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 JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITES EXCHANGE
ACT OF 1934
Commission File No. 0-21417
CAPITAL TITLE GROUP, INC.
(Name of registrant as specified in its charter)
Delaware 87-0399785
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2901 East Camelback Road, Phoenix, Arizona 85016
(Address of principal executive offices) (Zip Code)
(602) 954-0600
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value, 17,536,874 shares as of August 6, 2002.
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION Page Number
-----------
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of
June 30, 2002 (unaudited) and December 31, 2001 3
B. Condensed Consolidated Statements of Operations
for the three month and six month periods ended
June 30, 2002 and 2001 (unaudited) 4
C. Condensed Consolidated Statements of Cash Flows
for the six month periods ended
June 30, 2002 and 2001 (unaudited) 5
D. Notes to Condensed Consolidated Financial Statements
(unaudited) 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
Item 3. Quantitative and Qualitative Disclosure of Market Risk 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14-15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
----------- -----------
ASSETS (Unaudited)
Current Assets
Cash and cash equivalents $ 3,041,953 $ 7,676,760
Accounts receivable, net 482,961 462,793
Notes and other receivables 149,072 261,390
Other current assets 261,391 192,888
----------- -----------
Total Current Assets 3,935,377 8,593,831
Property and Equipment, net 10,895,002 10,075,328
Other Assets:
Investment in title plant 3,505,675 677,481
Deposits and other assets 1,783,998 1,136,231
Intangible assets 1,182,854 205,237
Deferred income taxes 337,276 337,276
----------- -----------
Total Assets $21,640,182 $21,025,384
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 33,907 $ 40,766
Accounts payable 1,572,689 1,934,599
Accrued expenses 3,268,774 4,072,497
----------- -----------
Total Current Liabilities 4,875,370 6,047,862
Long-term Debt, less current portion 3,026,109 3,042,069
Other Liabilities 774,239 831,191
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000,000
shares authorized, no shares issued and
outstanding in 2002 and 2001, respectively -- --
Common stock, $.001 par value, 50,000,000 shares
authorized, 17,444,374 and 17,065,381 shares
issued and outstanding in 2002 and 2001, respectively 17,444 17,065
Paid-in capital 11,387,190 10,911,469
Retained earnings 1,559,830 175,728
----------- -----------
Total Stockholders' Equity 12,964,464 11,104,262
----------- -----------
Total Liabilities and Stockholders' Equity $21,640,182 $21,025,384
=========== ===========
See Notes to Condensed Consolidated Financial Statements
3
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUE:
Title insurance fees, net $12,920,606 $11,324,460 $24,859,685 $19,154,285
Escrow and related fees 7,080,124 5,505,462 13,877,954 9,351,023
Interest and other income 677,880 738,458 1,335,801 1,385,977
----------- ----------- ----------- -----------
20,678,610 17,568,380 40,073,440 29,891,285
----------- ----------- ----------- -----------
EXPENSES:
Personnel costs 10,344,400 7,852,013 19,890,465 14,285,417
Commissions and incentives 2,932,746 2,524,240 5,595,324 3,869,507
Rent 1,634,308 1,038,268 2,915,450 2,011,728
Other operating expenses 4,515,421 3,985,944 8,477,283 6,976,939
Interest 65,351 66,967 129,578 145,188
----------- ----------- ----------- -----------
19,492,226 15,467,432 37,008,100 27,288,779
----------- ----------- ----------- -----------
Income before income taxes 1,186,384 2,100,948 3,065,340 2,602,506
Income taxes 540,037 -- 1,300,037 --
----------- ----------- ----------- -----------
Net income $ 646,347 $ 2,100,948 $ 1,765,303 $ 2,602,506
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.04 $ 0.12 $ 0.10 $ 0.15
=========== =========== =========== ===========
Diluted $ 0.04 $ 0.12 $ 0.10 $ 0.15
=========== =========== =========== ===========
Weighted average shares outstanding
Basic 17,273,063 16,994,982 17,256,178 17,148,261
=========== =========== =========== ===========
Diluted 18,302,682 17,741,387 18,122,554 17,644,934
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements
4
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
--------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,765,303 $ 2,602,506
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,187,856 921,888
Increase (decrease) in cash resulting from changes in:
Accounts receivable (20,168) (239,711)
Notes and other receivables 112,318 10,763
Other current assets (781) 33,782
Deposits and other assets (140,696) 8,430
Accounts payable (361,910) 110,252
Accrued expenses (860,675) 2,065,064
----------- -----------
Net Cash Flows provided by Operating Activities 1,681,247 5,512,974
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection of notes receivable 48,018 1,295
Net additions to property and equipment (1,591,718) (884,248)
Proceeds from sale of building -- 1,749,054
Purchase of subsidiaries, net of acquired cash (4,844,434) --
----------- -----------
Net Cash Flows provided by (used in) Investing Activities (6,388,134) 866,101
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 777,376 110,088
Repayment of debt (22,819) (1,906,456)
Purchase of treasury stock (682,477) --
----------- -----------
Net Cash Flows provided by (used in) Financing Activities 72,080 (1,796,368)
----------- -----------
NET INCREASE / (DECREASE) IN CASH
AND CASH EQUIVALENTS (4,634,807) 4,582,707
CASH AND CASH EQUIVALENTS
AT THE BEGINNING OF THE PERIOD 7,676,760 775,586
----------- -----------
CASH AND CASH EQUIVALENTS
AT THE END OF THE PERIOD $ 3,041,953 $ 5,358,293
=========== ===========
See Notes to Condensed Consolidated Financial Statements
5
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2002 and 2001
(Unaudited)
NOTE 1 - INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements of
Capital Title Group, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting of only
normal recurring accruals and intercompany eliminations) necessary for a fair
presentation have been included. Operating results for the six-month period
ended June 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and the accompanying notes. Actual results could differ
from these estimates. Certain reclassifications have been made to the prior
period financial statements to conform to the current period presentation. For
further information, refer to the consolidated financial statements and
footnotes included in the Company's Annual Report on Form 10-K as of and for the
year ended December 31, 2001.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share ("EPS"):
Three months ended June 30,
-----------------------------------------------------------------------------
2002 2001
------------------------------------- -------------------------------------
Per share Per share
Net income Shares amount Net income Shares amount
---------- ---------- ----------- ---------- ---------- -----------
Basic EPS $ 646,347 17,273,063 $ 0.04 $2,100,948 16,994,982 $ 0.12
=========== ===========
Effect of Dilutive Securities:
Stock options -- 892,175 -- 717,152
Warrants -- 137,444 -- 29,253
---------- ---------- ---------- ----------
Diluted EPS $ 646,347 18,302,682 $ 0.04 $2,100,948 17,741,387 $ 0.12
========== ========== =========== ========== ========== ===========
Six months ended June 30,
-----------------------------------------------------------------------------
2002 2001
------------------------------------- -------------------------------------
Per share Per share
Net income Shares amount Net income Shares amount
---------- ---------- ----------- ---------- ---------- -----------
Basic EPS $1,765,303 17,256,178 $ 0.10 $2,602,506 17,148,261 $ 0.15
=========== ===========
Effect of Dilutive Securities:
Stock options -- 761,035 -- 496,673
Warrants -- 105,341 -- --
---------- ---------- ---------- ----------
Diluted EPS $1,765,303 18,122,554 $ 0.10 $2,602,506 17,644,934 $ 0.15
========== ========== =========== ========== ========== ===========
6
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2002 and 2001
(Unaudited)
NOTE 3 - ASSET ACQUISITION AND MERGER
In September 2001, the Company executed a definitive agreement to acquire
BridgeSpan Title Company's title and escrow operations for the northern
California counties of Santa Clara, San Mateo and Sacramento. The transaction
included five branch offices and ownership interest in joint title plants for
the counties. The agreement was granted regulatory approval in March 2002 from
the California Department of Insurance and the transaction closed April 1, 2002.
The results of the purchased branches have been included in the consolidated
financial statements since that date. The adjusted purchase price for the assets
was approximately $4.3 million in cash.
The purchase price and direct acquisition costs were allocated to the assets
purchased based on their respective fair market values at the acquisition date.
The following table summarizes the estimated fair value of the assets acquired
at the date of purchase:
Assets Acquired:
Property and equipment $ 415,812
Investment in title plant 2,828,194
Deposits and other assets 68,722
Intangible assets 977,617
-----------
Total $ 4,290,345
===========
In accordance with the Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," (Statement No. 142) goodwill and
intangible assets with indefinite lives resulting from business combinations
completed subsequent to June 30, 2001 will not be amortized but instead will be
tested for impairment at least annually (more frequently if certain indicators
are present). In the event that the management of the combined company
determines that the value of goodwill or intangible assets with indefinite lives
has become impaired, the combined company will incur an accounting charge for
the amount of impairment during the fiscal quarter in which the determination is
made. 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 No. 142 requires that the Company test each of its reporting units for
an indicator of goodwill impairment within six months of adoption if an event or
circumstance indicates that it is more likely than not that an impairment loss
has been incurred. Management believes that no events or circumstances were
present related to either the southern or northern California operations to
indicate an impairment to goodwill may exist at June 30, 2002. The values of
goodwill assigned to these operations were as follows:
Southern California operations $ 205,237
Northern California operations 977,617
-----------
Total intangibles $ 1,182,854
===========
7
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2002 and 2001
(Unaudited)
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.
Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Reported net income $ 646,347 $ 2,100,948 $ 1,765,303 $ 2,602,506
Add back goodwill amortization -- 3,289 -- 6,578
----------- ----------- ----------- -----------
Adjusted net income $ 646,347 $ 2,104,237 $ 1,765,303 $ 2,609,084
=========== =========== =========== ===========
Basic and diluted income per share:
Reported net income per share $ 0.04 $ 0.12 $ 0.10 $ 0.15
Add back goodwill amortization -- -- -- --
----------- ----------- ----------- -----------
Adjusted income per share $ 0.04 $ 0.12 $ 0.10 $ 0.15
=========== =========== =========== ===========
Selected unaudited pro forma combined results of operations for the six-month
periods ended June 30, 2002 and 2001, assuming the asset purchase occurred on
January 1, 2002 and 2001, are as follows:
Six months ended
June 30,
----------------------------
2002 2001
----------- -----------
Total revenue $41,358,849 $31,755,649
Net income $ 1,388,815 $ 787,928
Net income per common share:
Basic $ 0.08 $ 0.05
Diluted $ 0.08 $ 0.04
Weighted average shares outstanding:
Basic 17,256,178 17,148,261
Diluted 18,122,554 17,644,934
In June 2002, the Company executed a definitive merger agreement with Nations
Holding Group ("Nations"). Nations' primary operating units include United Title
Company, United Title Insurance Company and First California Title Company.
Under the terms of the agreement, the Company will acquire all of the
outstanding shares of Nations for $35.0 million in a combination of
approximately $18.0 million in cash and approximately $17.0 million in preferred
stock. The $18.0 million cash payment is to be funded by new borrowings of $14.0
million, draws on the Company's line of credit and from working capital. In
addition, the Company will grant warrants to purchase 300,000 shares of common
stock. The warrants will have an exercise price equal to the average of the
closing price of the Company's common stock for the 21 consecutive trading days
prior to the date the transaction closes. The $35.0 million purchase price is
subject to increase or decrease by an amount equal to 50% of the change in
Nations' book equity from December 31, 2001 to the closing of the transaction.
The Company has received a commitment letter from a bank that would allow the
Company to borrow up to $14 million under a seven-year term loan with interest
at the prime rate or London Inter-Bank Offered Rate ("LIBOR") plus 2.75%.
8
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
June 30, 2002 and 2001
(Unaudited)
The preferred stock anticipated to be issued in connection with the transaction
will include an 8% cumulative dividend, payable quarterly in cash; provided that
the Company may, at its discretion, pay the dividends in shares of common stock
if the net income before provision for income taxes of the Company for the
immediately preceding quarter is less than $1.0 million.
The transaction is subject to the Company receiving regulatory approvals and is
currently anticipated to close during the third or fourth quarter of 2002. In
June 2002, the Company placed a $1 million deposit into escrow in connection
with this transaction, which is included in the Balance Sheet classification of
Deposits and Other Assets at June 30, 2002.
NOTE 4 - BUILDING SALE
In January 2001, the Company sold an office building in Santa Rosa, California
under a sale-leaseback arrangement, which provided approximately $785,000 in
cash and retired approximately $963,600 in debt related to the building. This
transaction resulted in a gain of approximately $604,000, which is included in
other liabilities, and has been deferred and is being amortized over the 10-year
leaseback term.
NOTE 5 - 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.
Six months ended
June 30,
---------------------
2002 2001
-------- --------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY:
Rescission of equity exchange $ -- $424,448
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest 129,578 145,188
Cash paid during the period for taxes 890,000 --
In March 2001, the Company rescinded an equity exchange which took place in June
2000. This recission resulted in 424,448 shares of Capital Title Group, Inc.
common stock issued to a third-party real estate organization being returned to
the Company and cancelled.
In September 2001, the Company's Board of Directors authorized a stock
repurchase program of up to one million shares of its outstanding common stock.
During the six months ended June 30, 2002, a total of 320,500 shares were
repurchased under this program, of which 320,500 shares were cancelled. The
total number of shares repurchased under this program is 654,396.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
The 2001 Form 10-K and the Annual Report should be read in conjunction with the
following discussion since they contain important information for evaluating the
Company's operating results and financial condition.
SUMMARY OF RESULTS
The Company's primary business is providing title and escrow services in four
counties in Arizona and eleven counties in California. Operating results for the
second quarter reflect the addition of nine new offices. This includes branches
in the northern California market, considered in the aggregate a turnaround
opportunity, that were purchased from BridgeSpan Title Company as of April 1,
2002 to gain entrance in new markets. New offices, including those purchased
that require an additional investment by the Company for integration into its
profitable operating model, typically do not initially contribute the level of
revenue consistent with existing, established branch offices. Consequently,
office openings, while crucial to long term revenue growth, typically result in
a drag on earnings in the short term. In addition, due to delays in obtaining
regulatory approval for the purchase of the five branches, that included
ownership in title plants in northern California, the Company experienced a
deterioration in the business acquired. A net loss of approximately $496,000 for
the three months ended June 30, 2002, is attributable to the five branches
purchased in the BridgeSpan Title Company transaction.
While the Company experienced revenue growth in the second quarter, several
expense categories grew as a percentage of revenue primarily reflecting
additional expense related to the recently acquired operations in northern
California operating at a loss and new offices that are not yet producing the
level of revenue that management anticipates from these offices once fully
established.
OPERATING REVENUE
Operating revenue increased by $3,110,230 or 17.7% for the three months ended
June 30, 2002 compared to the same period ended June 30, 2001. Operating revenue
increased by 34.1% for the six month period ended June 30, 2002 compared to the
same period of the prior year.
The Company has experienced an increase in revenue due to continued expansion of
branch offices, increased market share in existing operations and a favorable
real estate market resulting from continued relatively low mortgage interest
rates. To a lesser extent, the acquisition of offices in northern California
also contributed to the increase in revenue in the second quarter.
The following table presents information regarding the Company's operating
revenue:
Three months ended June 30,
----------------------------------------------------
2002 % of total 2001 % of total
----------- ---------- ----------- ----------
Title insurance fees, net $12,920,606 62.5% $11,324,460 64.5%
Escrow and related fees 7,080,124 34.2 5,505,462 31.3
Interest and other income 677,880 3.3 738,458 4.2
----------- ---------- ----------- ----------
Total revenue $20,678,610 100.0% $17,568,380 100.0%
Opened orders 29,199 25,284
Closed orders 19,717 19,159
Average revenue per closed order $ 1,049 $ 917
10
Six months ended June 30,
----------------------------------------------------
2002 % of total 2001 % of total
----------- ---------- ----------- ----------
Title insurance fees, net $24,859,685 62.1% $19,154,285 64.1%
Escrow and related fees 13,877,954 34.6 9,351,023 31.3
Interest and other income 1,335,801 3.3 1,385,977 4.6
----------- ---------- ----------- ----------
Total revenue $40,073,440 100.0% $29,891,285 100.0%
Opened orders 55,990 52,005
Closed orders 41,417 31,913
Average revenue per closed order $ 968 $ 937
In the Company's Arizona and northern California operations, title and escrow
services are for the most part handled together and an opened/closed order
includes the fee for both services. In southern California, the escrow portion
of a transaction is often handled by a company different than the one handling
the title work, therefore each component part is counted as an opened/closed
order, resulting in a lower fee per closed order. The Company experienced an
increase in the average fee per closed order in the periods ended June 30, 2002
when compared to the same period in the prior year due to an increase in resale
transactions which typically result in higher fees versus refinance
transactions, coupled with an overall increase in the value of transactions
closed.
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 June 30,
----------------------------------------------------------
2002 % of revenue 2001 % of revenue
----------- ------------ ----------- ------------
Personnel costs $10,344,400 50.0% $ 7,852,013 44.7%
Commissions and incentives 2,932,746 14.2 2,524,240 14.4
Rent 1,634,308 7.9 1,038,268 5.9
Other operating expenses 4,515,421 21.9 3,985,944 22.6
Interest expense 65,351 0.3 66,967 0.4
----------- ---- ----------- ----
$19,492,226 94.3% $15,467,432 88.0%
Six months ended June 30,
----------------------------------------------------------
2002 % of revenue 2001 % of revenue
----------- ------------ ----------- ------------
Personnel costs $19,890,465 49.6% $14,285,417 47.8%
Commissions and incentives 5,595,324 14.0 3,869,507 13.0
Rent 2,915,450 7.3 2,011,728 6.7
Other operating expenses 8,477,283 21.2 6,976,939 23.3
Interest expense 129,578 0.3 145,188 0.5
----------- ---- ----------- ----
$37,008,100 92.4% $27,288,779 91.3%
Overall operating expenses have increased by $4,024,794 or 26.0% and $9,719,321
or 35.6% for the three and six month periods ended June 30, 2002 respectively,
compared to the same periods in 2001 as a result of the acquisition of five
branch offices in northern California, as well as other office openings
throughout the Company. Operating expenses increased as a percentage of revenue
to 94.3% in the three months ended June 30, 2002 from 88.0% in the comparable
period in 2001. Operating expenses increased as a percentage of revenue to 92.4%
in the first six months of 2002 from 91.3% in the same period of 2001. These
increases as a percent of revenue relate primarily to the Company's recently
acquired unprofitable northern California operations and office openings
discussed above.
11
Personnel costs, including commissions and incentives, are the most significant
component of the Company's operating expenses. These costs increased overall
primarily due to an increase in the number of employees resulting from the
continued expansion in the overall Company and acquisition of offices in
northern California. The number of employees increased to 815 as of June 30,
2002 compared to 634 as of June 30, 2001. Personnel costs including commissions
increased as a percentage of revenue to 64.2% for the three months ended June
30, 2002 from 59.1% in the comparable period in 2001. Personnel costs including
commissions increased as a percentage of revenue to 63.6% in the first six
months of 2002 from 60.8% in the same period of 2001. These increases as a
percent of revenue relate to lower productivity primarily attributed to the
Company's recently acquired unprofitable northern California operations and new
employees hired to staff new offices that are not yet producing at the level of
revenue that is anticipated from more mature branches.
Rent expense increased as a percentage of revenue for the three months ended
June 30, 2002 to 7.9% from 5.9% for the comparable period in 2001. Rent expense
increased as a percentage of revenue for the six months ended June 30, 2002 to
7.3% from 6.7% for the comparable period in 2001. This increase was the result
of the acquisition of five branch offices in northern California as well as
other office openings throughout the Company as discussed above.
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
21.9% for the three months ended June 30, 2002 from 22.6% in the comparable
period in 2001. Other operating expenses decreased as a percentage of total
revenue to 21.2% for the six months ended June 30, 2002 from 23.3% in the
comparable period in 2001. These decreases were the result of continued cost
containment efforts and the relatively fixed nature of many of these expenses in
relation to the overall increase in revenue.
Interest expense has decreased for the three and six month periods ended June
30, 2002 compared to the same periods in 2001 as a result of debt retired upon
the sale of the Santa Rosa building and repayment of balances outstanding under
the Company's credit line.
An income tax provision of $1,300,037 was recorded for the six months ended June
30, 2002 based on statutory tax rates. No income tax provision was recorded by
the Company for the six months ended June 30, 2001 based on the availability of
its federal net operating loss carryforward. The Company used all available net
operating loss carryforwards during the third quarter 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $1,500,000 revolving line of credit, which bears interest on
any outstanding balance at the prime rate. At June 30, 2002, 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 September 2002, but the Company anticipates replacing
this credit facility with a new revolving line of credit with the same banking
institution in the third quarter of 2002. In connection with the announced
merger transaction with Nations Holding Group ("Nations"), the Company has
received a commitment letter for this new credit facility that would provide a
$3,000,000 revolving line of credit, bearing interest on any outstanding balance
at the prime rate.
In addition, related to the proposed merger transaction with Nations, the
Company has also received a commitment letter from a banking institution that
would allow the Company to borrow up to $14 million under a seven-year term loan
with interest at the prime rate or London Inter-Bank Offered Rate ("LIBOR") plus
2.75%. The Company expects to enter into this borrowing arrangement at the time
of the merger with Nations, which is anticipated to take place in the third or
fourth quarter of 2002.
At June 30, 2002, the Company had current assets totaling $3,935,377 compared to
current liabilities, which totaled $4,875,370. Cash flows provided by operating
activities were $1,681,247 for the six months ended June 30, 2002 compared to
cash flows provided by operating activities of $5,512,974 during the same period
in 2001. The principal non-operating uses of cash for the six months ended June
30, 2002 were $3,844,434 expended for the acquisition of operations in northern
California, a $1,000,000 million deposit paid related to the proposed merger
12
with Nations and $682,477 expended for the purchase of its common stock. A
source of non-operating cash for the six months ended June 30, 2002 came from
the exercise of stock options in the amount of $777,376.
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.
The total number of shares repurchased under this program is 654,396, all of
which were subsequently cancelled.
In September 2001, the Company executed a definitive agreement to acquire
BridgeSpan Title Company's title and escrow operations for the northern
California counties of Santa Clara, San Mateo and Sacramento. The transaction
includes five branch offices and ownership interest in joint title plants for
the counties. The agreement was granted regulatory approval in March 2002 from
the California Department of Insurance and the transaction closed April 1, 2002.
The adjusted purchase price for the assets was approximately $4.3 million. Due
to delays in obtaining approval for this transaction, the Company experienced a
deterioration in the business acquired. The operations acquired contributed a
net loss of approximately $496,000 for the three months ended June 30, 2002.
Management continues to believe that the key components to the acquisition are
in place and that expanding the base of business is key to improved results for
these operations.
In June 2002, the Company executed a definitive merger agreement with Nations.
Nations' primary operating units include United Title Company, United Title
Insurance Company and First California Title Company. Under the terms of the
agreement, the Company will acquire all of the outstanding shares of Nations for
$35.0 million in a combination of approximately $18.0 million in cash to be
funded by a new $14.0 million term loan, draws on the Company's line of credit
and working capital and approximately $17.0 million in preferred stock. In
addition, the Company will grant warrants to purchase 300,000 shares of common
stock. The warrants will have an exercise price equal to the average of the
closing price of the Company's common stock for the 21 consecutive trading days
prior to the date the transaction closes. The $35.0 million purchase price is
subject to increase or decrease by an amount equal to 50% of the change in
Nations' book equity from December 31, 2001 to the closing of the transaction.
As noted previously, related to the proposed merger, the Company has received a
commitment letter from a bank that would allow the Company to borrow up to $14
million under a seven-year term loan with interest at the prime rate or LIBOR
plus 2.75%.
The preferred stock anticipated to be issued in connection with the transaction
will include an 8% cumulative dividend, payable quarterly in cash; provided that
the Company may, at its discretion, pay the dividends in shares of common stock
if the net income before provision for income taxes of the Company for the
immediately preceding quarter is less than $1.0 million.
The transaction is subject to the Company receiving regulatory approvals and is
currently anticipated to close during the third or fourth quarter of 2002.
Management believes that cash on hand, future cash receipts and borrowings
available under its credit facility and the Company's continued profitability in
2002 will be sufficient to meet the Company's expansion plans and to pay all
obligations as they become due for the next twelve months.
SAFE HARBOR STATEMENT
Certain statements contained in this report with respect to factors which may
affect future earnings, including management's beliefs and assumptions based on
information currently available, are forward-looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements that are not historical facts involve
risks and uncertainties, and results could vary materially from the descriptions
contained herein. For more details on risk factors, see the Company's annual
reports on Form 10-K and other filings with the Securities and Exchange
Commission.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company's exposure to market risk is limited to interest rate risk on its
revolving credit agreement, which bears interest at the prime rate. The Company
does not have any derivative financial instruments. At June 30, 2002, the
carrying amounts reported in the Company's unaudited Condensed Consolidated
Balance Sheets for cash and cash equivalents, accounts receivable, accounts
payable and debt approximate fair value. The Company does not believe it is
subject to any market risks which could reasonably be expected to have a
material impact on the fair value of these assets and liabilities as reflected
in the unaudited Condensed Consolidated Balance Sheets contained in this report.
The Company's business is cyclical due to the effects of interest rate
fluctuations on the level of real estate activity. Periods of high mortgage
rates adversely effect real estate activity and therefore title and escrow
revenue. In addition, the amount of interest income derived from available cash
is subject to interest rate fluctuations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various other claims and lawsuits in the ordinary
course of its business, none of which are currently considered material to the
Company's financial condition and results of operations. Except as set forth
above, there have been no material developments in any legal actions reported in
the Company's 2001 Form 10-K.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company held a Special Meeting of Stockholders on April 10, 2002 to vote on
a proposal to amend the Company's Certificate of Incorporation to authorize the
issuance of up to 10,000,000 shares of "Blank Check" Preferred Stock. This
proposal was approved by stockholders as follows:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
Authorization of "Blank Check" Stock 10,527,597 483,252 7,138
The Company's Annual Meeting of Stockholders was held on May 22, 2002. The
matters voted on at the Annual Meeting were as follows:
(a) Election of a slate of directors to serve a three-year term.
(b) Ratification of KPMG LLP to serve as independent auditors for the
Company.
(c) Amendment of the 1996 Stock Option Plan.
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All matters voted on at the Annual Meeting were approved by stockholders as
follows:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
Board of Director nominees:
David C. Dewar 14,684,928 -- 181,609
Terry S. Jacobs 14,684,928 -- 181,609
Ben T. Morris 14,684,928 -- 181,609
Ratification of KPMG LLP 14,709,785 1,000 156,752
Amendment of the 1996 Stock Option Plan 9,082,072 1,710,177 36,666
The Company's Board of Directors currently consists of s even members and is
divided into three classes, each with three year terms. The following board
members with terms not expiring on the May 22, 2002 Annual Meeting: Donald R.
Head, Robert B. Liverant, Theo F. Lamb, and Stephen A McConnell.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
b. Reports
During the quarter ended June 30, 2002, the Company filed the following current
Reports on Form 8-K:
Current Report of Form 8-K dated 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 this Current Report
within 60 days following the date on which this Current Report was required to
have been filed. This amended Form 8-K was filed on June 14, 2002.
Current Report of 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.
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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: August 7, 2002
-------------------------------------
Donald R. Head
Chairman of the Board, President and
Chief Executive Officer
By: /s/ Mark C. Walker Date: August 7, 2002
-------------------------------------
Mark C. Walker
Vice President, Chief Financial Officer,
Secretary and Treasurer
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