
activities.
Year Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
($ in thousands)
Cash paid (refunded) during the year:
Interest $ 418 $ 277 $ 335
Income taxes 3,080 665 (142)
Non-cash investing and financing activities:
Issuance of preferred stock to acquire Nations 17,516 -- --
Issuance of warrants for common stock to acquire Nations 213 -- --
Issuance of common stock in connection with acquisition
of Nations 197 -- --
Issuance/(recission) of equity exchange -- (424) 424
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.
As of December 31, 2002, 696,533 shares had been repurchased under this program
at prices ranging from $1.97 to $2.30 per share.
In March 2001, the Company rescinded an equity exchange which took place in June
2000. This recission resulted in 424,488 shares of the Company's common stock
issued to a third-party real estate organization being returned to the Company
and cancelled.
14. EMPLOYEE BENEFIT PLANS:
PROFIT SHARING PLAN:
As a result of the acquisition of Nations, the Company maintains two profit
sharing plans under Section 401(k) of the Internal Revenue Code. Substantially
all employees of Nations and its subsidiaries may elect to defer up to 15% of
their salary. The Company contributes 1% of each participant's compensation up
to $500 per participant for those who defer at least 2% of their compensation.
Substantially all of the Company's other employees may elect to defer up to 15%
of their salary as well. Under this plan, the Company contributes $0.33 for
every $1.00 the employee contributes, up to a maximum of $1,000. Vesting of
matching contributions is based on certain service requirements. Employees are
fully vested after six years of service.
The Company's matching contributions for the years ended December 31, 2002, 2001
and 2000 were approximately $0.2 million, $0.2 million and $0.1 million,
respectively.
43
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CAFETERIA PLAN:
The Company maintains an Internal Revenue Code Section 125 Cafeteria Plan as a
benefit to its employees. The plan provides for employee and dependent coverage
to be paid from before tax compensation. As such, there is no effect on the
consolidated financial statements.
15. STOCK OPTION PLANS:
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related Interpretations
in accounting for its 1996 Stock Option Plan and the Company's Non-Employee
Directors Stock Option Plan. Under APB 25, because the exercise price of the
Company's stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized in the Company's
consolidated financial statements.
The Company's 1996 Stock Option Plan ("The Plan") has authorized the grant of
common stock options to all the Company's employees. Currently, 4,900,000 shares
of Common Stock are authorized for issuance pursuant to the Plan. As of December
31, 2002, 3,383,000 options are outstanding under the Plan. All options granted
have 5-year terms. Fifty percent of each option grant can be exercised after two
years from the date granted; the remaining options can be exercised after three
years provided the optionee remains employed with the Company at such vesting
date. Options granted under the Plan are not transferable and the per share
exercise price of an incentive stock option granted under the Plan may not be
less than the fair market value of the common stock on the date of grant.
The Company's Non-Employee Directors Stock Option Plan ("Directors Plan") has
authorized the grant of options to non-employee members of the Board of
Directors and advisory boards. Currently, 600,000 shares of Common Stock are
authorized for issuance pursuant to the Directors Plan. As of December 31, 2002,
400,000 options are outstanding under the Directors Plan. All options granted
have 5-year terms. Fifty percent of each option grant can be exercised after two
years from the date granted; the remaining shares can be exercised after three
years provided the optionee remains an eligible director at such vesting date.
Upon election to the Board of Directors each board member is granted the option
to purchase 15,000 shares of common stock. In addition to the foregoing option
grants, each year every non-employee director automatically receives an option
to acquire 10,000 shares of the Company's common stock on the third business day
following the date the Company publicly announces its annual financial results,
provided that such director has attended at least 75% of the meetings of the
Board of Directors and the Board Committees of which such non-employee director
is a member in the preceding fiscal year.
In December 2000, the Company gave all employees the option to cancel options
they currently held with the intent to have a like number of options granted on
July 2, 2001 (more than six months after the date of the cancellation) at the
greater of $1.00 or the then-current market price. A total of 1,073,100 options
with a weighted average price of $2.24 were cancelled pursuant to this
arrangement. On July 2, 2001, 1,039,050 options were regranted pursuant to this
agreement at an option price of $2.45.
44
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the Company's stock option activity pursuant to its stock option
plans, and related information for the years ended December 31 is as follows:
2002 2001 2000
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Options Price Options Price Options Price
----------- -------- ----------- -------- ----------- --------
Outstanding-
Beginning of year 3,418,000 $ 1.82 2,298,100 $ 1.42 3,224,400 $ 1.84
Granted 1,664,300 2.20 1,834,700 2.14 574,600 1.20
Exercised (737,750) 1.20 (435,600) 1.05 (30,500) 1.00
Forfeited (561,550) 1.92 (279,200) 1.71 (1,470,400) 2.19
----------- ----------- -----------
Outstanding-
End of year 3,783,000 2.09 3,418,000 1.82 2,298,100 1.42
=========== =========== ===========
Exercisable at end of year 530,575 1.83 1,154,500 1.48 1,494,300 1.23
=========== =========== ===========
Weighted average
fair value of options
granted during the year $ 1.25 $ 1.34 $ 0.51
=========== =========== ===========
Stock options outstanding at December 31, 2002 were as follows:
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise price Options Contractual life Exercise Price Options Exercise Price
- -------------- ---------- ---------------- -------------- ---------- --------------
$1.00-$2.00 1,208,100 2.8 years $ 1.50 387,625 $ 1.40
$2.03-$2.55 2,503,050 4.0 years 2.33 71,100 2.45
$3.00-$3.63 71,850 1.2 years 3.53 71,850 3.53
---------- ---------- ------ ---------- ------
3,783,000 3.6 years $ 2.09 530,575 $ 1.83
========== ========== ====== ========== ======
16. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE:
Changes in the allowance for uncollectible accounts receivable for the years
ended December 31, 2000 2001 and 2002 are as follows ($ in thousands):
Balance as of December 31, 1999 $ 14
Provision charged to operations 16
Write-offs, net of recoveries --
--------
Balance as of December 31, 2000 30
Provision charged to operations 170
Write-offs, net of recoveries (7)
--------
Balance as of December 31, 2001 193
Provision charged to operations 64
Balance resulting from acquisition 514
Write-offs, net of recoveries (285)
--------
Balance as of December 31, 2002 $ 486
========
45
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. SELECTED QUARTERLY FINANCIAL DATA:
The following table sets forth unaudited selected quarterly financial data for
each quarter of the years ended December 31, 2002 and 2001.
March 31 June 30 September 30 December 31 Total
-------- -------- ------------ ----------- --------
2002 ($ in thousands)
- ----
Total revenue $ 19,395 $ 20,679 $ 31,442 $ 56,195 $127,711
Net income 1,119 646 1,410 4,107 7,282
Earnings attributable to
common shares 1,119 646 1,360 3,754 6,879
Earnings attributable to common
shares per common share:
Basic 0.07 0.04 0.08 0.21 0.39
Diluted 0.06 0.04 0.08 0.21 0.38
2001
- ----
Total revenue $ 12,323 $ 17,568 $ 16,600 $ 17,945 $ 64,436
Net income 502 2,101 1,452 1,015 5,070
Net income per common share:
Basic 0.03 0.12 0.08 0.06 0.29
Diluted 0.03 0.12 0.08 0.06 0.28
18. SUBSEQUENT EVENT:
In January 2003, the Company acquired Land Title of Nevada, Inc. for
approximately $3.5 million, consisting of $1.25 million in cash and a five-year
note for $2.25 million issued to the seller. The acquisition marks the Company's
entrance into the Las Vegas, Nevada market adding five branch offices and 94
employees.
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for its 2003 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for its 2003 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for its 2003 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
ITEM 14. 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)). 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 IV
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. & 2. Financial Statements and Financial Statement Schedules
The Financial Statements filed as part of this report are listed in Item 8 of
Part II of this report.
3. Index to Exhibits
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
2 Share Exchange Agreement between Capital Title
Agency, Inc. and Norvex, Inc. dated May 23, 1996 (1)
3.1 Certificate of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
10.1 Underwriting Agreement between Capital Title
Agency, Inc. and Old Republic National Title
Insurance Company dated March 1, 1996 (1)
47
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
10.2 Underwriting Agreement between Capital Title
Agency, Inc. and First American Title Insurance
Company dated August 16, 1996 (1)
10.3 Underwriting Agreement between Capital Title
Agency, Inc. and United General Insurance Company
dated January 21, 1998. (2)
10.4 Placement Agent Agreement between Registrant and
Sanders Morris Mundy Inc. dated April 13, 1998. (3)
10.5 Title Plant Agreement between Registrant and Security
Union Title Insurance Company dated April 29, 1998 (3)
10.6 Purchase and Sale Agreement between Registrant and
KDC-AZ, LLC dated July 1, 1998 (3)
10.7 Merger Agreement among Registrant, Northwestern
Consolidated Corporation and related subsidiaries
dated September 1, 1998. (4)
10.8 Credit Agreement between Registrant and Imperial
Bank dated February 1, 1999. (3)
10.9 Access Agreement By and Between Security Union Title
Insurance Company and New Century Title Company
Company dated September 30, 1999. (5)
10.10 Title Plant Lease and Service Agreement by and
between Security Union Title Insurance Company and
Capital Title Agency Inc. dated May 19, 1999. (5)
10.11 Promissory Note between CTG Building Co. and GMAC
Commercial Mortgage Corporation dated July 30, 1999. (5)
10.12 Amendment to Underwriting Agreement by and between
Stewart Title Guaranty Company and New Century (5)
10.13 Asset Purchase and Sale Agreement by and among New
Century Title Company, BridgeSpan Title Company,
BridgeSpan, Inc. and the Registrant. (6)
10.14 Agreement and Plan of Merger dated June 11, 2002,
among the Registrant, Nations Holding Group, and
Capital One Merger Corporation. (7)
10.15 Variable Rate Installment Note and Business Loan
Agreement between Comerica Bank - California and
the Registrant. (7)
21 Subsidiaries (*)
23.1 Consent of KPMG LLP (*)
99.1 Certification pursuant to Section 906 of
Sarbanes-Oxley Act of 2002 (Subsections (a) and (b)
of Section 1350, Chapter 63 of Title 18, United
States Code) (*)
* Filed herewith
(1) Incorporated by reference to the Registrant's Form 10-QSB filed with the
Securities and Exchange Commission on September 20, 1996.
(2) Incorporated by reference to the Registrant's Form 10-KSB for the year
ended December 31, 1997, filed with the Securities and Exchange Commission
on March 25, 1998.
(3) Incorporated by reference to the Registrant's Form 10-KSB for the year
ended December 31, 1998, filed with the Securities and Exchange Commission
on March 23, 1999.
(4) Incorporated by reference to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on December 10, 1998.
(5) Incorporated by reference to the Registrant's Form 10-KSB for the year
ended December 31, 1999, filed with the Securities and Exchange Commission
on March 27, 2000.
(6) Incorporated by reference to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on April 1, 2002.
(7) Incorporated by reference to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on September 23, 2002.
(b) Reports on Form 8-K
During the year ended December 31, 2002, the Company filed the following reports
on Form 8-K:
Current Report on 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 statements and all required
proforma financial statements were filed pursuant to an amendment to the Form
8-K on December 2, 2002.
Current Report on Form 8-K dated June 14, 2002 - Pursuant to Item 5, the Company
reported that it had signed a definitive merger agreement with Nations Holding
Group. In addition, the Company disclosed terms of the preferred stock to be
issued as well as terms of a term loan agreement the Company plans to enter into
as part of the merger transaction.
48
Current Report on Form 8-K date April 1, 2002 - Pursuant to Item 2, the Company
reported the consummation of a transaction under an Asset Purchase and Sale
Agreement dated September 8, 2001 between New Century Title Company, a
wholly-owned subsidiary of the Company and BridgeSpan Title Company, a wholly-
owned subsidiary of BridgeSpan, Inc. Pursuant to Item 7(a)(4) of Form 8-K, all
required historical financial statements and all required proforma financial
statements were filed pursuant to an amendment to the Form 8-K on June 14, 2002.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAPITAL TITLE GROUP, INC.
By /s/ Donald R. Head
-------------------------------------
Donald R. Head
Chief Executive Officer
Date: March 17, 2003
In accordance with the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Donald R. Head Chairman of the Board, President /s/ Donald R. Head March 17, 2003
and Chief Executive Officer --------------------------
Mark C. Walker Vice President, Chief Financial /s/ Mark C. Walker March 17, 2003
Officer, Secretary and Treasurer --------------------------
David C. Dewar Director /s/ David C. Dewar March 17, 2003
--------------------------
Terry S. Jacobs Director /s/ Terry S. Jacobs March 17, 2003
--------------------------
Theo F. Lamb Director /s/ Theo F. Lamb March 17, 2003
--------------------------
Robert B. Liverant Director /s/ Robert B. Liverant March 17, 2003
--------------------------
Stephen A McConnell Director /s/ Stephen A McConnell March 17, 2003
--------------------------
Ben T. Morris Director /s/ Ben T. Morris March 17, 2003
--------------------------
49
Certification of the Principal Financial 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, Chief Financial Officer, Secretary and
Treasurer of Capital Title Group, Inc. (the "Company"), certify that:
(1) I have reviewed this annual report on Form 10-K of the Company;
(2) Based on my knowledge, this annual 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 annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
(4) The Company's other certifying officer 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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 officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the 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 officer and I have indicated in this annual
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, Chief Financial Officer, Secretary and Treasurer
March 17, 2003
50
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, Chairman of the Board, President and Chief Executive Officer
of Capital Title Group, Inc. (the "Company"), certify that:
(1) I have reviewed this annual report on Form 10-K of the Company;
(2) Based on my knowledge, this annual 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 annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
(4) The Company's other certifying officer 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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 officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the 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 officer and I have indicated in this annual
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.
Chairman of the Board, President, Chief Executive Officer
March 17, 2003
51