UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITES
EXCHANGE ACT OF 1934
Commission File No. 0-21417
CAPITAL TITLE GROUP, INC.
(Name of registrant as specified in its charter)
Delaware 87-0399785
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2901 East Camelback Road, Phoenix, Arizona 85016
(Address of principal executive offices) (Zip Code)
(602) 954-0600
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value, 18,015,718 shares as of April 23, 2003.
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Page Number
-----------
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of March 31, 2003
(unaudited) and December 31, 2002 3
B. Condensed Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002 (unaudited) 4
C. Condensed Consolidated Statements of Comprehensive Earnings for
the three months ended March 31, 2003 and 2002 (unaudited) 5
D. Condensed Consolidated Statements of Stockholders' Equity for the
year ended December 31, 2002 and three months ended March 31,
2003 (unaudited) 6
E. Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002 (unaudited) 7
F. Notes to Condensed Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13-16
Item 3. Quantitative and Qualitative Disclosure of Market Risk 17
Item 4. Controls and Procedures 17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
FINANCIAL STATEMENT CERTIFICATIONS 19-20
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
-------- --------
(Unaudited)
($ in thousands)
ASSETS
Cash and cash equivalents $ 14,519 $ 19,615
Short term investments 1,840 1,150
Restricted cash 2,137 2,130
Fixed maturity bonds, available-for-sale 8,417 7,416
Equity securities, available-for-sale 3,473 2,956
-------- --------
Cash and invested assets 30,386 33,267
Accounts receivable, net 4,204 3,998
Notes and other receivables 2,842 2,316
Property and equipment, net 16,867 16,279
Title plant 6,083 3,853
Goodwill and other intangibles 19,442 18,835
Deposits and other assets 4,153 4,739
Deferred income taxes, net 95 --
-------- --------
Total Assets $ 84,072 $ 83,287
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 17,230 $ 22,386
Reserve for title insurance and escrow losses 7,770 6,450
Long-term debt 18,255 16,542
Deferred income taxes, net -- 253
Other liabilities 631 688
-------- --------
Total Liabilities 43,886 46,319
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 2003 and 2002, respectively 17,516 17,516
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000 shares
authorized, 18,020,718 and 17,923,968 shares issued
and outstanding in 2003 and 2002, respectively 18 18
Additional paid-in capital 12,730 12,560
Retained earnings 9,638 6,616
Accumulated other comprehensive income 284 258
-------- --------
Total Stockholders' Equity 22,670 19,452
-------- --------
Total Liabilities and Stockholders' Equity $ 84,072 $ 83,287
======== ========
See Notes to Condensed Consolidated Financial Statements
3
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
-------------------------
2003 2002
----------- -----------
($ in thousands, except
per share data)
REVENUE:
Title service revenue, net $ 37,351 $ 11,939
Escrow and related fees 17,700 6,798
Other income 1,471 658
----------- -----------
Total Revenue 56,522 19,395
----------- -----------
EXPENSES:
Personnel costs 36,106 12,209
Rent 3,360 1,281
Provision for title insurance and escrow losses 1,842 295
Interest expense 220 64
Other operating expenses 9,468 3,667
----------- -----------
Total Expenses 50,996 17,516
----------- -----------
Income before income taxes 5,526 1,879
Income taxes 2,158 760
----------- -----------
Net income 3,368 1,119
Dividends on preferred stock 346 --
----------- -----------
Earnings attributable to common shares $ 3,022 $ 1,119
=========== ===========
Net income per common share:
Basic $ 0.17 $ 0.07
=========== ===========
Diluted $ 0.16 $ 0.06
=========== ===========
Weighted average shares outstanding:
Basic 17,971,696 17,197,173
=========== ===========
Diluted 19,006,435 17,900,305
=========== ===========
See Notes to Condensed Consolidated Financial Statements
4
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Unaudited)
Three months ended
March 31,
------------------
2003 2002
------ ------
($ in thousands)
Net income $3,368 $1,119
Other comprehensive income:
Unrealized gain on investments,
available-for-sale (1) 26 --
------ ------
Other comprehensive income: 26 --
------ ------
Comprehensive income $3,394 $1,119
====== ======
- ----------
(1) Net of income taxes of $13 for the three-month period ended March 31, 2003.
See Notes to Condensed Consolidated Financial Statements
5
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Common Stock Additional Other
---------------------------- Paid-in Retained Comprehensive
Shares Par Value Capital Earnings Income Total
------------ ------------ ------------ ------------ ------------- ------------
($ in thousands)
Balance at December 31, 2001 17,065,381 $ 17 $ 10,911 $ 176 $ -- $ 11,104
Shares issued in connection with
options and warrants exercised 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)
Net income -- -- -- 7,282 -- 7,282
Change in unrealized gain
on investments available-for-sale,
net of tax effect of $133 -- -- -- -- 258 258
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 17,923,968 18 12,560 6,616 258 19,452
Shares issued in connection with
options exercised 96,750 -- 170 -- -- 170
Dividends on preferred stock -- -- -- (346) -- (346)
Net income -- -- -- 3,368 -- 3,368
Change in unrealized gain
on investments available-for-sale,
net of tax effect of $13 -- -- -- -- 26 26
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2003 $ 18,020,718 $ 18 $ 12,730 $ 9,638 $ 284 $ 22,670
============ ============ ============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements
6
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
--------------------
2003 2002
-------- --------
($ in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,368 $ 1,119
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,187 557
Increase (decrease) in cash resulting from changes in:
Accounts receivable 49 (33)
Notes and other receivables (407) (60)
Deposits and other assets 557 (715)
Accounts payable and accrued expenses (5,707) (209)
Reserve for title insurance and escrow losses 1,271 49
Other liabilities (321) 723
-------- --------
Net Cash Flows provided (used in) by Operating Activities (3) 1,431
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property and equipment (1,276) (641)
Purchase of subsidiaries, net of acquired cash (915) --
Purchase of investment securities (2,189) --
-------- --------
Net Cash Flows used in Investing Activities (4,380) (641)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (537) (12)
Proceeds from the issuance of common stock, net 170 484
Purchase of treasury stock -- (682)
Payment of preferred dividends (346) --
-------- --------
Net Cash Flows provided by (used in) Financing Activities (713) (210)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,096) 580
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 19,615 7,677
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 14,519 $ 8,257
======== ========
See Notes to Condensed Consolidated Financial Statements
7
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2003 and 2002
(Unaudited)
NOTE 1 - INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements of
Capital Title Group, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting of only
normal recurring accruals and intercompany eliminations) necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. In September 2002, with the
acquisition of Nations Holding Group, the Company's balance sheet presentation
has been changed to an unclassified presentation, which is more customary to the
presentation of other companies in the industry.
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 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. For further information,
refer to the consolidated financial statements and footnotes included in the
Company's Annual Report on Form 10-K as of and for the year ended December 31,
2002.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement No. 145, RESCISSION OF FASB STATEMENTS
NO. 4, 44 AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS,
which rescinds and amends the aforementioned FASB Statements and amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions.
Statement No. 145 is effective for fiscal years beginning after May 15, 2002.
Effective January 1, 2003, the Company adopted Statement No. 145 and it did not
have a material impact on the Company's consolidated financial statements.
8
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Three Months Ended March 31, 2003 and 2002
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. The Company adopted Statement No. 147 and its application did not 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 RESCISSION 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 were
applicable to guarantees issued or modified after December 31, 2002. The
disclosure requirements were effective for financial statements of interim and
annual periods ending after December 31, 2002. Neither the recognition and
measurement provisions or the disclosure requirements had an impact on the
Company's consolidated financial statements.
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. The Statement does not permit the use of the original Statement
123 prospective method of transition for changes to the fair value based method
made in fiscal years beginning after December 15, 2003. 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. 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. Management has evaluated this accounting standard and has
determined no disclosure is necessary as the Company does not have an interest
in variable interest entities.
9
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Three Months Ended March 31, 2003 and 2002
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 net income of the fair-value-based method if it had
been applied to all outstanding and unvested awards in each period.
Three months ended
March 31,
--------------------
2003 2002
-------- --------
Earnings attributable to common shares $ 3,022 $ 1,119
Deduct pro forma total stock-based employee
compensation determined under fair-value-based method
for all rewards, net of tax (130) (78)
-------- --------
Pro forma earnings attributable to common shares $ 2,892 $ 1,041
======== ========
Pro forma earnings attributable to common shares per
share - basic $ 0.16 $ 0.06
Pro forma earnings attributable to common shares per
share - diluted $ 0.15 $ 0.06
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
both 2003 and 2002; dividend yields of 0% for both years; volatility factors of
the expected market price of the Company's common stock was 60% for 2003 and 67%
for 2002; and a weighted-average expected life of the options of four years for
both 2003 and 2002.
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.
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.
10
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Three Months Ended March 31, 2003 and 2002
NOTE 2 - 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 earnings per
share ("EPS"):
Three months ended March 31,
---------------------------
2003 2002
------------ ------------
($ in thousands, except
per share data)
Earnings attributable to common stock $ 3,022 $ 1,119
============ ============
Basic EPS - weighted average shares outstanding 17,971,696 17,197,173
============ ============
Basic earnings per share $ 0.17 $ 0.07
============ ============
Basic EPS - weighted average shares outstanding 17,971,696 17,197,173
Effect of dilutive securities 1,034,739 703,132
------------ ------------
Dilutive EPS - weighted average shares outstanding 19,006,435 17,900,305
============ ============
Diluted earnings per share $ 0.16 $ 0.06
============ ============
Stock options not included in diluted EPS since antidilutive 122,400 1,329,250
============ ============
Stock warrants not included in diluted EPS since antidilutive -- 463,500
============ ============
NOTE 3 - ACQUISITION
In January 2003, the Company acquired Land Title of Nevada, Inc. ("Land Title").
Land Title provides title insurance and escrow services to residential and
commercial customers in the real estate industry. The acquisition marks the
Company's entrance into the Las Vegas, Nevada market adding five branch offices
and 94 employees. The transaction, which is being accounted for as a purchase,
included payment of $1.25 million in cash and issuance of a $2.25 million,
five-year note to the seller for a total purchase price of approximately $3.5
million. The note provides for monthly installments and accrues interest at
prime, with a floor of 4.75% and a ceiling of 6.75%. The operations of Land
Title have been included in the consolidated financial statements of the Company
since January 1, 2003, which was the effective date of the transaction.
11
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Three Months Ended March 31, 2003 and 2002
The purchase price was allocated to the assets purchased based on their
respective fair values at the acquisition date. However, changes to the
estimates of the fair values of Land Title's assets acquired and liabilities
assumed may be necessary as evaluations of those assets and liabilities are
completed and as additional information becomes available. The following table
summarizes the estimated fair values of the allocation of the purchase price and
direct acquisition costs to the assets and liabilities acquired at the date of
purchase ($ in thousands):
Assets and (Liabilities) Acquired:
Cash and cash equivalents $ 335
Accounts receivable, net 255
Notes and other receivables 119
Deposits and other assets 66
Property and equipment, net 449
Title plant 2,230
Goodwill 426
Other intangible assets 231
Accounts payable and accrued expenses (551)
Reserve for title insurance and escrow losses (49)
Other liabilities (11)
-------
Total $ 3,500
=======
Selected unaudited pro forma combined results of operations for the three-month
periods ended March 31, 2003 and 2002, assuming the asset purchase occurred on
January 1, 2002 are as follows ($ in thousands):
Three months ended
March 31,
-------------------------
2003 2002
----------- -----------
Total revenue $ 56,522 $ 41,107
Earnings attributable to common shares $ 3,040 $ 1,677
Net income per common share:
Basic $ 0.17 $ 0.10
Diluted $ 0.16 $ 0.09
Weighted average shares outstanding:
Basic 17,971,696 17,197,173
Diluted 19,006,435 17,900,305
12
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
Three Months Ended March 31, 2003 and 2002
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental cash flow information is provided with respect to
interest and tax payments, as well as certain non-cash activities.
Three months ended
March 31,
------------------
2003 2002
------ ------
($ in thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 221 $ 64
Cash paid during the period for taxes 1,750 530
Non-cash financing activities:
Issuance of note payable in connection
with acquisition of Land Title 2,250 --
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULT OF OPERATIONS
The following discussion of the results of the operations and financial
condition of the Company should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and Notes thereto included elsewhere
in this report. Further, the Company's 2002 Form 10-K and 2002 Annual Report
should be read in conjunction with the following discussion since they contain
important information for evaluating the Company's results of operations and
financial condition. Historical results and percentage relationships among
accounts are not necessarily an indication of trends in operating results for
any future period.
CRITICAL ACCOUNTING POLICIES
There have been no material changes in our critical accounting policies
described in our Annual Report on Form 10-K for the year ended December 31,
2002.
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 transaction.
The Company reported net income of $3.4 million for the three months ended March
31, 2003 compared to $1.1 million the same period ended March 31, 2002. The
increase was primarily a result of the acquisition of Nations in September 2002,
and a strong housing market coupled with a high level of refinance transactions
resulting from low mortgage interest rates.
TRANSACTIONS AFFECTING COMPARABILITY
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 certain of 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.
13
In September 2002, the Company acquired Nations Holding Group ("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.
In January 2003, the Company acquired Land Title of Nevada, Inc. ("Land Title"),
which included five branch offices in the Las Vegas, Nevada metropolitan area
and ownership interest in a joint title plant. The purchase price, including
direct transaction costs was approximately $3.5 million and was accounted for
using the purchase method.
Included in the results of operations during the three months ended March 31,
2003 was revenue of approximately $28.8 million and pre-tax income of $2.2
million related to the aforementioned acquisitions.
RESULTS OF OPERATIONS
The following table presents information regarding the Company's operating
revenue:
Three months ended March 31,
---------------------------------------------
2003 % of total 2002 % of total
------- ---------- ------- ----------
($ in thousands, except revenue per order data)
Title service revenue, net $37,351 66.1% $11,939 61.6%
Escrow and related fees 17,700 31.3 6,798 35.0
Other income 1,471 2.6 658 3.4
------- ------ ------- ------
Total revenue $56,522 100.0% $19,395 100.0%
Opened orders 85,005 27,484
Closed orders 52,311 21,950
Average revenue per closed order $ 1,052 $ 854
OPERATING REVENUE
Operating revenue increased by $37.1 million or 191.4% for the three months
ended March 31, 2003 compared to the same period ended March 31, 2002. The
increase is primarily attributable to the acquisitions of Nations in September
2002, the acquisition of offices in northern California in April 2002 and the
acquisition of Land Title in January 2003. These acquisitions provided revenue
of approximately $28.8 million for the three months ended March 31, 2003. A
favorable real estate and refinance market also contributed to the increase
along with continued expansion in existing regions.
The Company experienced an increase in open orders, reflecting the acquisitions,
as previously discussed and also due to the favorable residential mortgage
refinance and resale environment. As a result of the Nations acquisition, the
company now has the ability to underwrite its own title insurance policies,
resulting in the Company retaining more of the fees it collects for closed
transactions. This factor, along with continued appreciation in housing prices,
contributed to an increase in average revenue per closed order during the three
months ended March 31, 2003 compared to the same period in the prior year.
Other income decreased as a percentage of revenue for the three months ended
March 31, 2003 to 2.6% from 3.4% for the same period in the prior year. This
decrease was the result of the larger increase to revenue resulting from title
service revenue and escrow and related fees. The overall increase in other
income was primarily due to the additional operations resulting from the
acquisition of Nations.
14
OPERATING EXPENSES
The following table presents the components of the Company's expenses and the
percentage they bear to the total revenue for the respective periods:
Three months ended March 31,
----------------------------------------------------
2003 % of revenue 2002 % of revenue
------- ------------ ------- ------------
($ in thousands)
Personnel costs $36,106 63.8% $12,209 62.9%
Rent 3,360 5.9 1,281 6.6
Provision for title insurance and escrow loss 1,842 3.3 295 1.6
Interest expense 220 0.4 64 0.3
Other operating expenses 9,468 16.8 3,667 18.9
------- ------- ------- -------
$50,996 90.2% $17,516 90.3%
======= ======= ======= =======
Overall operating expenses have increased by $33.5 million or 191.1% for the
three months ended March 31, 2003 compared to the same period in 2002 as a
result of expansion of the Company's operations. Operating expenses remained
relatively unchanged as a percentage of revenue at 90.2% for the three months
ended March 31, 2003 from 90.3% for the comparable period in 2002.
Personnel costs, including commissions and incentives, are the most significant
component of the Company's operating expenses. Due to the Company's expansion,
the number of employees has increased to 1,812 as of March 31, 2003 compared to
746 as of March 31, 2002 resulting in an overall increase of $23.9 million or
195.7% for the three months ended March 31, 2003. Personnel costs including
commissions increased as a percentage of revenue to 63.8% for the three months
ended March 31, 2003 from 62.9% for the comparable period in 2002. 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 for the three months ended
March 31, 2003 to 5.9% from 6.6% for the comparable period in 2002. This
decrease was the result of the fixed nature of these costs in relation to the
increase in revenue. Rent expense overall is higher as a result of additional
office locations resulting from the acquisition in 2002 and early 2003, as
previously discussed.
Provision for title insurance and escrow losses increased as a percentage of
revenue for the three months ended March 31, 2003 compared to the same period in
the prior year. This increase was primarily due to the inclusion of United Title
Insurance Company, a title insurance underwriter, in the 2003 operating results,
as a result of the Nations acquisition.
The significant components of other operating expenses include supplies,
utilities, insurance, depreciation, title plant access, postage and professional
fees. Other operating expenses decreased as a percentage of total revenue to
16.8% for the three months ended March 31, 2003 from 18.9% for the comparable
period in 2002. 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 revenue.
Interest expense increased to $0.2 million for the three months ended March 31,
2003 compared to the same period in the prior year primarily as a result of a
$14.0 million term loan used to partially fund the Nations acquisition and a
$2.25 million note used to partially fund the Land Title acquisition.
An income tax provision of $2.2 million was recorded for the three months ended
March 31, 2003 at an effective tax rate of 39.1%, which approximates the
statutory income tax rate for corporations. An income tax provision of $760,000
was recorded by the Company for the quarter ended March 31, 2002 at an effective
tax rate of 40.4%, which also approximates statutory rates.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company has two $3.0 million revolving lines of credit, which bears interest
on any outstanding balance at the prime rate. At March 31, 2003, there were no
cash draws against this credit facility. There is $75,000 committed against the
credit facility for a standby letter of credit pursuant to an office lease. This
credit facility matures in May 2003, but the Company anticipates renewing this
line of credit for an additional one-year term.
Cash flows used in operating activities were $3,000 for the quarter ended March
31, 2003 compared to cash flows provided by operating activities of $1.4 million
during the same period in 2002. This decrease was primarily related to incentive
payments made in the first quarter of 2003. The principal non-operating uses of
cash for the quarter ended March 31, 2003 were $1.3 million expended for the
purchase of property and equipment, and $2.2 million expended for the purchase
of investment securities and $0.9 million expended for the purchase of Land
Title of Nevada.
Management believes that cash on hand, anticipated future cash receipts and
borrowings available under its credit facility will be sufficient to meet the
Company's expansion plans and to pay all obligations as they become due for the
next twelve months.
SAFE HARBOR STATEMENT
Certain statements contained in this report with respect to factors which may
affect future earnings, including management's belief and assumptions are
forward-looking statements. The forward-looking statements contained herein are
based on current 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. For more
details on risk factors, see the Company's Annual Report on Form 10-K and other
filings with the Securities and Exchange Commission.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
There have been no material changes in the market risks described in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)). Based on
that evaluation, the CEO and CFO have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
Subsequent to the date of their evaluation, there were no significant changes in
the Company's internal controls or in other factors that could significantly
affect the disclosure controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is 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. Except as set forth above, there have been no material
developments in any legal actions reported in the Company's 2002 Form 10-K.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
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)
b. Reports
During the three months ended March 31, 2003, the Company filed the following
Current Report on Form 8-K:
Current Report of Form 8-K dated January 6, 2003 - Pursuant to Item 2, the
Company reported the acquisition of Land Title of Nevada, Inc. Pursuant to the
requirements of Form 8-K regulations, the acquisition of Land Title of Nevada,
Inc. does not require the presentation of financial statements or other pro
forma financial information.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL TITLE GROUP, INC.
By: /s/ Donald R. Head Date: May 1, 2003
--------------------------------------------
Donald R. Head
Chairman of the Board, President and
Chief Executive Officer
By: /s/ Mark C. Walker Date: May 1, 2003
--------------------------------------------
Mark C. Walker
Vice President, Chief Financial Officer,
Secretary and Treasurer
18
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 quarterly report on Form 10-Q of the Company;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this quarterly report;
(4) The Company's other certifying 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
quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The Company's other certifying 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
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Mark C. Walker
- -----------------------------------------
Mark C. Walker
Capital Title Group, Inc.
Vice President, Chief Financial Officer,
Secretary and Treasurer
May 1, 2003
19
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 quarterly report on Form 10-Q of the Company;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this quarterly report;
(4) The Company's other certifying 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
quarterly report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The Company's other certifying 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
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Donald R. Head
- -----------------------------------------
Donald R. Head
Capital Title Group, Inc.
Chairman of the Board, President,
Chief Executive Officer
May 1, 2003
20