SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
FIRST RESERVE, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 86-0740730
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
1360 SOUTH DIXIE HIGHWAY, CORAL GABLES, FLORIDA 33146
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 667-8871
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
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(TITLE OF CLASS)
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ITEM 1. BUSINESS
First Reserve, Inc. (the "Company") is a holding company whose primary
operations are through Esslinger-Wooten-Maxwell, Inc. ("EWM"), a wholly-owned
subsidiary, and a general real estate brokerage firm. EWM was originally founded
in 1964. Allen C. Harper and Ronald A. Shuffield, the current principals of the
Company, purchased EWM in April 1984 through First Reserve, Inc., a Florida
corporation ("First Reserve Florida"), which was established for the purpose of
acquiring EWM. They subsequently transferred their ownership in EWM to First
Reserve Florida. First Reserve Florida was a holding company that wholly-owned
EWM along with certain other related entities, including Embassy Financial
Services, Inc. ("Embassy"), a licensed residential mortgage lender that
originates loans in an agency capacity on behalf of other mortgage lenders.
HISTORY - MERGER
The Company was organized under the laws of the State of Arizona on September 7,
1993 under the name El Squared, Inc. On August 31, 1994, El Squared, Inc.
changed its name to Phoenix Financial Reporting Group, Inc. ("PFRG"). On
February 2, 1998, PFRG changed its name to First Reserve, Inc. On June 17, 1998,
the Company transferred it domicile from Arizona to Florida, effectively
becoming a Florida corporation. The Company's headquarters are located at 1360
South Dixie Highway, Coral Gables, Florida 33146. Its telephone number is (305)
667-8871 and its fax number is (305) 667-0781.
Pursuant to a Stock Purchase Agreement dated January 7, 1998, certain
shareholders of First Reserve Florida acquired 83.3% of the total common shares
(5,000,000 shares) of PFRG, a public holding company with no operations. The
PFRG shares were acquired from four different shareholders for an aggregate
purchase price of $80,000. The remaining 1,000,000 shares of PFRG common stock
are owned by 219 shareholders that owned shares in PFRG prior to the
consummation of the Stock Purchase Agreement. By acquiring 83.3% of PFRG, the
shareholders of First Reserve Florida acquired control of PFRG.
Subsequent to the above-described acquisition, the shareholders of PFRG voted to
change the name of PFRG to First Reserve, Inc. The Company also issued
additional shares of common stock. In addition, pursuant to an Agreement of
Tax-Free Reorganization ("Exchange Merger Agreement"), the shareholders of First
Reserve Florida and the shareholders of Embassy exchanged all of their common
stock shares of First Reserve Florida and Embassy respectively for shares of the
Company's Common Stock, with the result being that First Reserve Florida and
Embassy became wholly-owned subsidiaries of PFRG. This exchange was intended to
qualify as a tax-free reorganization pursuant to Section 351 of the Internal
Revenue Code of 1986, as amended. After the completion of the share exchange,
First Reserve Florida was merged into the Company and all the assets of First
Reserve Florida became assets of the Company.
Effective May 1, 1998, EWM acquired Byrne-Rinehart & Co. ("Byrne"), a Miami,
Florida real estate
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brokerage operation. The acquisition was consummated via a merger pursuant to a
Plan of Reorganization and Merger Agreement dated as of May 1, 1998 (the "Byrne
Merger Agreement"). Pursuant to the Byrne Merger Agreement, Byrne merged with
and into EWM, with EWM being the surviving corporation. The merger was
structured as a reorganization to comply with the terms of Section 368(a)(2)(D)
of the Internal Revenue Code of 1986, as amended.
Under the terms of the merger, all of the shares of Common Stock of Byrne were
converted into and exchanged for an aggregate of 400,000 shares of common stock
of the Company and $300,000 cash. In connection with the merger, Thomas E. Byrne
was hired as President of EWM's Commercial Sales Division pursuant to a
three-year employment agreement and the sales associates of Byrne have been
retained by EWM. As of May 1, 1998, all of Byrne's pending real estate closings
are being administered by EWM and EWM is entitled to the brokerage proceeds
therefrom.
Effective September 30, 1998, EWM acquired Gerard International Realty, Inc.
("Gerard"), a Miami Beach, Florida real estate brokerage operation. The
acquisition was consummated via merger pursuant to a Plan of Reorganization and
Merger Agreement dated as of September 30, 1998 (the "Gerard Merger Agreement").
Pursuant to the Gerard Merger Agreement, Gerard merged with and into EWM, with
EWM being the surviving corporation. The merger was structured as a
reorganization to comply with the terms of Section 368(a)(2)(D) of the Internal
Revenue Code of 1986, as amended.
Under the terms of the merger, all of the shares of Common Stock of Gerard were
converted into and exchanged for up to 500,000 shares of the Company, in the
ratio of (i) 3,000 shares of the Company's Common Stock for each share of Gerard
Common Stock and (ii) 2,000 shares of the Company's Common Stock for each share
of Gerard Common Stock, which shall be subject to and released from escrow in
accordance with the terms and conditions set forth in the Merger Agreement. As
of September 30, 1998, all of Gerard's pending real estate closings are being
administered by EWM and EWM is entitled to the brokerage proceeds therefrom.
OPERATIONS
The primary operations of the Company are through Esslinger-Wooten-Maxwell,
Inc., its wholly-owned subsidiary. EWM is a Florida licensed real estate
brokerage firm with five offices, which engages approximately 400 sales
associates and support staff, in Miami-Dade and Broward Counties. In 1998, EWM
closed 2,200 real estate "sale" transactions and 600 "rental" transactions
having a gross dollar value of $733,000,000. The average home price was
$264,100.
EWM is member of the Realtor Association of Greater Miami and the Beaches, the
Realtor Association of Dade County, the Realtor Association of Greater Ft.
Lauderdale and the Florida Keys Association of Realtors. The Company offers its
services in southern Florida. EWM operates from offices located in Coral
Gables/Coconut Grove, South Miami, Miami Beach, Pinecrest/Palmetto area of
Miami-Dade County, Florida, and Plantation, Broward County Florida. EWM provides
the following services:
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o Residential Brokerage
o Commercial Brokerage
o Relocation
o Property Management and Leasing
o International Brokerage
o Business Brokerage
EWM has recently expanded into Broward County by opening an office in
Plantation. The Company believes that this expansion will allow EWM to take
advantage of the burgeoning growth in the residential real estate market in
Broward as well as the much sought after relocation transferee market.
RESIDENTIAL BROKERAGE
EWM acts as a broker or agent in residential real estate transactions. EWM
markets homes in every price range throughout Miami-Dade County, with a market
niche in luxury properties (over $500,000). The Company believes its 1998
average residential sales price of approximately $264,100 was higher than its
primary competitors. See "Business-Competition" herein.
All customers who list their property for sale with EWM must sign an Exclusive
Right of Sale Listing Agreement, which provides that EWM shall be the exclusive
sales agent for a set period of time. The Company's residential brokerage
services to sellers of real estate include:
o Pricing a property based on market knowledge and current
research
o Individualized marketing program for each property
o Seller's Net Sheet, setting forth costs of sale and net profit
estimates upon closing
o Suggestions for preparing a property for sale
o Appointment options
o Inclusion of all properties in the computerized South Florida
Regional Multiple
o Listing System
o Pre-qualifying of potential buyers' ability to purchase
o General advice and assistance in preparing forms and attending
closing of transaction
o Negotiating the terms and conditions of the sales and purchase
contract
o Conducting "open houses" for properties
o Obtaining tenants
In exchange for these services, the customer pays to the Company a commission
which is typically fixed at 6% of the sales price, of which 3% is paid to the
"listing" broker and 3% is paid to the "selling" broker, which amounts are then
"split" between the Company and the participating sales associate.
EWM assists buyers of real estate by providing the following services:
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o Locating a property that meets personal and financial
objectives
o Showing the buyer properties
o Assistance with inspections, repairs, and obtaining
appraisals, etc.
o Negotiating the terms and conditions of the sales and purchase
contract
o Assisting the buyer in preparing for and attending closing of
transactions.
In exchange for these services, the customer pays to the Company a commission
which is also generally fixed at 6% of the sales price. This commission is
usually, with the consent of the listing broker, i.e., the seller's broker,
deducted from and payable out of, the commission payable to such listing broker.
The agreements usually executed by the customer (the buyer/seller) of
residential real estate is the form Contract for Sale and Purchase that is
approved by the Florida Association of Realtors and the Florida Bar and is
customarily used in the State of Florida. Under Florida real estate law, EWM
does not represent the Buyer or Seller directly, but rather operates as a
"transaction" broker.
COMMERCIAL BROKERAGE
EWM's commercial brokerage services provide specialized services to third
parties, including financial institutions, investors, developers and landowners.
EWM's services include but are not limited to:
o Commercial Sales and Leasing
o Property Owner Representation
o Tenant Representation
o Corporate Relocations
o Project Management
o Market Surveys
o Project Feasibilities
o Computer Financial Models
o Construction and Permanent Loan Packaging
o Land Acquisition and Assemblage
o Workouts of Challenging Properties
o Real Estate Consulting
RELOCATION
EWM has an extensive corporate relocation division, specializing in corporate
relocations. EWM is affiliated with several of the industry's largest relocation
networks. In particular, EWM maintains a Strategic Alliance Agreement with the
Cendant Mobility Relocation Network (successor to PHH Relocation Network)
("Cendant"), which the Company believes is the nation's largest relocation
organization, which provides EWM with membership in Cendant's nationwide network
of over 400 other suppliers of relocation services. Ron Shuffield, EWM's
President, served on the PHH National
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Advisory Council (predecessor to Cendant) from 1993-1996.
The South Florida area is strongly positioned for corporate relocations. The
area serves as a hub of domestic and international business. Because of the
favorable geographic location of Miami-Dade County, coupled with its trained
commercial and industrial labor force, many Fortune 500 companies have a Latin
American and Caribbean base in Miami. According to Miami-Dade County statistics
obtained from the Miami-Dade County Beacon Council (the county's economic
development council), in Coral Gables, Florida, the Company's main office
location, the following corporations have operations: Disney, Texaco West
Africa/Latin America, Hilton Hotel-International, Apple Computer, and IBM. In
addition, such major corporations as Burger King, Borden and Eastman Kodak have
significant South Florida operations. In order to capitalize on the growing need
to assist international executives, EWM has a division devoted solely to
assisting relocating executives.
The services that EWM provides in connection with corporate relocations
includes, but is not limited to, sales and marketing of a transferred employee's
existing properties, assisting relocated employees in finding new properties,
education and school placement counseling, rental assistance, area tours,
short-term housing, financial service assistance., mortgage prequalification,
assistance with coordination of moving personal property, and personal and
repair service professionals, including a list of pre-qualified baby sitters,
interior design consultants and home repair specialists. A referral fee equal to
25 % to 30% of the gross listing or selling commission received by EWM is paid
to the referring party for any business referred to EWM. All outgoing referral
fees earned by EWM are split between the referring associate and the Company.
All outgoing referrals must be placed through the Relocation Network.
PROPERTY MANAGEMENT
The Property Management Division of EWM serves as an agent for the property
owner, overseeing all facets of the leasing and management process, including
customary landlord activities.
EWM provides property management for single family homes, condominiums, and
apartment complexes. Specific property management services include:
o Collecting rent
o Accounting and bookkeeping services
o Regular property inspections
o Coordination of regular maintenance (lawn pool, service
contracts, etc.)
o Contract work (paint, repairs, etc.)
o Customer services for tenants
o Consistent owner contact
o Showing rental properties to prospective tenants.
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MARKET
The rate of home sales in Miami-Dade County, Florida for 1998 showed a marked
improvement over 1997. Analysts believe that strong consumer confidence, low
interest rates, weak inflation and gains from a surging stock market should
continue to lead to a very strong real estate market in South Florida for the
remainder of 1999, with new and existing home sales to increase at a rate
slightly higher than the national average.
According to MLS data, there were 18,480 existing home sales in Miami-Dade
County in 1998, compared to 16,145 in 1997 representing a 14.4% increase in
sales for 1998.
While homes under $200,000 accounted for 82% of all homes sold in Miami-Dade
County in 1998, luxury homes continue to sell well in the region. In the past
year, EWM was involved in 97 home sale transactions through the MLS in the price
range over $500,000. This equals 14.3% of the 676 total Miami-Dade County
transactions in this price range through the MLS.
MARKETING
The Company intends to undertake an aggressive growth strategy by acquiring
local brokerage operations throughout Florida to increase market presence, sales
volume and the Company's geographic base. The Company will continue its
expansions of its mortgage brokerage services and title company services across
southeast Florida.
The Company services are marketed in a variety of outlets throughout South
Florida. EWM's marketing efforts include, without limitation, advertising in all
major newspapers, full-color magazine pictorials, targeted mailings, press
releases and inclusion of all properties in the county-wide Multiple Listing
Systems. EWM targets new sellers and buyers of its properties by placing
advertisements for its properties in each Sunday's MIAMI HERALD REAL ESTATE
GUIDE. Further, EWM places a monthly pictorial centerfold and back cover of
advertising in Harmon's Real Estate Market Magazine, a magazine published
monthly and widely distributed throughout South Florida. Further, EWM mails its
"Open House Sundays" literature monthly to over 77,000 potential customers and
its "Crown Collection" quarterly mailer to approximately 30,000 potential
customers, which features homes priced in excess of $500,000. EWM provides its
associates with advertising dollar value credits, based on their property's
sales price, for use in various advertising means.
In addition to the above described traditional avenues of sales and marketing,
EWM and its executives and associates are extremely active members of the
community. EWM is a sponsor of such South Florida charities as the American Red
Cross, Miami Opera, United Way, Junior Orange Bowl, Junior Achievement, the
College Assistance Program and the local arts and crafts festivals, just to name
a few. Further, EWM is a member of all local Chambers of Commerce, and is a
trustee for
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chambers in Miami, Coral Gables, Homestead, Ft. Lauderdale, Florida and is a
member of the University of Miami Citizens Board.
COMPETITION
All of the businesses in which EWM is engaged are highly competitive, especially
residential real estate brokerage services. Many of its competitors, in
particular those who benefit by affiliated franchising organizations, have
substantially greater financial resources than the Company. Many of the
Company's competitors are also undertaking a growth strategy. While EWM has a
higher average sales price than its primary competitors, these primary
competitors close substantially more residential listings than EWM and have
substantially higher gross sales. See "Business Competition". Even though the
Company believes that its ability to specialize in higher-priced properties, the
quality of its services and its knowledge of and relative strength in the South
Florida market position itself well with its competitors, the substantial amount
of competition is expected to continue, which may have an adverse affect on the
Company and its operations.
EWM's major competitors are Coldwell Banker Real Estate, Arvida Realty Services,
and The Keyes Company Realtors. Coldwell Banker has been pursuing an aggressive
acquisition strategy. In January 1998, Coldwell Banker acquired 37 offices of
Gimelstob Realty, a South Florida realtor primarily based in Broward and Palm
Beach Counties, and Coldwell Banker has publicly stated its intent to acquire
additional brokerage operations in South Florida. Arvida Realty Services has
also made recent acquisitions, including Jeanne Baker, Inc. Realty. The
substantial trend in the real estate industry is consolidation through
acquisitions by national chains, such as Cendant, Inc. Cendant owns Century 21
Realty, ERA Realty, Coldwell Banker Realty and Cendant Relocation Services.
National chains now represent 35% of the total U.S. real estate brokerage
operations.
A comparison of EWM listing and sales activities to its principal competitors in
the residential properties brokerage business follows. The statistics
represented were obtained from the Multiple Listing Service ("MLS"), an
independent real estate data reporting entity, whose sales data represents
approximately 85% of the total sales in the Miami-Dade County, Florida area.
JANUARY 1, 1998 THRU DECEMBER 31, 1998 RANKING BY NUMBER OF
RESIDENTIAL LISTINGS CLOSED IN MIAMI-DADE COUNTY.
1. Arvida Realty Services 3,725 Transactions
2. Coldwell Banker 3,469 Transactions
3. The Keyes Company 2,081 Transactions
4. EWM 1,912 Transactions
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JANUARY 1, 1998 THRU DECEMBER 31, 1998 RANKING BY DOLLAR
VOLUME OF RESIDENTIAL LISTINGS CLOSED IN MIAMI-DADE COUNTY.
AVERAGE
GROSS SALES HOME PRICE
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1. Arvida Realty Services $652,290,000 $175,111
2. Coldwell Banker $558,677,000 $161,048
3. EWM $490,290,000 $256,427
4. The Keyes Company $235,242,000 $113,042
EWM has the highest average sales price of its competitors. Its average
residential sales price substantially exceeds the average sales prices in
Miami-Dade County. The above figures include only residential sales and do not
include sales made outside the MLS. EWM sales for 1998 including all
residential, commercial and rentals from existing operations and acquisitions
made in 1998 were approximately $733,000,000.
ECONOMIC FACTORS
The Company's operations are directly dependent on the South Florida economy in
general, and the South Florida real estate market in particular. South Florida's
real estate market has been historically cyclical. Downturns in South Florida's
economy will likely have adverse affects on the Company's business and
operations.
REGULATORY ISSUES
The operation of the Company is subject to various federal, state and local laws
and regulations. EWM is licensed by the State of Florida Department of Business
and Professional Regulation to sell real estate in the State of Florida. In
addition, each of the Company's real estate associates must be licensed with the
State of Florida Department of Business and Professional Regulation as a real
estate broker or real estate sales agent. The licenses must be updated every two
years by passing an administered examination. The Company has made, and will
continue to make, expenditures to comply with such laws and regulations. The
Company believes that it is in compliance with all material laws and
regulations. The Company does not believe that any such laws or regulations that
are currently in existence, or to the best of the Company's knowledge are
proposed or contemplated, that will have such an adverse affect on the Company's
financial condition or its operations.
The subsequent adoption or modification of state and local laws and regulations
imposing environmental controls, disclosure rules, zoning and other land use
restrictions may materially and adversely affect the marketability of real
estate, which would likely have a negative effect on the Company's financial
conditions and its operations. Additionally, there are various licensing
requirements imposed on the Company and its sales associates. While based on the
Company's experiences to date, the cost of compliance has not had, and is not
expected to have, a material effect
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on the Company, changes in laws and regulations may give rise to additional
compliance costs that could have a material adverse effect on the Company.
Further, licenses may be revoked for a variety of reasons, including the
violation of regulations and the failure to maintain certain financial
requirements. Revocation of licenses would also have material and adverse affect
on the Company and its operations.
EMPLOYEES
As of December 31, 1998, the Company employs 42 persons full time as support
staff and engages 360 persons as sales associates. Of the sales associates, 175
are based in the Coral Gables office, 85 are based in the Pinecrest/Palmetto
office, 55 are based in the South Miami office, and 45 are based in the Miami
Beach office. Of the Company's sales associates, 100 are referral associates
licensed with an affiliated company, EWM Referral Services, Inc. These
associates have an active real estate license but merely refer listings to the
Company in return for a fee. All sales associates are independent contractors
rather than employees of the Company, which is a standard structure in the real
estate brokerage industry. The Company requires that each associate sign an
Independent Contractor Status Agreement that is a Florida Association of
Realtors standard form.
All of the Company's sales associates are paid by commission solely on the basis
of closed sales transactions. Typically, the share of a total commission is
split evenly between the listing broker and the selling broker, with each broker
entitled to a commission of approximately 3% of the property sales price for
residential listings and 5% for commercial, business brokerage and rental
listings. Approximately 40% of EWM sales are "in-house," where EWM represents
both the buyer and seller and therefore receives both halves of the brokerage
commission.
REPORTS TO SECURITY HOLDERS
The Company intends to provide all of its shareholders with an annual report of
the Company's operations, including audited financial statements, for the 11
month period ended December 31, 1998.
The public may read and copy any materials that the Company has on file with the
Securities and Exchange Commission ("SEC") at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling SEC at
1-800-SEC-0330.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
The "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein should be read in conjunction with the Combined
Financial Statements of First Reserve, Inc. and subsidiaries and Embassy
Financial Services, Inc. as of January 31, 1998, and the related notes to the
Combined Financial Statements, along with the
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Consolidated Financial Statements of First Reserve, Inc. and subsidiaries as of
December 31, 1998, and the related Notes to Consolidated Financial Statements.
The Company's Financial Statements have been prepared in accordance with
generally accepted accounting principles in the United States and have been
audited by the Company's independent accountants.
The financial information in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to the continuing operations of the
Company.
RESULTS OF OPERATIONS
REVENUES. The Company's revenues increased approximately 48.3% for the 11-month
period ended December 31, 1998, over those for the fiscal year ended January 31,
1998. The increase is primarily attributable to increased residential real
estate sales activity in the Company's existing market (32.5%) (Miami-Dade
County, Florida). Revenue increases also resulted from the Company's acquisition
of two real estate companies operating in that market (60.5%). Finally, the
increase is partly attributable to the approximate 62% increase in the volume of
mortgages placed through the Company's mortgage banking operations from
approximately $26,000,000 for the year ended January 31, 1998 to approximately
$42,000,000 for the 11-month period ended December 31, 1998 (7%).
OPERATING EXPENSES. Operating expenses increased to approximately $15.8 million
for the 11-month period ended December 31, 1998 versus approximately $11.1
million for the year ended January 31, 1998. The significant components of the
Company's operating expenses are: commissions to real estate associates (66%),
officer and staff salaries (11%), office rental costs (4%), advertising expenses
(4%), promotional expenses (1%) and insurance (1%). The Company's operating
expenses also increased as a result of costs incurred by the Company in
connection with the acquisition of two residential real estate companies and the
pre-opening costs associated with the relocation of the Company's Miami Beach
office and the creation of a Broward County sales office.
INTEREST. Interest income increased from approximately $13,000 for the year
ended January 31, 1998 to $14,000 for the 11-month period ended December 31,
1998 due to higher average daily balances of restricted cash.
PRE-TAX INCOME FROM CONTINUING OPERATIONS AND NET INCOME (LOSS). The Company had
pre-tax income from operations of approximately $134,000 for the 11-month period
ended December 31, 1998 as compared to income of approximately $375,000 for the
year ended January 31, 1998. This reduction in pre-tax profit from continuing
operations was a result of a one-time charge of approximately $1 million during
the 11-month period ended December 31, 1998, the Company had a net income of
approximately $109,000. This one-time charge was associated with the settlement
of a contingent liability to a third party. In connection with this settlement
the Company paid $250,000 in cash and executed a $950,000, non-interest bearing,
promissory note with principal payments at varying dates through 2002.
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LIQUIDITY AND CAPITAL RESOURCES
The Company generated approximately $924,000 in cash from operating activities
for the 11-month period ended December 31, 1998. This was primarily due to an
increase in the amount of commissions and management fees received as a result
of increased "closings" of principally residential real estate sales and
rentals.
Cash used for investing activities was approximately $560,000 for the 11-month
period ended December 31, 1998, primarily attributable to the purchase of
property and equipment, and the purchase of certain businesses acquired by the
Company during this period.
Cash provided from financing activities was approximately $312,000 for the
11-month period ended December 31, 1998, principally due to the net proceeds
received from a private placement of the Company's common stock.
At December 31, 1998, the Company had outstanding a $950,000 obligation
(described above), and no other material indebtedness except for trade credit.
Subsequent to December 31, 1998, the Company arranged for a $500,000 revolving
line of credit from a private, unaffiliated lender for the period expiring in
October 1999. In addition, the Company has arranged for a $1.8 million
"warehouse" line of credit to fund loans to be made in connection with its
mortgage banking operations in fiscal 1999. Each "warehouse" loan will be fully
backed by a permanent loan "take-out" commitment from a national lender of
residential financing. The Company expects the availability of this borrowing
capacity to improve the profitably of this aspect of its operations due to the
favorable pricing offered by these national lenders.
At December 31, 1998, the Company had shareholder equity of approximately
$2,938,000. For the 11-month period ended December 31, 1998 the Company's net
working capital (current assets minus current liabilities) increased to
$1,048,003 from $443,399 at January 31, 1998, primarily as a result of
internally generated funds. The Company believes its current working capital
will be sufficient to support its presently-contemplated strategy for the next
12 months.
The Company's new office in Broward County was completed on June 1, 1999. The
Company anticipates that this office will increase opportunities to
substantially increase sales. The Company's temporary Broward County office has
generated an annualized volume of approximately $60,000,000 of sales through the
end of April 1999. As of April 1, 1999, the Company has acquired Columbia Title
of Florida, Inc., a 37 year old title insurance business, for approximately
$191,000 in cash. The Company believes this title business will be profitable
during 1999, and will contribute to the cash flow of the Company's overall
operations.
SEASONALITY
The Company's operations are principally based on the residential real estate
market in South Florida.
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These markets have historically been seasonal with generally higher sales in the
second and third fiscal quarters. Therefore, the results of any interim period
is not necessarily indicative of the results that might be expected during a
full fiscal year.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. We have made certain
adjustments to our equipment and software, including equipment purchases over
the last two years, in order to make our systems Year 2000 compliant. We have
not incurred material costs to date in this regard, and currently do not believe
the cost of additional actions will have a material effect on our results of
operations or financial condition. We currently believe that our systems are
Year 2000 compliant in all material respects; however, our current systems may
contain undetected errors or defects which with Year 2000 date functions that
may result in material costs.
Failure of our equipment, or software to operate properly with regard to the
year 2000, and thereafter, could require us to incur unanticipated expenses to
remedy any problems, which could have a material adverse effect on our business,
results of operations, and financial condition. We have not yet developed a
comprehensive contingency plan to address situations that may result if such
systems fail; the cost of developing and implementing any such plan may itself
be material. Finally, we are also subject to external forces that might
generally affect industry and commerce.
As of the present date, we have contacted all of our major suppliers, vendors
and financial institutions in order to ascertain their Year 2000 compliance. All
of the Company's software vendors, including GEAC Interrealty (multiple listing
service computer system), are Year 2000 compliant and have supplied the Company
with compliance statements attesting to such compliance. MetroBank, the
Company's primary financial institution, has had a Year 2000 Committee working
on compliance issues since 1997. MetroBank has been testing its systems
throughout 1999 and has ensured the Company of its compliance. Additionally,
MetroBank keeps backup records for all of its account transactions allowing the
bank to identify and correct errors due to a computer failure. One of the
Company software vendors, REAL/Easy, has recently introduced a new Year 2000
version of its real estate software. REAL/Easy has notified the Company to
upgrade its software in order to avoid any loss in data and to ensure the
accuracy of the Company's reports. Adobe Systems, which provides the Company
software, has informed the Company that its current products are Year 2000
compliant and that the Company should upgrade to current versions. Finally,
GEAC/Interealty, which supplies the Company with its multiple listing service
software and operating system, has informed the Company that its current
products are Year 2000 compliant.
We are is currently in the process of updating its systems with its vendors'
software. All of the Company's computer hardware and operating systems have been
updated to come in to compliance.
13
<PAGE>
The Company's copy machines are Year 2000 compliant (the Company has received a
compliance statement from Xerox). In addition, the Company's alarm systems are
in compliance. The telephone systems in the Company's Broward and Miami Beach
offices are Year 2000 compliant. Year 2000 modifications for the telephone
systems in the Company's other offices are currently being made and letters of
compliance will be forthcoming upon the completion of these tasks.
Currently, all of the Company's associated financial institutions (100%) and its
significant software vendors (90%) have indicated Year 2000 compliance. The
Company's remaining vendors and suppliers (approximately 10%) have either
indicated compliance or will be compliant by October 1, 1999. The Company has
not received notice from any of its vendors, suppliers or associated financial
institutions indicating that they are not currently compliant or will not be
compliant in the next 30 days.
Our worst case Year 2000 scenario would be a computer systems failure which
adversely affects the multiple listing services. Although we do not anticipate
such a failure, we are prepared to carry on our operations in the traditional
manner of referrals and word of mouth promotion of our services.
We do not foresee any problems with our systems arising from the Year 2000
issue. However, in the event that any system does fail, we have established and
maintain a paper backup of any and all relevant information including multiple
listing service information, bank accounts and production reports. This backup
system will allow the Company to recover any vital information that is lost in
the case of a failure in its computer systems. In addition, the Company has a
back up telephone system which the Company has used in the past when there have
been telephone system failures.
FORWARD LOOKING STATEMENTS
From time to time, we make statements about our future results in this Form
10-SB that may constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
our current expectations and the current economic environment. We caution you
that these statements are not guarantees of future performance. They involve a
number of risks and uncertainties that are difficult to predict. Our actual
results could differ materially from those expressed or implied in the
forward-looking statements. Important assumptions and other important factors
that could cause our actual results to differ materially from those in the
forward-looking statements, include, but are not limited to: (i) the continued
growth in the residential real estate market in South Florida; (ii) the general
availability of home mortgage financing at favorable rates; (iii) continued
positive economic climate in the United States; (iv) competition in our existing
lines of business; and (v) our ability to obtain and maintain working capital,
whether internally generated or from financing sources (on acceptable terms) in
order to finance our growth strategy.
14
<PAGE>
ITEM 3. PROPERTIES
The Issuer's facilities consist of five offices: (1) 11,930 square feet leased
at the Issuer's principal office at 1360 S. Dixie Highway, Coral Gables, Florida
33146; (2) 7,468 square feet leased at 12651 S. Dixie Highway, Miami, Florida
33156; (3) 5,000 square feet leased at 419 Arthur Godfrey Road, Miami Beach,
Florida 33140; (4) 5,000 square feet leased office at 6150 S.W. 76 Street, South
Miami, Florida; and (5) 6,400 square feet leased at 8500 West Broward Boulevard,
Plantation, Florida 33324.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the securities
ownership of those persons who own more than five (5%) percent of the
registrant's outstanding common stock as of the date hereof, including shares
owned by its executive officers and directors:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF PERCENT OF
TITLE OF CLASS BENEFICIAL OWNERS NO. OF SHARES CLASS (%)
- -------------- ----------------- ------------- ----------
<S> <C> <C> <C>
Common Stock Thomas E. Byrne 421,000 6.22
6150 S.W. 76th Street
South Miami, FL 33143
Common stock James E, Newmeyer 337,500 4.99
1360 S. Dixie Highway
Coral Gables, FL 33146
Common Stock Allen C. Harper & 1,113,501 16.45
Carol Harper, JTWROS
1360 S. Dixie Highway
Coral Gables, FL 33146
Common Stock Ronald Shuffield 1,113,501 16.45
1360 S. Dixie Highway
Coral Gables, FL 33146
Common Stock VALORSEC 2,160,001 31.90
M. Thierry Manni
c/o 1360 S. Dixie Highway
Coral Gables, FL 33146
Common Stock Officers and directors, as a group 4,724,503 69.80
(4 persons)
</TABLE>
15
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the registrant are as
follows:
NAME AGE POSITION
- ---- --- --------
Allen C. Harper 54 Chairman of the Board of Directors/
Chief Executive Officer
Ronald A. Shuffield 48 President/Chief Operating Officer/Director
President of EWM
Thierry Manni 32 Director
James E. Newmeyer 50 Secretary/Treasurer and Director
President of Embassy Financial Services, Inc.
MANAGEMENT
A brief description of the key management of the Company is as follows:
ALLEN C. HARPER
Since 1984 Allen C. Harper has been principally employed as the Chairman and
Chief Executive Officer and is a principal shareholder of First Reserve, Inc.,
the holding company of EWM.
Mr. Harper has more than 30 years of business experience, primarily in the areas
of real estate management and development and rail transportation. He is still
active in a variety of businesses. Mr. Harper is currently the Chairman of the
Board of Directors, Chief Executive Officer and, with his wife, the owner of
American Heritage Railways, Inc., which owns and operates The Durango &
Silverton Narrow Gauge Railroad, in southwestern Colorado. Since September 1989,
Mr. Harper has served as a Director on the Tri-County Rail Authority and has
been chairman of the board for two terms. He has also served as a director of
Florida East Coast Railway Co., a railroad company based in St. Augustine
Florida, since May of 1994.
From February 1994 to July 1998, Mr. Harper served as Chairman of the Board of
Directors and Chief Executive Officer of First American Railways, Inc. In
October 1998, First American Railways, Inc., voluntarily filed a Chapter 7
Bankruptcy Proceeding in the United States Bankruptcy Court for the Southern
District of Florida.
RONALD A. SHUFFIELD
Ronald A. Shuffield is the President and Chief Operating Officer of both the
Company and EWM, and a member of each entity's Board of Directors. He has been
the President of EWM since 1984. He acts as the chief operating officer and
supervises the day-to-day operations of the Company and EWM. Mr. Shuffield is a
licensed Florida real estate broker and certified general contractor. Mr.
Shuffield has been a member of the Realtor Association of Dade County since 1984
and has served
16
<PAGE>
in a variety of officer and director positions thereon. Mr. Shuffield served on
the National Advisory Council of the PHH Relocation Network (now Cendant
Mobility Servicers) from 1993-1996. Mr. Shuffield's community memberships
include the Coral Gables Chamber of Commerce (where he serves as President from
1992-93 and where he was awarded the Robert B. Knight Outstanding Citizen of
Coral Gables Award), the Greater Miami Chamber of Commerce (where he serves on
the Board of Governors) and the Rotary Club of Coral Gables. Mr. Shuffield
received a Bachelor of Science degree in business administration from the
University of Tennessee.
M. THIERRY MANNI
Mr. Manni is Chairman and International Development Director of MECAPLAST
International. MECAPLAST International is a Monegasque corporation which
manufacturers plastic parts for the automobile industry. Mr. Manni is
responsible for that company's operations in Monaco and France.
JAMES E. NEWMEYER
Mr. Newmeyer has been President of Embassy Financial Services, Inc. since 1996,
where he oversees all operations of the mortgage business. He is also
Secretary/Treasurer of the Company. Prior to joining Embassy, Mr. Newmeyer has
been an executive with numerous real estate mortgage companies for over twenty
years, including PHH Mortgage Services, Source One Mortgage Services
Corporation, MHSI/Chemical Residential Mortgage/ CenTrust Mortgage, Amerifirst
Mortgage and Southeast Mortgage Company. Mr. Newmeyer has a Bachelor of Arts
degree from Furman University and a Masters Degree from Florida International
University.
ITEM 6. EXECUTIVE COMPENSATION
COMPENSATION
The following table sets forth information about the compensation paid
or accrued by the Company to the Company's named executive officers whose
aggregate compensation exceeded $100,000, for the last three completed fiscal
years:
17
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
NAME AND SECURITIES UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
------------------ ---- -------- ----- ---------------------
<S> <C> <C> <C> <C>
Allen C. Harper - Chief 1998 $274,682 --- ---
Executive Officer 1997 $324,924 --- ---
1996 $257,843 --- ---
Ronald A. Shuffield - 1998 $323,630 --- ---
President, Chief Operating 1997 $373,381 --- ---
Officer; 1996 $305,597 --- ---
President of Ewm
James E. Newmeyer - 1998 $143,092* --- ---
Secretary, Treasurer; 1997 --- --- ---
President of Embassy 1996 --- --- ---
Financial Services, Inc.
</TABLE>
- -------------------
* Beginning April 1, 1998, through December 31, 1998.
COMPENSATION OF DIRECTORS
The Company will reimburse members of the Board of Directors for their expenses
incurred in connection with their services as directors. In addition, each
director will be paid $500 for every directors meeting they attend and $100 for
each committee meeting they attend for directors' committees of which such
director is a member.
COMPENSATION OF OFFICERS - EMPLOYMENT AGREEMENTS
The Company recently entered into employment agreements with Messrs. Harper and
Shuffield. The agreements memorialize the employment relationship that have
existed since 1984 between the respective individuals and the Company. The
agreements have an initial five year term, with an option of the employee to
extend for an additional five-year period. Mr. Shuffield's agreement provides
for his employment as President of EWM at a base salary of $320,000 per year
with a bonus of up to 7.5% of its pre-tax net income. Mr. Harper's agreement
provides for his employment as Chairman and Chief Executive Officer of EWM at a
base salary of $270,000 per year with a bonus of up to 7.5% of its pre-tax net
income. Each of the employment agreements provide that the base salary shall
18
<PAGE>
be increased at least 10% per year during the term of the agreement. The Company
also pays for disability and life insurance for both Messrs. Harper and
Shuffield and provides each with full medical and health insurance coverage, a
401(K) plan and a monthly automobile allowance.
In connection with the purchase of Byrne, EWM also entered into an employment
agreement with Thomas E. Byrne. Mr. Byrne's agreement provides for his
employment as President of EWM's Commercial Sales Division at a base salary of
$100,000 plus a commission and bonus incentives based on real estate closings.
The agreement provides for an initial term of five years.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to two First Reserve, Inc. Common Stock Purchase Warrants dated August
31, 1998 (collectively, the "Warrants"), the Company granted to VALORSEC
Vermaltungs & Treu-Anstalt, a Swiss company ("VALORSEC"), rights to purchase
Common Stock of the Company. M. Thierry Manni, a director of the Company, is a
director of VALORSEC. The first Warrant grants VALORSEC the right to purchase
500,000 shares of the Common Stock of the Company at the initial exercise price
of $3.50 per share. The second Warrant grants VALORSEC the right to purchase
500,000 shares of the Common Stock of the Company at the initial exercise price
of $3.00 per share. All Warrants may be exercised until August 31, 2004.
ITEM 8. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The Company is authorized to issue 100,000,000 shares of Common Stock, no par
value. There are 6,767,050 shares of Common Stock currently outstanding. Each
holder of Common Stock is entitled to one vote per share owned on all matters
submitted to a vote of the shareholders. Holders of Common Stock will be
entitled to receive ratably any dividends declared by the Board of Directors out
of funds legally available for dividends. If the Company is liquidated,
dissolved or wound up, holders of the Common Stock have the right to a ratable
portion of the assets remaining after payment of liabilities. All shares of
Common Stock outstanding and to be outstanding upon completion of this Offering
are and will be fully paid and non-assessable.
Holders of Common Stock have no cumulative voting rights and, therefore, the
holders of more than half of the shares voting for the election of directors can
elect all the directors. Furthermore, the Bylaws of the Company provide that
only the Board of Directors, the President shareholders holding at least 10% of
the stock of the Company may call a special shareholders' meeting, which may
prevent a shareholder or group of shareholders holding less than 10% of the
stock of the Company from calling such a meeting.
American Securities Transfer & Trust Co., Denver, Colorado, serves as the
Company's transfer agent for its Common Stock.
19
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The registrant's Common Stock is not currently quoted on any national exchange
or other public trading market.
The registrant has not paid any dividends on its Common Stock and intends to
retain all earnings for use in its operations and to finance the development and
the expansion of its business. It does not anticipate paying any dividends on
the Common Stock in the foreseeable future. The payment of dividends is within
the discretion of the registrant's Board of Directors. Any future decision with
respect to dividends will depend on future earnings, future capital needs and
the registrant's operating and financial condition, among other factors.
ITEM 2. LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation which is not
incidental to the ordinary course of its business and operations.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to a Confidential Private Offering Memorandum dated April 6, 1998, the
Company sold 555,000 shares of Common Stock at $1.00 per share. The Company
received $555,000 in gross proceeds from this Offering. The Company paid no cash
commissions in connection with this Offering. This Offering was made pursuant to
the exemption from registration provided in Rule 504 of Regulation D as
promulgated under the Securities Act of 1933, as amended (the "1933 Act").
Effective May 1, 1998, EWM acquired Byrne-Rinehart & Co. ("Byrne"), a Miami,
Florida real estate brokerage operation. Under the terms of the merger, all of
the shares of Common Stock of Byrne were converted into and exchanged for an
aggregate of 400,000 shares of Common Stock of the Company and $300,000 cash.
This sale of the Common Stock of the Company was made pursuant to the exemption
from registration provided in Section 4(2) of the 1933 Act.
Effective September 30, 1998, EWM acquired Gerard International Realty, Inc.
("Gerard"), a Miami Beach, Florida real estate brokerage operation. Under the
terms of the merger, all of the shares of Common Stock of Gerard were converted
into and exchanged for an aggregate of up to 500,000 shares of Common Stock
(200,000 of these shares remain in escrow and may be released upon the
satisfaction of certain conditions subsequent set forth in the Gerard Merger
Agreement) of the
20
<PAGE>
Company. This sale of the Common Stock of the Company was made pursuant to the
exemption from registration provided in Section 4(2) of the 1933 Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has authority under Section 607.0850 of the Florida Business
Corporation Act to indemnify its directors and officers to the extent provided
in such statute. The Company's Bylaws provide that the Company may indemnify its
executive officers and directors to the fullest extent permitted by law either
now or hereafter.
The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of a director, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available under Florida law. In addition, each
director will be subject to liability for (a) violations of criminal laws,
unless the director had reasonable cause to believe his conduct was lawful or
had no reasonable cause to believe his conduct was unlawful; (b) deriving an
improper personal benefit from a transaction; (c) voting for or assenting to an
unlawful distribution; and (d) willful misconduct or a conscious disregard for
the best interests of the Company in a proceeding by or in the right of the
Company to procure a judgment in its favor or in a proceeding by or in the right
of a shareholder. The statute does not affect a director's responsibilities
under any other law, such as the federal securities laws.
At present, there is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any threatened litigation that may result in claim for
indemnification by any officer or director.
PART F/S
The Company's audited consolidated financial statements for the eleven month
period ended December 31, 1998, immediately follow the signature page to this
Form 10-KSB.
PART III
ITEM 1. INDEX TO EXHIBITS
2.1 Stock Purchase Agreement dated March 31, 1999 by and between
Marjorie Schwartz and First Reserve, Inc. (acquisition of
Columbia Title of Florida, Inc.).
3.1 Articles of Incorporation of the Company (f.k.a. El Squared,
Inc.), incorporated by reference to the Company's Form 10-SB,
as filed with the Securities and Exchange Commission on May
14, 1999.
3.2 Bylaws of First Reserve, Inc., incorporated by reference to
the Company's Form 10-SB, as filed with the Securities and
Exchange Commission on May 14, 1999.
21
<PAGE>
10.1 Articles of Merger of First Reserve, Inc. (a Florida
corporation) and First Reserve, Inc. (an Arizona corporation),
incorporated by reference to the Company's Form 10- SB, as
filed with the Securities and Exchange Commission on May 14,
1999.
10.2 Agreement and Plan of Merger dated April 1, 1998 by and
between First Reserve, Inc. (a Florida corporation) and First
Reserve, Inc. (an Arizona corporation), incorporated by
reference to the Company's Form 10-SB, as filed with the
Securities and Exchange Commission on May 14, 1999.
10.3 Articles of Merger of Byrne-Rinehart & Co. (a Florida
corporation) and Esslinger- Wooten-Maxwell, Inc. (a Florida
corporation), incorporated by reference to the Company's Form
10-SB, as filed with the Securities and Exchange Commission on
May 14, 1999.
10.4 Articles of Merger of Gerard International Realty, Inc. (a
Florida corporation) and Esslinger-Wooten-Maxwell, Inc. (a
Florida corporation), incorporated by reference to the
Company's Form 10-SB, as filed with the Securities and
Exchange Commission on May 14, 1999.
10.5 Employment Agreement dated March 5, 1998 by and between First
Reserve, Inc. and Allen C. Harper, incorporated by reference
to the Company's Form 10-SB, as filed with the Securities and
Exchange Commission on May 14, 1999.
10.6 Employment Agreement dated March 5, 1998 by and between First
Reserve, Inc. and Ronald A. Shuffield, incorporated by
reference to the Company's Form 10-SB, as filed with the
Securities and Exchange Commission on May 14, 1999.
10.7 Promissory Note for $ 1.2 million between First Reserve, Inc.
and R.T. Construction Interests, Inc., dated July 13, 1998.
10.8 Confidential Private Offering Memorandum, dated April 6, 1998.
10.9 Common Stock Purchase Warrant between the Company and
Valorsec, dated August 31, 1998.
10.10 Common Stock Purchase Warrant between the Company and
Valorsec, dated August 31, 1998.
21 Subsidiaries of the registrant.
23.1 Consent of McClain and Company, L.C.
22
<PAGE>
23.2 Consent of McClain and Company, L.C.
23.3 Consent of McClain and Company, L.C.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
FIRST RESERVE, INC.
DATE: SEPTEMBER 13, 1999 BY: /s/ Allen C. Harper
TITLE: Chairman
BY: /s/ Ronald A. Shuffield
TITLE: Director
BY: /s/ James E. Newmeyer
TITLE: Director
BY: /s/ Thierry Manni
TITLE: Director
24
<PAGE>
COMBINED FINANCIAL STATEMENTS
RESTATED
JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
AND
EMBASSY FINANCIAL SERVICES, INC.
CORAL GABLES, FLORIDA
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Officers and Directors
First Reserve, Inc. and Subsidiaries and
Embassy Financial Services, Inc.
Coral Gables, Florida
We have audited the accompanying combined balance sheet of First Reserve, Inc.
and Subsidiaries, and Embassy Financial Services, Inc. as of January 31, 1998,
and the related combined statements of income, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of First
Reserve, Inc. and Subsidiaries, and Embassy Financial Services, Inc. as of
January 31, 1998 and the combined results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
As discussed in Note 14 to the financial statements, these financial statements
have been restated to reflect certain changes.
McClain & Company, L.C.
April 20, 1998, except for Note 14
as to which the date is July 30, 1999
Miami, Florida
Page 1 of 15
<PAGE>
<TABLE>
<CAPTION>
COMBINED BALANCE SHEET
JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 378,423
Receivables 179,759
Prepaid expenses and other 108,195
Shareholders' loans receivable 86,000
-----------
Total current assets $ 752,377
PROPERTY AND EQUIPMENT
Furniture and fixtures 358,132
Office equipment 485,545
-----------
843,677
Less accumulated depreciation 535,333
-----------
Net property and equipment 308,344
OTHER ASSETS
Goodwill, net 21,970
Deposits and other 41,531
-----------
Total other assets 63,501
-----------
Total assets $ 1,124,222
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 308,978
STOCKHOLDERS' EQUITY
Common stock $ 2,255
Paid-in capital 4,681,877
Accumulated deficit (3,868,888)
-----------
Total stockholders' equity 815,244
-----------
Total liabilities and stockholders'
equity $ 1,124,222
===========
</TABLE>
See independent auditors' report and the accompanying notes to the combined
financial statements, which are an integral part of this combined statement.
Page 2 of 15
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENT OF INCOME
YEAR ENDED JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
<S> <C> <C>
REVENUES $ 11,462,686
COST AND EXPENSES
Commissions, fees and other incentives $ 7,215,802
General and administrative expenses 3,770,104
Depreciation and amortization 103,835
------------
Total costs and expenses 11,089,741
------------
Income from operations before income taxes
and other income and expenses 372,945
OTHER INCOME AND (EXPENSES)
Interest income 21,062
Interest expense (122)
Other expenses (18,570)
------------
Total other income and (expenses) 2,370
------------
Income before income taxes 375,315
PROVISION FOR INCOME TAX 2,277
------------
Net income 373,038
DIVIDENDS TO PREFERRED STOCKHOLDERS (202,687)
DIVIDENDS TO "S" STOCKHOLDERS OF EMBASSY
FINANCIAL SERVICES, INC (152,997)
Net income $ 17,354
============
BASIC EARNINGS PER COMMON SHARE $ 11.70
============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,483
============
DILUTED EARNINGS PER COMMON SHARE $ 11.70
============
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 1,483
============
</TABLE>
See independent auditors' report and the accompanying notes to the combined
financial statements, which are an integral part of this combined statement.
Page 3 of 15
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
TOTAL
COMMON COMMON PREFERRED PREFERRED PAID STOCK-
STOCK STOCK STOCK STOCK IN ACCUMULATED HOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ --------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 1, 1997 4,335 $1,365 3,926,792 $ 3,926,792 $ 74,816 $(3,886,242) $ 116,731
Dividends to preferred stockholders of
First Reserve, Inc. at $0.05 per
preferred share -- -- -- -- -- (202,687) (202.687)
Dividends to Embassy Financial
Services, Inc. "S" stockholders at
$51.00 per common share -- -- -- -- -- (152,997) (152,997)
Return of capital to the shareholders of
Embassy Financial Services, Inc. -- -- -- -- (12,377) -- (12,377)
Conversion of preferred shares and
accrued dividends into shares of
common stock 890 890 (3,926,792) (3,926,792) 4,619,438 -- 693,536
Net income -- -- -- -- -- 373,038 373,038
----- ------ ---------- ----------- ---------- ----------- ---------
BALANCE, January 31, 1998 5,225 $2,255 -- $ -- $4,681,877 $(3,868,888) $ 815,244
===== ====== ========== =========== ========== =========== =========
</TABLE>
See independent auditors' report and the accompanying notes to the combined
financial statements, which are an integral part of this combined statement.
Page 4 of 15
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEAR ENDED JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 11,428,132
Interest received 12,943
Cash paid to suppliers and employees (10,861,918)
Income taxes paid (2,277)
------------
Net cash provided by operating
activities 576,880
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in shareholders loans receivable (86,000)
Purchases of property and equipment (151,495)
------------
Net cash used in investing activities (237,495)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Return of paid-in-capital (12,377)
Dividends paid (152,997)
------------
Net cash used in financing activities (165,374)
------------
Net increase in cash 174,011
CASH, February 1, 1997 204,412
------------
CASH, January 31, 1998 $ 378,423
============
</TABLE>
See independent auditors' report and the accompanying notes to the combined
financial statements, which are an integral part of this combined statement.
Page 5 of 15
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENT OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEAR ENDED JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
<S> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 373,038
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 100,922
Amortization 2,912
Loss on abandonment of property
and equipment 240
Increase in prepaid expenses and
other assets (43,754)
Increase in accounts receivable (42,930)
Increase in accounts payable and
accrued expenses 186,452
---------
Net cash provided by operating
activities $ 576,880
=========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During fiscal year ended January 31, 1998, dividends of $202,687 were
accrued and not paid.
As fully described in Note 6, during fiscal year ended January 31, 1998,
preferred stock of First Reserve, Inc. totaling $3,926,792 and accrued
dividends of $693,536 were converted to 889.67 shares of $1 par value common
stock of First Reserve, Inc.
See independent auditors' report and the accompanying notes to the combined
financial statements, which are an integral part of this combined statement.
Page 6 of 15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the
accounts of First Reserve, Inc., and Embassy Financial Services,
Inc. (the "Companies"), all of which are under common ownership.
All intercompany accounts have been eliminated in the combined
financial statements.
The accounts of Embassy Financial Services, Inc. are for the
year ended December 31, 1997.
PRINCIPLES OF CONSOLIDATION
The accompanying combined financial statements include the
accounts of First Reserve, Inc. (the Company) and its
wholly-owned subsidiaries, Esslinger, Wooten and Maxwell, Inc.,
First Reserve Realty, Inc., First Reserve Management, Inc., and
First Reserve Equities, Inc. All intercompany accounts and
transactions have been eliminated in the consolidation of First
Reserve, Inc.
REVENUE RECOGNITION
First Reserve, Inc. earns brokerage commissions from the sale of
commercial and residential real estate and from the management
of rental properties. Revenues are recorded when the real estate
sale is closed and the management fees are earned. Embassy
Financial Services, Inc. charges its customers for loan and
ancillary fees related to mortgages for the purchase and
refinancing of their homes. Revenues are recorded when the
mortgage is "closed". Expenses for all companies are recorded
when they are incurred.
ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
NATURE OF OPERATIONS
First Reserve, Inc. is primarily engaged in the brokerage and
management of residential and commercial real estate in Miami,
Florida.
Embassy Financial Services, Inc. is a licensed residential
mortgage lender that specializes in conventional, FHA, and VA
first mortgages. To date, all loans originated by Embassy
Financial Services, Inc. have been in the capacity of an agent
on behalf of other mortgage lenders. Presently, Embassy
Financial Services, Inc. does not service any of the loans they
originate. Embassy Financial Services, Inc. was in the
development stage since its formation on April 8, 1996 until
November 1996.
See independent auditors' report.
Page 7 of 15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ORGANIZATIONAL COSTS
Organizational costs are amortized on the straight-line method
over five years. Organizational costs are reflected in other
assets and amounted to $878, net of accumulated amortization of
$330 at January 31, 1998.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
FIDUCIARY FUNDS
The Company also receives money from clients, property owners,
tenants and third parties for the purchase, rental and
management of properties. This cash is held in trust on behalf
of clients and property owners and may not be used by the
Company for its regular operations. As such, the combined
balance sheet does not include the net assets held in escrow
which amounted to $1,784,002 at January 31, 1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using
straight-line and accelerated methods over the estimated useful
lives of the assets.
INCOME TAXES
Deferred income tax assets and liabilities are computed annually
for differences between the financial statements and tax basis
of assets and liabilities that will result in taxable or
deductible amounts in the future, based on enacted tax laws and
rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax
payable or refundable for the period minus the changes during
the period in deferred tax assets and liabilities.
Income taxes are provided for on all taxable income included in
the combined financial statements in the period in which the
income is reported for financial purposes. Accordingly, deferred
income taxes (benefits) are provided for timing differences
between financial and tax reporting. The principal items
comprising these differences are the deferred recognition of
operating losses and passive losses for tax purposes.
No liability for income taxes appears on the accompanying
financial statements for Embassy Financial Services, Inc. as the
Company has elected to be treated as an "S" Corporation for
federal income tax purposes. Pursuant to this election, the
corporate income is taxed to the shareholders of Embassy
Financial Services, Inc.
See independent auditors' report.
Page 8 of 15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
NOTE 2 - RECEIVABLES
Receivables consist primarily of open trade accounts that have
not been reduced by an allowance for doubtful accounts, as
management considers all receivables to be fully collectible.
NOTE 3 - SHAREHOLDER LOANS RECEIVABLE
These loans are due on demand and bear no interest.
NOTE 4 - GOODWILL
The Company has accounted for the excess of the acquisition
costs of certain subsidiaries over the fair value of
identifiable assets as goodwill. This goodwill is being
amortized over fifteen-year periods. Accumulated amortization
amounted to $7,334 at January 31, 1998.
NOTE 5 - COMMON STOCK
Common stock as of January 31, 1998 for First Reserve, Inc. and
as of December 31, 1997 for Embassy Financial Services, Inc.
consists of the following:
First Reserve, Inc., $1 par value, 5,000 shares
authorized 2,224.67 issued and outstanding. $2,225
Embassy Financial Services, Inc., $.01 par value,
10,000 shares authorized, 3,000 shares issued
and outstanding. 30
------
$2,255
NOTE 6 - PREFERRED STOCK
In January 1998, the Company entered into an agreement with its
preferred stockholders to purchase 889.67 shares of $1 par value
common stock. In exchange for the purchase of the common stock,
the preferred stockholders surrendered their preferred stock and
all rights to accrued and unpaid dividends in relation to the
preferred stock and received 1,000,000 warrants (see Note 13).
At January 1998, the accrued and unpaid dividends in relation to
the preferred stock amounted to $693,536.
See independent auditors' report.
Page 9 of 15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LEASES
The Company has entered into several automobile and real estate
lease commitments which expire in various fiscal years through
2002. The future commitments under these leases are summarized
as follows:
YEARS ENDING
JANUARY 31,
------------
1999 $ 458,124
2000 428,368
2001 277,922
2002 12,364
2003 --
----------
$1,176,778
==========
Rent expense under these leases was approximately $527,000 for
the year ended January 31, 1998.
GUARANTEE
In February 1995, the Company and a majority shareholder of the
Company, as guarantor, entered into an agreement with an
unrelated third party to guarantee that the Company would be
responsible for certain portions of the obligations on a
building managed by a subsidiary of the Company, First Reserve
Equities, Inc., provided that such building was sold after
December 31, 1995. In the event that the building was sold after
1995, the Company would be obligated to pay to the third party
any shortfall between the Net Sales Proceeds and the balance of
the note owed on the building, up to a maximum of $1,000,000.
The building was sold subsequent to December 31, 1995, but no
notice had been given to the Company, nor were any collection
proceedings initiated against the Company until mid 1998. On
July 13, 1998, a settlement agreement was reached with the third
party in the amount of $1,200,000, covering the $1,000,000
guarantee and an additional $200,000 for paying late.
See independent auditors' report.
Page 10 of 15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
NOTE 8 - CONCENTRATION OF CREDIT RISK
Esslinger, Wooten & Maxwell, Inc.(EWM) has experienced credit
risk in connection with its bank accounts. At various times
during the year, EWM maintained deposits with financial
institutions in excess of amounts insured by the FDIC. The
exposure to EWM is solely dependent on daily bank balances and
the financial strength of the respective institutions.
NOTE 9 - INCOME TAXES
The provision for income taxes for the year ended January 31,
1998 is based on current statutory rates and is summarized as
follows:
CURRENT DEFERRED TOTAL
------- -------- -----
Florida $ -- $ -- $ --
Federal 2,277 -- 2,277
------ --------- ------
$2,277 $ -- $2,277
====== ========= ======
DEFERRED PROVISION
The principal timing differences relate to net operating loss
carry forwards which resulted in deferred tax assets. These
deferred tax assets have been reduced in their entirety by
valuation allowances. A summary of the deferred tax assets and
related valuation accounts is as follows:
FEDERAL FLORIDA TOTAL
------- ------- -----
Deferred tax assets $ 337,004 $ 115,052 $ 452,056
Deferred tax asset -
valuation allowance (337,004) (115,052) (452,056)
--------- --------- ---------
$ -- $ -- $ --
========= --------- ---------
As of January 31, 1998, the Company had net operating loss
carryovers of approximately $2,132,000. The carryovers expire at
various dates through 2011.
NOTE 10 - PROFIT SHARING PLAN
EWM has a deferred tax savings plan which qualifies under
section 401(k) of the Internal Revenue Code. The plan covers all
employees having at least one year of service during which they
have worked at least 1,000 hours, providing they have attained
the age of 21. The plan allows EWM to make voluntary
contributions to the plan for eligible participants.
Participants are 100% vested in their contributions to the plan
and vest in EWM's contribution as follows:
See independent auditors' report.
Page 11 of 15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
NOTE 10 - PROFIT SHARING PLAN (CONTINUED)
YEARS OF TOTAL SERVICE VESTING PERCENTAGE
---------------------- ------------------
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
During the year ended January 31, 1998, employer contributions
to the plan were approximately $8,500.
NOTE 11 - SUBSEQUENT EVENT
Subsequent to January 31, 1998, the Companies' Boards of
Directors authorized a plan of reorganization. The
reorganization involves the shareholders of First Reserve, Inc.
and Embassy Financial Services, Inc. transferring 100% of each
company's stock to First Reserve, Inc. (Arizona) in exchange for
4,624,000 shares of First Reserve, Inc. (Arizona). First
Reserve, Inc. (Arizona) is a publicly traded company that, prior
to the reorganization, is in shell form. It is 83.33% owned by
the shareholders of First Reserve, Inc. and Embassy Financial
Services, Inc.
In addition, on April 21, 1998, the Company announced and
authorized a plan of merger with Byrne-Rinehart & Co., a real
estate company specializing in upper-end home sales. The
announced merger calls for First Reserve, Inc. (Arizona) to
issue 400,000 shares of stock and $300,000 of cash to the
shareholders of Byrne-Rinehart & Co. in exchange for all the
issued and outstanding shares of Byrne-Rinehart & Co. At this
time, financial information of Byrne-Rinehart & Co. is
unavailable. This merger will allow the Company to offer a full
line of integrated real estate and financial services.
After the above planned transactions have transpired, the former
shareholders of First Reserve, Inc. and Embassy Financial
Services, Inc. will own in excess of 90% of First Reserve, Inc.
(Arizona).
Additionally, as described in Note 7, subsequent to January 31,
1998, the third party demanded payment on the shortfall between
the Net Sales Proceeds and the balance of the note owed on the
building managed by a subsidiary of the Company for the original
$1,000,000 guarantee and an additional $200,000 for the late
payment. On July 13, 1998, a settlement agreement was reached
with the third party in the amount of $1,200,000. The Company
paid $250,000 on the date the agreement was signed and the
remaining balance of $950,000 was financed under a promissory
note over four years bearing no interest with an unamortized
discount of $164,248 based on an imputed interest rate of
10.175%.
See independent auditors' report.
Page 12 of 15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
NOTE 12 - EARNINGS PER SHARE
Earnings per share ("EPS") was computed by dividing net income
by the weighted average number of common shares outstanding
during the period. The calculation of earnings per share
includes net income adjusted for accrued dividends applicable to
the preferred stock of First Reserve and "S" shareholders of
Embassy Financial Services, Inc. As discussed in Note 6, all of
the preferred stock and accrued dividends through that date were
converted to common stock on January 1998.
The following is a calculation of earnings per share for the
year ended January 31, 1998:
Basic earnings per common share:
Numerator
Net income before extraordinary items applicable
to common stockholders $17,354
Extraordinary items, net --
-------
Income applicable to common stockholders 17,354
Denominator
Weighted average common shares 1,483
-------
Basic EPS $ 11.70
=======
Diluted earnings per common share:
Numerator
Net income before extraordinary items applicable
to common stockholders $17,354
Extraordinary items, net --
-------
Income applicable to common stockholders 17,354
Denominator
Weighted average common shares 1,483
-------
Diluted EPS $ 11.70
=======
Options to purchase 500,000 shares of common stock at $3.00 per
share and 500,000 shares of common stock at $3.50 per share were
as of November 30, 1997, but were not included in the
computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares.
The options, which expire on November 30, 2002, were still
outstanding at the end of the year.
See independent auditors' report.
Page 13 of 15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
NOTE 13 - WARRANTS
On November 30, 1997, First Reserve issued 1,000,000 warrants to
a majority shareholder as part of an agreement with the
shareholder to convert preferred shares and accrued dividends
into common shares. No other consideration was given to the
Company for these warrants. The first warrant grants this
majority shareholder the right to purchase 500,000 shares of the
Company's common stock at the initial exercise price of $3 per
share. The second warrant grants the same majority shareholder
the right to purchase another 500,000 shares of the Company's
common stock at the initial exercise price of $3.50 per shares.
The warrants are exercisable from the date of issuance and
expired on November 30, 2002.
The following is a summary of the activity of the Company's
warrants for the year ended January 31, 1998:
WEIGHTED
NUMBER OF AVERAGE
WARRRANTS EXERCISE PRICE
--------- --------------
Outstanding beginning of the year --
Granted 1,000,000
Exercised --
---------
Outstanding at end of year 1,000,000 $3.25
=========
Exercisable at end of year 1,000,000
Weighted average fair value of
warrants issued for the year
ended January 31, 1998. $0.46
The weighted average fair value was estimated using the
Black-Scholes Option pricing model based on the weighted average
market price at date of grant of $1.00.
The following is a summary of the status of the stock warrants
outstanding at January 31, 1998:
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER
PRICE OUTSTANDING LIFE PRICE EXERCISABLE
-------- ----------- ----------- -------- -----------
$3.00 500,000 4.8 years $3.00 500,000
$3.50 500,000 4.8 years 3.50 500,000
--------- -----
1,000,000 $3.25
========= =====
See independent auditors' report.
Page 14 of 15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES AND
EMBASSY FINANCIAL SERVICES, INC.
(RESTATED)
NOTE 14 - RESTATEMENT
The Companies' financial statements have been restated to
reflect the following:
1. To exclude the activity of First Reserve Enterprises,
Inc., an inactive corporation from the combined financial
statements. This caused cash to decrease $93, deposits and
other assets to increase $1,600, common stock to decrease
$100, paid-in-capital to decrease $408,957 and accumulated
deficit to increase $410,564.
2. To reflect changes to the financial statement presentation
and related disclosures pursuant to an SEC comment letter
dated June 18, 1999.
See independent auditors' report.
Page 15 of 15
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
RESTATED
DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
CORAL GABLES, FLORIDA
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Officers and Directors
First Reserve, Inc. and Subsidiaries
Coral Gables, Florida
We have audited the accompanying consolidated balance sheet of First Reserve,
Inc. and Subsidiaries ("the Companies"), as of December 31, 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for the eleven-month period then ended. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Reserve, Inc. and Subsidiaries, as of December 31, 1998 and the consolidated
results of its operations and its cash flows for the eleven-month period then
ended in conformity with generally accepted accounting principles.
As discussed in Note 19 to the Financial Statements, it was determined that
common stock and accumulated deficit were understated and paid-in capital,
goodwill deposits and other assets, legal settlements and amortization expense
were overstated. Accordingly, the financial statements have been restated to
reflect this correction.
McClain & Company, L.C.
April 5, 1999, except for Note 19,
as to which the date is July 30, 1999 and Note 17
as to which the date is August 19, 1999
Miami, Florida
Page 1 of 23
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,055,160
Receivables 325,227
Prepaid expenses and other 157,079
Shareholders' loans receivable 80,000
-----------
Total current assets $1,617,466
PROPERTY AND EQUIPMENT
Furniture and fixtures 402,905
Office equipment 497,929
Leasehold improvements 74,626
-----------
975,460
Less accumulated depreciation (541,656)
-----------
Net property and equipment 433,804
OTHER ASSETS
Goodwill, net 945,834
Deposits and other 126,781
-----------
Total other assets 1,072,615
----------
Total assets $3,123,885
==========
</TABLE>
See independent auditors' report and the accompanying notes to the consolidated
financial statements, which are an integral part of this consolidated statement.
Page 2 of 23
<PAGE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 400,592
Current maturities of long-term debt, net
of unamortized discount 168,871
-----------
Total current liabilities $ 569,463
LONG TERM LIABILITIES
Note payable, net of unamortized
discount 616,881
----------
Total liabilities 1,186,344
STOCKHOLDERS' EQUITY
Common stock, no par value, 100,000,000
authorized shares; 6,567,050 shares
issued, 6,767,050 shares outstanding 5,739,507
Accumulated deficit (3,801,966)
-----------
Total stockholders' equity 1,937,541
----------
Total liabilities and stockholders'
equity $3,123,885
==========
</TABLE>
Page 3 of 23
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
<S> <C> <C>
REVENUES $17,015,043
COST AND EXPENSES
Commissions, fees and other incentives $11,261,239
General and administrative expenses 4,416,803
Depreciation and amortization 153,956
Legal and other settlements 1,048,812
-----------
Total costs and expenses 16,880,810
-----------
Income from operations before income taxes
and other income and expenses 134,233
OTHER INCOME AND EXPENSES
Interest income 14,029
Interest expense (35,832)
Other expenses (2,865)
Total other income and (expenses) (24,668)
-----------
Income before income taxes 109,565
PROVISION FOR INCOME TAX --
-----------
Net income $ 109,565
===========
EARNINGS PER COMMON SHARE:
BASIC EARNINGS PER COMMON SHARE $ 0.02
===========
WEIGHTED AVERAGE COMMON SHARES 5,718,504
===========
DILUTED EARNINGS PER COMMON SHARE $ 0.02
===========
WEIGHTED AVERAGE DILUTED COMMON SHARES 5,730,085
===========
PROFORMA EARNINGS PER SHARE (FROM CONTINUING
OPERATIONS - SEE NOTE 15):
NET INCOME AS REPORTED $ 109,565
===========
Proforma adjustment to provision for income taxes --
-----------
PROFORMA NET INCOME $ 109,565
===========
BASIC EARNINGS PER COMMON SHARE $ 0.02
===========
DILUTED EARNINGS PER COMMON SHARE $ 0.02
===========
</TABLE>
See independent auditors' report and the accompanying notes to the consolidated
financial statements, which are an integral part of this consolidated statement.
Page 4 of 23
<PAGE>
<TABLE>
<CAPTION>
FIRST RESERVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
(RESTATED)
COMMON COMMON TOTAL
STOCK STOCK PAID IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE, February 1, 1998 2,613 $ 2,255 $4,681,877 $(3,868,888) $ 815,244
No par value stock acquired from reverse merger of
Phoenix Financial Reporting Group, Inc. with First
Reserve, Inc. and Embassy Financial Services, Inc. 3,000,000 130 -- -- 130
No par value stock issued from reverse merger of
Phoenix Financial Reporting Group, Inc. with First
Reserve, Inc. and Embassy Financial Services, Inc. 2,312,050 4,676,288 -- -- 4,676,288
Return of capital to the shareholders of Embassy
Financial Services, Inc. prior to the reorganization. -- -- (7,844) -- (7,844)
Retirement of Embassy Financial Services, Inc.
common stock as a result of the reverse merger
with Phoenix Financial Reporting Group, Inc. (1,500) (30) (43,346) -- (43,376)
Retirement of First Reserve, Inc. common stock as a
result of the reverse merger with Phoenix Financial
Reporting Group, Inc. (1,113) (2,225) (4,630,687) -- (4,632,912)
No par value stock issued from "504" private
placement 555,000 363,089 -- -- 363,089
No par value stock issued from the acquisition of
Byrne-Rhinehart & Co. 400,000 400,000 -- -- 400,000
No par value stock issued from the acquisition of
Gerard International Realty, Inc. 300,000 300,000 -- -- 300,000
Distributions to Embassy Financial Services, Inc.
former "S" stockholders of $14.21 per common
share -- -- -- (42,643) (42,643)
Net income for the 11-month period ended December
31, 1998 -- -- -- 109,565 109,565
--------- ---------- ---------- ----------- -----------
BALANCE, December 31, 1998 6,567,050 $5,739,507 $ -- $(3,801,966) $ 1,937,541
========= ========== ========== =========== ===========
</TABLE>
See independent auditors' report and the accompanying notes to the consolidated
financial statements, which are an integral part of this consolidated statement.
Page 5 of 23
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 16,882,003
Interest received 14,029
Interest paid (80)
Cash paid to suppliers and employees (15,673,531)
Settlements paid (298,812)
------------
Net cash provided by operating
activities $ 923,609
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in deposits (59,247)
Purchase of property and equipment (219,936)
Payment for purchase of acquired
companies; net of cash received (286,291)
Net decrease in shareholders'
loans receivable 6,000
------------
Net cash used in investing activities (559,474)
CASH FLOWS FROM FINANCING ACTIVITIES:
Return of paid-in-capital (7,844)
Distributions paid (42,643)
Net proceeds from "504" private placement
and recapitalization 363,089
Net cash provided by financing activities 312,602
---------
Net increase in cash 676,737
CASH, February 1, 1998 378,423
----------
CASH, December 31, 1998 $1,055,160
==========
</TABLE>
See independent auditors' report and the accompanying notes to the consolidated
financial statements, which are an integral part of this consolidated statement.
Page 6 of 23
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
<S> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 109,565
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 120,469
Amortization 33,487
Loss on abandonment of property
and equipment 3,097
Increase in prepaid expenses and
other assets (94,817)
Increase in accounts receivable (122,428)
Increase in accounts and notes
(operating) payable and
accrued expenses 874,236
----------
Net cash provided by operating
activities $ 923,609
==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On April 1, 1998, First Reserve, Inc. and Embassy Financial Services, Inc.
merged with First Reserve, Inc. (Arizona) f/k/a Phoenix Financial Reporting
Group, Inc. As a result of this merger, accounted for as a reverse acquisition
under the purchase method, Embassy Financial Services, Inc.'s assets totaling
$91,223 and liabilities totaling $47,847 were recorded. In addition, First
Reserve, Inc.'s (Arizona's) assets totaling $129 were recorded. No goodwill was
recorded as a result of this merger.
On May 1, 1998, the Company purchased all the stock of Byrne-Rhinehart & Co.
(Byrne) for $300,000 in cash and $400,000 in stock of the Company. Simultaneous
with the stock purchase, Byrne was merged into a wholly owned subsidiary of the
Company, Esslinger, Wooten and Maxwell, Inc. (EWM). As a result of this merger,
accounted for as a purchase, assets of $11,045, goodwill of $692,085, and
liabilities of $3,130 were recorded.
On September 30, 1998, the Company purchased all the stock of Gerard
International Realty, Inc. for $300,000 in stock of the Company. Simultaneous
with the stock purchase, Gerard International Realty, Inc. was merged into the
Company's wholly owned subsidiary, EWM. As a result of this merger, accounted
for as a purchase, assets of $706,490, goodwill of $258,915, and liabilities of
$665,405 were recorded.
The Company entered into a settlement with an unrelated third party in the
amount of $1,200,000. Under the terms of the agreement, the Company paid
$250,000 on the date the agreement was signed. The remaining $950,000 was
financed over four years with no interest. Interest on the note was imputed
using a 10.175% effective rate.
See independent auditors' report and the accompanying notes to the consolidated
financial statements, which are an integral part of this consolidated statement.
Page 7 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND COMBINATION
The accompanying consolidated financial statements include the
accounts of First Reserve, Inc. ("the Company") and its
wholly-owned subsidiaries, Esslinger, Wooten and Maxwell, Inc.,
First Reserve Realty, Inc., First Reserve Management, Inc.,
First Reserve Equities, Inc., and Embassy Financial Services,
Inc. ("Embassy"). Embassy's activity as part of the consolidated
group is for the period from April 1, 1998 to December 31, 1998.
For the period from January 1, 1998 to March 31, 1998, Embassy
was not a subsidiary of the Company, but was under common
ownership. Accordingly, the accounts of Embassy for this period
have been combined with the accounts of the Company and are
reflected in the consolidated statements of income,
stockholders' equity and cash flows for the eleven-month period
ended December 31, 1998. All intercompany accounts and
transactions have been eliminated in the consolidated financial
statements.
The accounts of Embassy are for the year ended December 31,
1998.
NATURE OF OPERATIONS
The Company is primarily engaged in the brokerage and management
of residential and commercial real estate in South Florida.
Embassy is a licensed residential mortgage lender that
specializes in conventional, FHA, and VA first mortgages
primarily in the South Florida area. To date, all loans
originated by Embassy have been in the capacity of an agent on
behalf of other mortgage lenders. Presently, Embassy does not
service any of the loans they originate.
REORGANIZATIONS
On April 1, 1998, the Company's Board of Directors authorized a
plan of reorganization. The reorganization involves the
shareholders of First Reserve, Inc., a Florida corporation and
Embassy Financial Services, Inc. transferring 100% of each
company's stock in exchange for 4,624,000 shares of First
Reserve, Inc., f/k/a Phoenix Financial Reporting Group, Inc., an
Arizona corporation in shell form. This reorganization was
accounted for as a reverse acquisition under the purchase
method. After the reorganization, the former shareholders of
First Reserve (Florida) and Embassy own 83.33% of First Reserve
(Arizona). The two surviving corporations are First Reserve,
Inc. (Arizona) and Embassy Financial Services, Inc. On June 17,
1998, First Reserve, Inc. (Arizona) domesticated to Florida.
See independent auditors' report.
Page 8 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS COMBINATIONS
On May 1, 1998, the Company acquired all the stock of
Byrne-Rhinehart & Co. (Byrne). Simultaneous with the stock
purchase, Byrne merged into a subsidiary of the Company,
Esslinger-Wooten-Maxwell, Inc. (EWM) in a business combination
accounted for as a purchase. Byrne was primarily engaged in the
same activity as EWM. Under the terms of the agreement, the
shareholders of Byrne received $300,000 in cash and 400,000
shares of common stock of First Reserve, Inc. for all the shares
of stock of Byrne. The total cost of the acquisition was
approximately $732,000, which includes direct acquisition costs
of approximately $32,000. Goodwill of approximately $692,000,
resulting from this transaction, is being amortized on the
straight-line method over 20 years. The results of operations
for Byrne are included in the consolidated income statement for
the period from May 1, 1998 to December 31, 1998.
On September 30, 1998, the Company acquired all the stock of
Gerard International Realty, Inc. (Gerard). Simultaneous with
the stock purchase, Gerard was merged into EWM in a business
combination accounted for as a purchase. Gerard was primarily
engaged in the same activity as EWM. Under the terms of the
agreement, the shareholders of Gerard received 300,000 shares of
common stock of the Company on the date of the acquisition. An
additional 200,000 "contingent" shares of common stock of the
Company are being held in escrow pending future gross commission
income to be generated by the former shareholders of Gerard over
the next 24 months. Due to the contingent nature of these
shares, the Company will record them as additional purchase
price upon issuance of the shares. The total cost of the
acquisition, excluding the contingent shares, was approximately
$335,000. Goodwill of approximately $259,000 resulting from this
transaction is being amortized on the straight-line method over
40 years. The results of operations for Gerard are included in
the consolidated statement of income for the period from
September 30, 1998 to December 31, 1998.
REVENUE RECOGNITION
The Company earns commissions from the sale of commercial and
residential real estate and from the management of rental
properties. Revenues are recorded when the real estate sale is
closed and the management fees are earned. Embassy charges its
customers for loan and ancillary fees related to mortgages for
the purchase and refinancing of their homes. Revenues are
recorded when the mortgage is "closed". Expenses for all
companies are recorded when they are incurred.
ORGANIZATIONAL COSTS
Organizational costs are amortized on the straight-line method
over five years. Organizational costs are reflected in other
assets and amounted to $634 net of accumulated amortization at
December 31, 1998.
See independent auditors' report.
Page 9 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1998, the American Institute of Certified Public Accountants
issued a Statement of Position (SOP 98-5), REPORTING ON THE
COSTS OF START-UP ACTIVITIES. SOP 98-5 requires companies to
expense organization costs as they are incurred and is effective
for fiscal years beginning after December 15, 1998. The Company
will adopt SOP 98-5 for the year beginning January 1, 1999. The
implementation of this SOP will not have a material effect on
the financial position of the Company.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
FIDUCIARY FUNDS
The Company also receives money from clients, property owners,
tenants and third parties for the purchase, rental and
management of properties. This cash is held in trust on behalf
of clients and property owners and may not be used by the
Company for its regular operations. As such, the consolidated
balance sheet does not include the net assets held in escrow
which amounted to $2,447,690 at December 31, 1998.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using
straight-line and accelerated methods over the estimated useful
lives of the assets.
INCOME TAXES
Deferred income tax assets and liabilities are computed annually
for differences between the financial statements and tax bases
of assets and liabilities that will result in taxable or
deductible amounts in the future, based on enacted tax laws and
rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax
payable or refundable for the period minus the changes during
the period in deferred tax assets and liabilities.
Income taxes are provided for on all taxable income included in
the consolidated financial statements in the period in which the
income is reported for financial purposes. Accordingly, deferred
income taxes (benefits) are provided for timing differences
between financial and tax reporting. The principal items
comprising these differences are the deferred recognition of
operating losses and passive losses for tax purposes.
Embassy's income for federal income tax purposes is computed
beginning April 1, 1998, when it became a taxpaying entity for
Federal income tax purposes as a result of the reorganization.
Prior to this date, Embassy was a pass-through entity and, as
such, the corporate income was passed through and ultimately
taxed to Embassy's shareholders.
See independent auditors' report.
Page 10 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CHANGE IN ACCOUNTING YEAR
In 1998, the Company's Board of Directors and Stockholders, due
to business and industry reporting reasons, elected to change
the fiscal year of the Company from January 31 to December 31.
The consolidated financial statements are for the eleven-month
period ended December 31, 1998 for all companies in the
consolidated group, except for the accounts of Embassy, which
are for the year ended December 31, 1998.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
ESTIMATES
The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management to
make 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 and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2 - RECEIVABLES
Receivables consist primarily of open trade accounts that have
not been reduced by an allowance for doubtful accounts, as
management considers all receivables to be fully collectible.
NOTE 3 - SHAREHOLDERS' LOANS RECEIVABLE
These loans are due on demand, and bear no interest.
NOTE 4 - GOODWILL
The Company has accounted for the excess of the acquisition
costs of certain subsidiaries over the fair value of
identifiable assets as goodwill. This goodwill is being
amortized over periods ranging from fifteen to forty years.
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (FAS 107)
requires the Company to disclose the fair value of financial
instruments for which it is practicable to estimate that value.
FAS 107 also requires the entity to disclose the method(s) and
significant assumptions used to estimate the fair value of
financial instruments.
See independent auditors' report.
Page 11 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical
to estimate that value:
CASH AND CASH EQUIVALENTS
The carrying amounts of cash and cash equivalents
approximate their fair value.
SHAREHOLDERS' LOANS RECEIVABLE
Carrying amounts of shareholders' loans receivable
approximate their fair value.
NOTE PAYABLE
The fair values of the non-interest bearing note payable is
estimated based upon the present value of future payments
using an imputed rate of interest of 10.175%.
The estimated fair values of the Company's financial instruments
at December 31, 1998, were as follows:
CARRYING FAIR
AMOUNT VALUE
----------- ----------
Cash and cash equivalents $1,055,160 $1,055,160
Shareholders' loans receivable $ 80,000 $ 80,000
Note payable $ 785,752 $ 785,752
NOTE 6 - BUSINESS SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
established standards for reporting information about operating
segments in financial statements. Operating segments are defined
as components of an enterprise about which separate financial
information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in
deciding how to allocate resources and on assessing performance.
The operating segments are managed separately because each
operating segment represents a strategic business unit that
offers different product services. The following information is
provided in accordance with the requirement of this statement.
See independent auditors' report.
Page 12 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 6 - BUSINESS SEGMENT INFORMATION (CONTINUED)
The Company's operations are principally managed on a product
services basis and are comprised of two reportable segments:
Esslinger, Wooten and Maxwell, Inc. (EWM) and Embassy Financial
Services, Inc. (Embassy). EWM's product services consists of
residential and commercial real estate brokerage. Embassy's
product services have been in the capacity of an agent for other
mortgage lenders in the South Florida area, specializing in
conventional, FHA and VA mortgages. Revenue, net income and
identifiable assets for these segments are as follows:
<TABLE>
<CAPTION>
ESSLINGER, EMBASSY
WOOTEN, FINANCIAL ALL
MAXWELL, INC. SERVICES, INC. OTHERS TOTAL
------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $15,893,097 $1,060,938 $ 61,008 $17,015,043
Net income $ 1,089,801 $ 99,761 $(1,079,997) $ 109,565
Identifiable assets
at year end $ 2,799,838 $ 299,037 $ 25,010 $ 3,123,885
</TABLE>
NOTE 7 - NOTE PAYABLE
At December 31, 1998, note payable consists of the following:
<TABLE>
<CAPTION>
UNAMORTIZED
PRINCIPAL DISCOUNT TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Note payable to third party, non-
interest bearing, payable in annual
installments of $237,500, matures
July 13, 2002, unsecured,
personally guaranteed by a majority
shareholder of the company
(unamortized discount is based on
imputed interest rate of 10.175%). $ 785,752 $164,248 $ 950,000
Less current portion (168,871) (68,629) (237,500)
--------- -------- ---------
$ 616,881 $ 95,619 $ 712,500
========= ======== =========
</TABLE>
Principal payments and amortized discount on the note payable
for the next five years and in the aggregate are as follows:
<TABLE>
<CAPTION>
UNAMORTIZED
PRINCIPAL DISCOUNT TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
1999 $ 168,871 $ 68,629 $ 237,500
2000 186,054 51,446 237,500
2001 204,985 32,515 237,500
2002 225,842 11,658 237,500
2003 -- -- --
--------- -------- ---------
$ 785,752 $164,248 $ 950,000
========= ======== =========
</TABLE>
See independent auditors' report.
Page 13 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 8 - EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with two
executives. These agreements provide for base salaries, to be
increased annually by at least 10%, plus bonuses and benefits at
the discretion of the Company's Board of Directors. The term of
the contract is five years and it may be terminated for cause.
In the event of termination without cause, the Company is liable
for all salary, payments and benefits for the remaining term of
the agreement.
EWM has entered into an employment agreement with the president
of its Commercial Sales Division. This agreement provides for
base salary, commission and bonus incentives based on real
estate closings, and additional bonus and benefits at the
discretion of the Company's Board of Directors. The term of the
contract is five years and it may be terminated for cause. In
the event of termination without cause, EWM is liable for all
salary, payments and benefits for the remaining term of the
agreement.
Minimum future commitment under these employment agreements are
as follows:
1999 $ 809,025
2000 869,927
2001 936,920
2002 877,279
2003 --
----------
$3,493,151
The total commitment, excluding incentives and bonuses, was
$686,992 for the eleven-month period ended December 31, 1998.
NOTE 9 - LEASES
During the eleven-month period ended December 31, 1998, the
Company entered into four office lease agreements.
The first agreement was with a corporation owned by a related
party. The lease is on a month-to-month basis and calls for a
monthly rental of $5,533.
A second office lease agreement was with a related party and
will commence in 1999. The lease is for a period of ten years
with an option to renew for two successive five year terms. The
lease calls for an annual rent of $90,000, plus all applicable
sales taxes, with an annual increase in rent of three percent
over the prior year's base rent.
See independent auditors' report.
Page 14 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 9 - LEASES (CONTINUED)
The third office lease agreement was entered into with an
unrelated party and will commence in 1999. This lease calls for
annual rent of $94,050, plus all applicable sales taxes, with an
increase in rent of three percent over the prior year's base
rent. The lease is for a term of ten years, two months and
fifteen days, with an option to renew for two successive five
year terms.
Finally, a fourth office lease agreement is on a month-to-month
basis and calls for a monthly rent of $3,439.
As a result of the merger with Byrne-Rhinehart & Co. and Gerard
International Realty, Inc., EWM assumed operating lease
agreements expiring at various dates.
Additionally, prior to 1998, the Company had entered into
several automobile, real estate and equipment leases accounted
for as operating leases.
These leases expire in various years through 2009. Minimum
future lease payments under all operating leases for the next
five years and in the aggregate are as follows:
YEARS ENDING
DECEMBER 31,
-------------
1999 $ 765,534
2000 686,608
2001 372,255
2002 356,373
2003 349,952
Beyond 1,824,447
----------
$4,355,169
==========
Rent expense under these leases was approximately $614,218 for
the eleven-month period ended December 31, 1998.
NOTE 10 - CONCENTRATION OF CREDIT RISK
EWM has experienced credit risk in connection with its bank
accounts. At various times during the year, EWM maintained
deposits with financial institutions in excess of amounts
insured by the FDIC. The exposure to EWM is solely dependent on
daily bank balances and the financial strength of the respective
institutions.
NOTE 11 - INCOME TAXES
Provision (benefit) is made for the tax effects of timing
differences as described in Note 1. The provision for income
taxes for the eleven-month period ended December 31, 1998, is
based upon current statutory rates and is summarized as follows:
CURRENT DEFERRED TOTAL
-------- -------- --------
Florida $ -- $ -- $ --
Federal -- -- --
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
See independent auditors' report.
Page 15 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 11 - INCOME TAXES (CONTINUED)
Deferred tax assets have been provided for deductible temporary
differences related to net operating losses. Deferred tax
liabilities have been provided for taxable temporary differences
related to accumulated depreciation and amortization. Deferred
income taxes related to the following at December 31, 1998:
Deferred tax assets:
Net operating loss $ 463,301
Valuation allowance (458,926)
---------
Deferred tax assets after
valuation allowance $ 4,375
Deferred tax liabilities
Property and equipment (2,332)
Goodwill (2,043)
---------
Gross deferred tax liabilities (4,375)
-------
Net deferred tax asset $ --
=======
At December 31, 1998, the Company's net operating loss
carryforwards for income tax purposes amounted to approximately
$2,077,000 and are available to offset future taxable income
through the year 2013.
NOTE 12 - PROFIT SHARING PLAN
EWM has a deferred tax savings plan which qualifies under
section 401(k) of the Internal Revenue Code. The plan covers all
employees having at least one year of service during which they
have worked at least 1,000 hours, provided they have attained
the age of 21. The plan allows EWM to make voluntary
contributions to the plan for eligible participants.
Participants are 100% vested in their contributions to the plan
and vest in EWM's contribution as follows:
YEARS OF TOTAL SERVICE VESTING PERCENTAGE
---------------------- ------------------
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
For the eleven-month period ended December 31, 1998, employer
contributions to the plan were approximately $7,217.
See independent auditors' report.
Page 16 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 13 - LEGAL AND OTHER SETTLEMENTS
In February 1995, the Company and a majority shareholder of the
Company, as guarantor, entered into an agreement with an
unrelated third party to guarantee that the Company would be
responsible for certain portions of the obligations on a
building managed by a subsidiary of the Company, First Reserve
Equities, Inc. provided that such building was sold after
December 31, 1995. In the event that the building was sold after
1995, the Company would be obligated to pay to the third party
any shortfall between the Net Sales Proceeds and the balance of
the note owed on the building, up to a maximum of $1,000,000.
The building was sold subsequent to December 31, 1995, but no
notice had been given to the Company, nor had any collection
proceedings been initiated against the Company until mid 1998.
On July 13, 1998, a settlement agreement was reached with the
third party in the amount of $1,200,000 covering the $1,000,000
guarantee and an additional $200,000 for paying late. The
Company paid $250,000 on the date the agreement was signed and
the remaining balance of $950,000 was financed under a
promissory note over four years bearing no interest.
A $1,000,000 expense from this settlement is reflected in the
consolidated statement of income for the eleven-month period
ended December 31, 1998. The $200,000 was treated as imputed
interest and will be amortized over the life of the note under
the interest method using an effective rate of 10.175%. Total
interest expense related to this note amounted to $35,752 for
the eleven-month period ended December 31, 1998.
Also, included in legal and other settlements is an additional
$48,812 incurred by EWM in settling various disputes arising
with customers or tenants in the ordinary course of business.
NOTE 14 - STOCKHOLDERS' EQUITY
COMMON STOCK
On April 1, 1998, as a result of the reverse acquisition of
First Reserve, Inc. (Florida) and Embassy with First Reserve,
Inc. (Arizona), a non-operating public shell corporation, the
Company increased its common stock by $130.
See independent auditors' report.
Page 17 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK (CONTINUED)
On April 21, 1998, the Company effected a two for one reverse
stock split. As a result of the split, every stockholder of the
Company would own one-half as many shares as before the reverse
split. Prior to the reverse split, the number of issued and
outstanding shares of common stock of the Company was
10,624,000, and after the reverse split, the number became
5,312,050 (including fractional shares issued). Accordingly, all
numbers of common shares and per share data for the current
period presented in these financial statements have been
restated to reflect the stock split. Subsequent to the reverse
split, the Board of Directors authorized an increase of shares
of common stock of no par value from 50,000,000 to 100,000,000.
On April 6, 1998, the Company entered into a series of
transactions to recapitalize its equity pursuant to a
Confidential Private Offering Memorandum ("504"). These
transactions resulted in an additional 555,000 of no par shares
being issued totaling $555,000. Of the 555,000 shares issued,
6.3% were acquired by two minority shareholders of the Company,
the remaining 93.7% of the shares were acquired by unrelated
third parties. The Company incurred legal, underwriting and
other fees totaling $191,911. These costs were deducted from the
total proceeds and the net proceeds are reflected in the
statement of stockholders' equity under common stock.
WARRANTS
During the eleven-month period ending December 31, 1998, the
Company re-issued 1,000,000 warrants ("new warrants") to a
majority shareholder in exchange for 1,000,000 warrants
previously issued by First Reserve, Inc. (Florida) on November
30, 1997 ("original warrants"). These original warrants were
issued as part of an agreement with the shareholder of First
Reserve, Inc. (Florida) to convert preferred shares and accrued
dividends into common shares. The original warrants were
exercisable from the date of issuance and expired on November
30, 2002. No other consideration was given to the Company for
these warrants. The original warrants were canceled and new
warrants were issued on August 31, 1998. All the terms and
conditions of the original warrants remained the same with the
exception of the expiration date which was changed from November
30, 2002 to August 31, 2003.
The first warrant grants this majority shareholder the right to
purchase 500,000 shares of the Company's common stock at the
initial exercise price of $3 per share. The second warrant
grants the same majority shareholder the right to purchase
another 500,000 shares of the Company's common stock at the
initial exercise price of $3.50 per share. The warrants are
valid, beginning on August 31, 1998, for a period of five years.
See independent auditors' report.
Page 18 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)
The following is a summary of the activity of the Company's
warrants for the eleven-month period ended December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE OF
WARRANTS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding beginning of the year 1,000,000 $3.25
Granted 1,000,000 $3.25
Canceled (1,000,000) $3.25
Exercised -- $ --
---------- -----
Outstanding at end of year 1,000,000 $3.25
========== =====
Exercisable at end of year 1,000,000
Weighted average fair value of warrants
issued during the eleven-month period
ending December 31, 1998. $0.44
</TABLE>
The weighted average fair value was estimated using the
Black-Scholes option pricing model based on the weighted average
market price at date of grant of $1.00.
The following is a summary of the status of the stock warrants
outstanding at December 31, 1998.
weighted
average weighted
REMAINING Average
Number Contractual Exercise Number
PRICE OUTSTANDING LIFE PRICE EXERCISABLE
----- ----------- ----------- -------- -----------
$3.00 500,000 4.7 years $3.00 500,000
$3.50 500,000 4.7 years 3.50 500,000
--------- -----
1,000,000 $3.25
========= =====
NOTE 15 - EARNINGS PER SHARE
Basic earnings per share ("EPS") was computed by dividing net
income by the weighted average number of common shares
outstanding during the period. Diluted EPS were determined on
the assumption that the contingent shares were exercised at the
beginning of the period, or at time of issuance, if later.
See independent auditors' report.
Page 19 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 15 - EARNINGS PER SHARE (CONTINUED)
The following is the calculation of earnings per share for the
eleven-month period ended December 31, 1998:
Basic earnings per common share:
Numerator
Net income (loss) before extraordinary items
applicable to common stockholders $ 109,565
Extraordinary items, net --
----------
Income (loss) applicable to common
stockholders 109,565
Denominator
Weighted average common shares 5,718,504
----------
Basic EPS $ 0.02
==========
Diluted earnings per common share:
Numerator
Net income (loss) before extraordinary
items applicable to common
stockholders. $ 109,565
Extraordinary items, net --
----------
Income (loss) applicable to common
stockholders. 109,565
----------
Denominator
Weighted average common shares 5,718,504
Contingent shares 11,581
----------
Total 5,730,085
----------
Diluted EPS $ 0.02
==========
Options to purchase 500,000 shares of common stock at $3.00
per share and 500,000 shares of common stock at $3.50 per
share were outstanding for the eleven-month period ended
December 31, 1998, but were not included in the computation
of diluted EPS because the options' exercise price was
greater than the average market price of the common shares.
The options, which expire on August 31, 2003, were still
outstanding at the end of the year.
See independent auditors' report.
Page 20 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 15 - EARNINGS PER SHARE (CONTINUED)
The following pro forma tax and earnings per share data assumes
that Embassy was a tax paying entity for the entire year. The
pro forma amounts give effect to the adjustments resulting from
the filing of a consolidated tax return which would include
Embassy as a subsidiary of the Company for the entire year.
Income before income taxes $109,565
Provision for income tax --
--------
Net income $109,565
========
Basic earnings per share $ 0.02
========
Diluted earnings per share $ 0.02
========
NOTE 16 - RELATED PARTY TRANSACTIONS
The Company rents an office building from a corporation owned by
a minority shareholder. The lease is on a month-to-month basis
and calls for a monthly rental of $5,553. For the eleven-month
period ended December 31, 1998, total rent paid amounted to
$44,267. At December 31, 1998, no amounts were due to this
corporation.
NOTE 17 - SUBSEQUENT EVENT
BUSINESS COMBINATIONS
On March 31, 1999, the Company acquired all the stock of
Columbia Title of Florida, Inc. ("Columbia") in a business
combination accounted for as a purchase. Columbia is engaged in
the business of closing real estate and mortgage loan
transactions, primarily in the South Florida area. Columbia has
two branches, Miami and Key Largo, Florida. Under the terms of
the agreement, the shareholder of Columbia (seller) received
$100 for the stock of Columbia. The agreement also provided for
additional consideration if the assets of the Key Largo branch
would be sold within 90 days after the acquisition date. If this
condition was met, the seller would receive eighty-five percent
(85%) of the net proceeds of the sale of the assets of the Key
Largo branch. If the sale did not effectuate within the 90 days,
all the assets of the Key Largo branch office would be
transferred back to the seller. The sale of the Key Largo branch
was made within the ninety day period. As a result, additional
consideration of $191,250 for the acquisition of the stock will
be recorded.
In April 1999, the Company arranged for a $500,000 unsecured
revolving line of credit from a private third party lender. The
note matures on September 30, 1999 and bears interest at 9% per
year. The note is personally guaranteed by a majority
shareholder of the Company and his spouse. In May 1999, the
Company also arranged for a $1.8 million "warehouse" line of
credit with a third party financial institution. This loan will
be used to fund loans to be made in connection with its 1999
mortgage banking operations. Each "warehouse" loan will be fully
backed by a permanent loan "take-out" commitment from a national
lender of residential financing. The interest on the loan is at
prime rate less 3.75%.
See independent auditors' report.
Page 21 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 18 - UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF INCOME
The assets and liabilities of Byrne and Gerard (the "acquired
companies") are reflected in the accompanying consolidated
financial statements. The results of operations of the acquired
companies are included in the consolidated results from the
dates they were acquired, May 1, 1998 for Byrne and September
30, 1998 for Gerard. The following pro forma consolidated
statement of income gives effect to the acquisitions of all of
the outstanding shares of the acquired companies as if they had
occurred as of February 1, 1998. The pro forma adjustments are
based upon available information and certain assumptions that
the Company believes are reasonable. This unaudited pro forma
condensed consolidated information does not purport to represent
what the actual results of operations would have been assuming
the acquisitions had taken place on the dates assumed above, nor
do they purport to predict the results of operations in future
periods:
ELEVEN-MONTH
PERIOD ENDED
DECEMBER 31, 1998
-----------------
Total revenue $20,354,425
Total costs and expenses 20,094,067
-----------
Operating income 260,358
Other income and (expenses) (24,148)
-----------
Income before tax provision 236,210
Provisions or income taxes --
-----------
Net income $ 236,210
===========
Earnings per share
Basic $0.04
Weighted average shares 5,718,504
Diluted $0.04
Weighted average shares 5,730,085
NOTE 19 - RESTATEMENT
The Company's financial statements have been restated to reflect
the following:
1. The stated value assigned to the common shares issued as a
result of the acquisition of First Reserve, Inc. (Florida)
and Embassy Financial Services, Inc., as well as the
acquisitions of Byrne-Rhinehart & Co. and Gerard
International Realty, Inc. (see Note 1, "Reorganizations and
Business Combinations"). This caused common stock to
increase $6,131,418 and paid-in-capital to decrease
$6,131,418.
See independent auditors' report.
Page 22 of 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
(RESTATED)
NOTE 19 - RESTATEMENT (CONTINUED)
2. To reflect a decrease in the amortization period for the
acquisition of Byrne-Rhinehart & Co. (see Note 1, "Business
Combinations") from 40 to 20 years. This caused the
accumulated amortization on goodwill to increase $11,535 and
amortization expense to increase $11,535.
3. To reflect a decrease in the goodwill for the acquisition of
Gerard International Realty, Inc. as a result of the
issuance of contingent shares as part of the purchase price
(see Note 1, "Business Combinations"). This caused a
decrease in goodwill and common stock of $200,000 and a
decrease in accumulated amortization and amortization
expense of $1,250.
4. To reflect the imputed interest on the non-interest bearing
note (see Note 7). This caused a decrease in legal and other
settlement expenses of $200,000, an increase in interest
expense of $35,752 and an increase in unamortized discount
on the notes payable of $164,248.
5. To reflect the proceeds of the "504" private placement, net
of legal, underwriting and other expenses. This caused net
capital legal expenses to decrease $163,124, common stock to
decrease $191,911 and amortization expense to decrease
$28,787.
6. To reflect changes to the financial statement presentation
and related disclosures pursuant to an SEC comment letter
dated June 18, 1999.
See independent auditors' report.
Page 23 of 23
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
CORAL GABLES, FLORIDA
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
The Officers and Directors
First Reserve, Inc. and Subsidiaries
Coral Gables, Florida
The accompanying consolidated balance sheet of First Reserve, Inc. and
Subsidiaries as of June 30, 1999, and the related consolidated statements of
income, stockholders' equity, and cash flows for the six-month period then ended
were not audited by us, and, accordingly, we do not express an opinion on them.
McClain & Company, L.C.
August 19, 1999
Miami, Florida
Page 1 of 20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 943,867
Interest bearing deposit with bank 125,000
Receivables 378,403
Mortgage loans held for sale 1,284,450
Prepaid expenses and other 131,461
Shareholders' loans receivable 37,366
----------
Total current assets $2,900,547
PROPERTY AND EQUIPMENT
Furniture and fixtures 674,200
Office equipment 636,234
Transportation equipment 28,102
Leasehold improvements 739,562
----------
2,078,098
Less accumulated depreciation (829,201)
----------
Net property and equipment 1,248,897
OTHER ASSETS
Goodwill, net 1,177,985
Deposits and other 129,336
----------
Total other assets 1,307,321
----------
Total assets $5,456,765
==========
</TABLE>
See independent accountants' report and the accompanying notes to the
consolidated financial statements, which are an integral part of this
consolidated statement.
Page 2 of 20
<PAGE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 494,638
Current maturities of long-term debt, net
of unamortized discount 1,939,244
----------
Total current liabilities $2,433,882
LONG TERM LIABILITIES
Note payable, net of unamortized
discount 649,285
----------
Total liabilities 3,083,167
STOCKHOLDERS' EQUITY
Common stock, no par value, 100,000,000
authorized shares; 6,567,050 shares
issued, 6,767,050 shares outstanding 5,739,507
Accumulated deficit (3,365,909)
-----------
Total stockholders' equity 2,373,598
----------
Total liabilities and stockholders'
equity $5,456,765
==========
</TABLE>
Page 3 of 20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
<S> <C> <C>
REVENUES $11,855,119
COST AND EXPENSES
Commissions, fees and other incentives $7,745,597
General and administrative expenses 3,732,674
Depreciation and amortization 117,323
Legal and other settlements 4,000
----------
Total costs and expenses 11,599,594
-----------
Income from operations before income taxes
and other income and expenses 255,525
OTHER INCOME AND EXPENSES
Interest income 18,615
Interest expense (58,848)
Other expenses (1,600)
Gain on disposition of property and equipment 222,365
----------
Total other income and (expenses) 180,532
-----------
Income before income taxes 436,057
PROVISION FOR INCOME TAX --
-----------
Net income $ 436,057
===========
EARNINGS PER COMMON SHARE:
BASIC EARNINGS PER COMMON SHARE $ .07
===========
WEIGHTED AVERAGE COMMON SHARES 6,567,050
===========
DILUTED EARNINGS PER COMMON SHARE $ .06
===========
WEIGHTED AVERAGE DILUTED COMMON SHARES 6,720,625
===========
</TABLE>
See independent accountants' report and the accompanying notes to the
consolidated financial statements, which are an integral part of this
consolidated statement.
Page 4 of 20
<PAGE>
<TABLE>
<CAPTION>
FIRST RESERVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
UNAUDITED
COMMON COMMON TOTAL
STOCK STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1998 6,567,050 $5,739,507 $(3,801,966) $1,937,541
Net income for the 6-month
period ended June 30, 1999 -- -- 436,057 436,057
--------- ---------- ----------- ----------
BALANCE, June 30, 1999 6,567,050 $5,739,507 $(3,365,909) $2,373,598
========= ========== =========== ==========
</TABLE>
See independent accountants' report and the accompanying notes to the
consolidated financial statements, which are an integral part of this
consolidated statement.
Page 5 of 20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 11,809,943
Interest received 15,844
Interest paid (21,005)
Cash paid to suppliers and employees (11,469,922)
Net increase in mortgage loans held for sale (1,284,450)
Settlements paid (4,000)
------------
Net cash used in operating
activities $ (953,590)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in deposits (16,757)
Purchase of property and equipment (813,718)
Purchase of interest bearing deposit with
bank (125,000)
Payment for purchase of acquired
companies; net of cash received (185,397)
Proceeds from disposition of property
and equipment 225,000
------------
Net cash used in investing activities (915,872)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on loan payable 500,000
Net proceeds from line of credit 1,258,761
Payment on loan payable (592)
------------
Net cash provided by financing activities 1,758,169
----------
Net decrease in cash (111,293)
CASH, December 31, 1998 1,055,160
----------
CASH, June 30, 1999 $ 943,867
==========
</TABLE>
See independent accountants' report and the accompanying notes to the
consolidated financial statements, which are an integral part of this
consolidated statement.
Page 6 of 20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
<S> <C>
RECONCILIATION OF NET INCOME TO NET CASH
USED IN OPERATING ACTIVITIES:
Net income $ 436,057
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation 84,898
Amortization 32,425
Gain on disposition of property and
equipment (222,365)
Increase in accounts receivable (45,176)
Increase in mortgage loans held for
sale (1,284,450)
Increase in prepaid expenses and
other assets 76,524
Increase in accounts and notes
(operating) payable and
accrued expenses (31,503)
-----------
Net cash used in operating
activities $ (953,590)
===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On March 31, 1999, the Company purchased all the stock of Columbia Title of
Florida, Inc. ("Columbia") for $191,350. As a result of this merger,
accounted for as a purchase, assets of $104,267, goodwill of $257,340, and
liabilities of $170,257 were recorded.
See independent accountants' report and the accompanying notes to the
consolidated financial statements, which are an integral part of this
consolidated statement.
Page 7 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of First Reserve, Inc. and its wholly-owned
subsidiaries, Esslinger, Wooten and Maxwell, Inc., First Reserve
Realty, Inc., First Reserve Management, Inc., First Reserve
Equities, Inc., (collectively "the Company") Embassy Financial
Services, Inc. ("Embassy") and Columbia Title of Florida, Inc.
("Columbia"). Columbia was acquired on March 31, 1999,
accordingly, Columbia's activity as part of the consolidated
group is for the period from March 31, 1999 to June 30, 1999.
All intercompany accounts and transactions have been eliminated
in the consolidated financial statements.
NATURE OF OPERATIONS
The Company is primarily engaged in the brokerage and management
of residential and commercial real estate in South Florida.
Embassy is a licensed residential mortgage lender that
specializes in conventional, FHA, and VA first mortgages
primarily in the South Florida area. In 1999, Embassy began
funding loans to be made in connection with its mortgage banking
operations. Each loan is backed by a permanent loan "take-out"
commitment from a national lender of residential financing. The
loans are purchased by the national lender, once permanent
financing is secured. Embassy does not service loans.
Columbia is a title company engaged in the business of closing
real estate and mortgage loan transactions, primarily in the
South Florida area.
BUSINESS COMBINATIONS
On March 31, 1999, the Company acquired all the stock of
Columbia Title of Florida, Inc. ("Columbia") in a business
combination accounted for as a purchase. Columbia is engaged in
the business of closing real estate and mortgage loan
transactions, primarily in the South Florida area. Columbia has
two branches, Miami and Key Largo, Florida. Under the terms of
the agreement, the shareholder of Columbia (seller) received
$100 for the stock of Columbia. The agreement also provided for
additional consideration if the assets of the Key Largo branch
would be sold within 90 days after the acquisition date. If this
condition was met, the seller would receive eighty-five percent
(85%) of the net proceeds of the sale of the assets of the Key
Largo branch. If the sale did not effectuate within the 90 days,
all the assets of the Key Largo branch office would be
transferred back to the seller. The sale of the Key Largo branch
was made within the ninety day period. As a result, additional
consideration of $191,250 for the acquisition of the stock was
recorded. Goodwill of approximately $257,340 resulting from this
transaction is being amortized on the straight-line method over
20 years. The results of operations of Columbia are included in
the consolidated statement of income from March 31, 1999 to June
30, 1999.
See independent accountants' report.
Page 8 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company earns commissions from the sale of commercial and
residential real estate and from the management of rental
properties. Revenues are recorded when the real estate sale is
closed and the management fees are earned. Embassy charges its
customers for loan, ancillary fees and interest related to
mortgages for the purchase and refinancing of their homes.
Columbia charges its customers title search, recording and other
ancillary fees related to mortgages for the purchase and
refinancing of their homes. Embassy and Columbia record revenues
when the mortgage is "closed". Expenses for all companies are
recorded when they are incurred.
ORGANIZATIONAL COSTS
In 1999, the Company adopted Statement of Position (SOP 98-5),
REPORTING ON THE COSTS OF START-UP ACTIVITIES issued by the
American Institute of Certified Public Accountants. SOP 98-5
requires companies to expense organization costs as they are
incurred.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
INTEREST BEARING DEPOSIT WITH BANK
Interest bearing deposit with bank consists of a certificate of
deposit held at a financial institution bearing interest at
4.75% per annum and maturing in January 2000.
FIDUCIARY FUNDS
The Company also receives money from clients, property owners,
tenants and third parties for the purchase, rental and
management of properties. This cash is held in trust on behalf
of clients and property owners and may not be used by the
Company for its regular operations. As such, the consolidated
balance sheet does not include the net assets held in escrow
which amounted to $4,398,807 at June 30, 1999.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using
straight-line and accelerated methods over the estimated useful
lives of the assets. Depreciation expense charged to operations
for the six-month period ended June 30, 1999 was $84,898.
See independent accountants' report.
Page 9 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income tax assets and liabilities are computed annually
for differences between the financial statements and tax bases
of assets and liabilities that will result in taxable or
deductible amounts in the future, based on enacted tax laws and
rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax
payable or refundable for the period minus the changes during
the period in deferred tax assets and liabilities.
Income taxes are provided for on all taxable income included in
the consolidated financial statements in the period in which the
income is reported for financial statement purposes.
Accordingly, deferred income taxes (benefits) are provided for
timing differences between financial and tax reporting. The
principal items comprising these differences are the deferred
recognition of operating losses and passive losses for tax
purposes.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
ESTIMATES
The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management to
make 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 and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 2 - RECEIVABLES
Receivables consist primarily of open trade accounts that have
not been reduced by an allowance for doubtful accounts, as
management considers all receivables to be fully collectible.
NOTE 3 - MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale consist primarily of residential
mortgage loans made in connection with Embassy's mortgage
banking operations and are reported at the lower of cost or
market value. The method used to determine this amount is the
commitment price from national lenders utilizing the individual
loan method. Net unrealized losses, if any, are recognized
through a valuation allowance by charges to income. Each loan is
fully backed by a permanent loan "take-out commitment" from a
national lender of residential financing. The mortgage loans are
purchased by the national lender once permanent financing is
secured, usually within five to twelve days of original funding.
See independent accountants' report.
Page 10 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
NOTE 4 - SHAREHOLDERS' LOANS RECEIVABLE These loans are due on
demand, and bear no interest.
NOTE 5 - GOODWILL
The Company has accounted for the excess of the acquisition
costs of certain subsidiaries over the fair value of
identifiable assets as goodwill. This goodwill is being
amortized over periods ranging from fifteen to forty years.
Amortization expense charged to operations for the six-month
period ended June 30, 1999 was $25,089.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (FAS 107)
requires the Company to disclose the fair value of financial
instruments for which it is practicable to estimate that value.
FAS 107 also requires the entity to disclose the method(s) and
significant assumptions used to estimate the fair value of
financial instruments.
The following assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical
to estimate that value:
CASH AND CASH EQUIVALENTS
The carrying amounts of cash and cash equivalents
approximate their fair value.
INTEREST-BEARING DEPOSIT WITH BANK
The carrying amount of interest-bearing deposit with bank
approximates its fair value.
MORTGAGE LOANS HELD FOR SALE
Fair values of mortgage loans held for sale are based on
commitments on hand from investors.
SHAREHOLDERS' LOANS RECEIVABLE
Carrying amounts of shareholders' loans receivable
approximate their fair value.
NOTES PAYABLE
The fair values of the non-interest bearing note payable is
estimated based upon the present value of future payments
using an imputed rate of interest of 10.175%. The fair
values of the interest bearing notes payable are estimated
based upon current rates offered to the Company for debt of
the same remaining maturities. Carrying amounts of the
interest-bearing notes payable are reasonable estimates of
their fair values.
See independent accountants' report.
Page 11 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments
at June 30, 1999, were as follows:
CARRYING FAIR
AMOUNT VALUE
---------- ----------
Cash and cash equivalents $ 943,867 $ 943,867
Interest-bearing deposit with bank $ 125,000 $ 125,000
Shareholders' loans receivable $ 37,366 $ 37,366
Mortgage loans held for sale $1,284,450 $1,284,450
Notes payable $2,588,529 $2,588,529
NOTE 7 - BUSINESS SEGMENT INFORMATION
Financial Accounting Standards Board Statement No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, requires companies to report information about
operating segments in financial statements. Operating segments
are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly
by the chief operating decision maker, or decision making group,
in deciding how to allocate resources and on assessing
performance. The operating segments are managed separately
because each operating segment represents a strategic business
unit that offers different product services. The following
information is provided in accordance with the requirement of
this statement.
The Company's operations are principally managed on a product
services basis and are comprised of three reportable segments:
Esslinger, Wooten and Maxwell, Inc. (EWM), Embassy Financial
Services, Inc. (Embassy) and Columbia Title of Florida, Inc.
(Columbia). EWM's product services consists of residential and
commercial real estate brokerage. Embassy's product services
have been in the capacity of a mortgage lender in the South
Florida area, specializing in conventional, FHA and VA
mortgages. Columbia's product has been in the capacity of a
title company. Revenue, net income and identifiable assets for
these segments are as follows:
<TABLE>
<CAPTION>
ESSLINGER, EMBASSY COLUMBIA
WOOTEN, FINANCIAL TITLE OF ALL
MAXWELL, INC. SERVICES, INC. FLORIDA, INC. OTHERS TOTAL
------------- -------------- ------------- ------ -----
<S> <C> <C> <C> <C> <C>
Revenue $11,134,579 $ 577,146 $142,741 $ 653 $11,855,119
Net income
(loss) $ 421,122$ (2,720) $209,821 $(192,166) $ 436,057
Identifiable
assets at
year end $ 3,456,050 $1,559,544 $424,094 $ 17,077 $ 5,456,765
</TABLE>
See independent accountants' report.
Page 12 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
NOTE 8 - NOTES PAYABLE
At June 30, 1999, notes payable consist of the following:
<TABLE>
<CAPTION>
UNAMORTIZED
PRINCIPAL DISCOUNT TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Operating note payable to third party,
non-interest bearing, payable in
annual installments of $237,500,
matures July 13, 2002, unsecured,
personally guaranteed by a majority
shareholder of the company
(unamortized discount is based on
imputed interest rate of 10.175%). $ 823,595 $126,405 $ 950,000
Loan with a financing company,
interest at 10.5% per year, payable
in monthly installments of $354.03
of principal and interest through
January 2001, secured by a vehicle. 6,173 -- 6,173
Note payable with an unrelated third
party lender, interest at 9% per
year, payable in monthly interest
only installments of $3,750 through
September 1999, principal due on
September 30, 1999, unsecured,
personally guaranteed by a majority
shareholder. 500,000 -- 500,000
$1,800,000 line of credit with bank,
interest at prime less 3.75% (4% at
June 30, 1999), payable in monthly
installments of interest only on the
unpaid principal balance, payable
on demand, mortgage loans held for
sale. 1,258,761 -- 1,258,761
----------- -------- -----------
2,588,529 126,405 2,714,934
----------- -------- -----------
Less current portion (1,939,244) (60,496) (1,999,740)
$ 649,285 $ 65,909 $ 715,194
=========== ======== ===========
</TABLE>
See independent accountants' report.
Page 13 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
NOTE 8 - NOTES PAYABLE (CONTINUED)
Principal payments and amortized discount on the notes payable
for the next five years and in the aggregate are as follows:
TWELVE-MONTH PERIOD UNAMORTIZED
ENDING JUNE 30: PRINCIPAL DISCOUNT TOTAL
------------------- ---------- ----------- ----------
2000 $1,939,244 $ 60,496 $1,999,740
2001 197,708 42,486 240,194
2002 214,857 22,643 237,500
2003 236,720 780 237,500
2004 -- -- --
---------- -------- ----------
$2,588,529 $126,405 $2,714,934
========== ======== ==========
NOTE 9 - EMPLOYMENT AGREEMENTS
The Company has employment agreements with two executives. These
agreements provide for base salaries, to be increased annually
by at least 10%, plus bonuses and benefits at the discretion of
the Company's Board of Directors. The terms of the contracts are
for five years, expire on December 2002, and may be terminated
for cause. In the event of termination without cause, the
Company is liable for all salary, payments and benefits for the
remaining term of the agreement.
EWM has an employment agreement with the president of its
Commercial Sales Division. This agreement provides for a base
salary, commission and bonus incentives based on real estate
closings, and additional bonus and benefits at the discretion of
the Company's Board of Directors. The term of the contract is
for five years, expires on April 2003, and may be terminated for
cause. In the event of termination without cause, EWM is liable
for all salary, payments and benefits for the remaining term of
the agreement.
In March 31, 1999 Columbia entered into an employment agreement
with its Senior Vice President of Underwriting. This agreement
provides for a base salary and other benefits. The term of the
contract is for two years.
Minimum future commitments under these employment agreements are
as follows:
TWELVE-MONTH PERIOD
ENDING JUNE 30:
-------------------
2000 $ 884,500
2001 956,450
2002 949,595
2003 631,297
2004 --
----------
$3,421,842
==========
The total commitment incurred excluding incentives and bonuses,
was $400,000 for the six-month period ended June 30, 1999.
See independent accountants' report.
Page 14 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
NOTE 10 - LEASES
The Company had entered into several automobile, real estate and
equipment leases accounted for as operating leases. These leases
expire in various years through 2009. Minimum future lease
payments under all operating leases for the next five years and
in the aggregate are as follows:
TWELVE-MONTH PERIOD
ENDING JUNE 30:
-------------------
2000 $ 904,999
2001 568,363
2002 427,823
2003 438,357
2004 387,258
Thereafter 1,690,309
----------
$4,417,109
==========
Rent expense under these leases was approximately $520,000 for
the six-month period ended June 30, 1999.
NOTE 11 - CONCENTRATION OF CREDIT RISK
EWM, Embassy and Columbia have experienced credit risk in
connection with their bank accounts. At various times during the
year, EWM, Embassy and Columbia maintained deposits with
financial institutions in excess of amounts insured by the FDIC.
The exposure to EWM, Embassy and Columbia are solely dependent
on daily bank balances and the financial strength of the
respective institutions.
NOTE 12 - INCOME TAXES
Provision (benefit) is made for the tax effects of timing
differences as described in Note 1. The provision for income
taxes for the six-month period ended June 30, 1999, is based
upon current statutory rates and is summarized as follows:
CURRENT DEFERRED TOTAL
-------- -------- --------
Florida $ -- $ -- $ --
Federal -- -- --
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
Deferred tax assets have been provided for deductible temporary
differences related to net operating losses. Deferred tax
liabilities have been provided for taxable temporary differences
related to accumulated depreciation and amortization. Deferred
income taxes related to the following at June 30, 1999:
See independent accountants' report.
Page 15 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
NOTE 12 - INCOME TAXES (CONTINUED)
<TABLE>
<S> <C> <C>
Deferred tax assets:
Net operating loss $ 317,473
Valuation allowance (310,792)
Organizational costs 102
---------
Deferred tax assets after valuation allowance $ 6,783
Deferred tax liabilities
Property and equipment (2,332)
Goodwill (4,451)
---------
Gross deferred tax liabilities (6,783)
-------
Net deferred tax asset $ --
=======
</TABLE>
The provision for income taxes computed differed from the amount
obtained by applying the federal and state statutory income tax
rates to income before income taxes. The sources and tax effects
of the difference are as follows:
<TABLE>
<S> <C>
Federal and state statutory rate applied
to pre-tax income at 31.5% $ 137,358
Non-deductible expenses 10,776
Change in valuation allowance (148,134)
---------
$ --
=========
</TABLE>
At June 30, 1999, the Company's net operating loss carryforwards
for income tax purposes amounted to approximately $1,625,000 and
are available to offset future taxable income through the year
2013.
NOTE 13 - PROFIT SHARING PLAN
EWM has a deferred tax savings plan which qualifies under
section 401(k) of the Internal Revenue Code. The plan covers all
employees having at least one year of service during which they
have worked at least 1,000 hours, provided they have attained
the age of 21. The plan allows EWM to make voluntary
contributions to the plan for eligible participants.
Participants are 100% vested in their contributions to the plan
and vest in EWM's contribution as follows:
YEARS OF TOTAL SERVICE VESTING PERCENTAGE
---------------------- ------------------
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
For the six-month period ended June 30, 1999, there were no
employer contributions to the plan.
See independent accountants' report.
Page 16 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
NOTE 14 - LEGAL AND OTHER SETTLEMENTS
Included in legal and other settlements amounts are costs
incurred by EWM in settling various disputes arising with
customers or tenants in the ordinary course of business.
NOTE 15 - STOCKHOLDERS' EQUITY
WARRANTS
The Company has outstanding warrants issued to a majority
shareholder. The first warrant grants this majority shareholder
the right to purchase 500,000 shares of the Company's common
stock at the initial exercise price of $3 per share. The second
warrant grants the same majority shareholder the right to
purchase another 500,000 shares of the Company's common stock at
the initial exercise price of $3.50 per share. The warrants are
valid, beginning on August 31, 1998, for a period of five years
and expire on August 31, 2003.
The following is a summary of the activity of the Company's
warrants for the six-month period ended June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE OF
WARRANTS EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding beginning of the year 1,000,000 $3.25
Granted -- $ --
Exercised -- $ -- $ -
--------- -----
Outstanding at end of year 1,000,000 $3.25
========= =====
Exercisable at end of year 1,000,000
Weighted average fair value of warrants
issued during the six-month period
ending June 30, 1999. $.40
</TABLE>
The weighted average fair value was estimated using the
Black-Scholes option pricing model based on the weighted average
market price at date of grant of $1.00.
The following is a summary of the status of the stock warrants
outstanding at June 30, 1999.
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER
PRICE OUTSTANDING LIFE PRICE EXERCISABLE
----- ----------- ----------- -------- -----------
$3.00 500,000 4.2 years $3.00 500,000
$3.50 500,000 4.2 years 3.50 500,000
--------- -----
1,000,000 $3.25
========= =====
See independent accountants' report.
Page 17 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
NOTE 15 - STOCKHOLDERS' EQUITY (CONTINUED)
CONTINGENT SHARES
Under the terms of the September 30, 1998 merger agreement
between EWM and Gerard International Realty, Inc. (Gerard), the
former shareholders of Gerard would receive an additional
200,000 "contingent" shares of common stock of the Company,
pending future gross commission income to be generated by the
former shareholders of Gerard over a 24 month "review" period,
beginning September 30, 1998. These contingent shares are
currently held in escrow. Due to the contingent nature of the
shares, the Company will record them as additional purchase
price upon issuance of the shares. At June 30, 1999, the former
shareholders of Gerard had met 77% of the gross commission
income requirements stated in the agreement. If the review
period had ended on June 30, 1999, the number of shares to be
issued to former shareholders of Gerard would be 153,575 shares
and related goodwill of $153,575 would be recorded on the
Company's balance sheet. Since these shares have not been
issued, they are not included in the basic earnings per share
calculation but are included in the diluted earnings per share
calculation.
NOTE 16 - EARNINGS PER SHARE
Basic earnings per share ("EPS") was computed by dividing net
income by the weighted average number of common shares
outstanding during the period. Diluted EPS were determined on
the assumption that the contingent shares were exercised at the
beginning of the period, or at time of issuance, if later.
The following is the calculation of earnings per share for the
six-month period ended June 30, 1999:
Basic earnings per common share:
Numerator
Net income before extraordinary items
applicable to common stockholders $ 436,057
Extraordinary items, net --
----------
Income applicable to common stockholders $ 436,057
==========
Denominator
Weighted average common shares 6,567,050
==========
Basic EPS $ .07
==========
See independent accountants' report.
Page 18 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
NOTE 16 - EARNINGS PER SHARE (CONTINUED)
Diluted earnings per common share:
Numerator
Net income before extraordinary
items applicable to common
stockholders. $ 436,057
Extraordinary items, net --
-----------
Income applicable to common
stockholders. $ 436,057
==========-
Denominator
Weighted average common shares 6,567,050
Contingent shares 153,575
-----------
Total 6,720,625
===========
Diluted EPS $ .06
===========
Options to purchase 500,000 shares of common stock at $3.00 per
share and 500,000 shares of common stock at $3.50 per share were
outstanding for the six-month period ended June 30, 1999, but
were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market
price of the common shares. The options, which expire on August
31, 2003, were still outstanding at the end of the six-month
period ending June 30, 1999.
NOTE 17 - RELATED PARTY TRANSACTIONS
The Company rents an office building from a corporation owned by
a minority shareholder. The lease is on a month-to-month basis
and calls for a monthly rental of $5,553. For the six-month
period ended June 30, 1999, total rent paid amounted to $33,200.
At June 30, 1999, no amounts were due to this corporation.
The Company rents an office building from a corporation owned by
minority shareholders. The lease is for a period of ten years
expiring in March 2009 with an option to renew for two
successive five year terms. The lease calls for an annual rent
of $90,000, plus all applicable sales taxes, with an annual
increase in rent of three percent per year over the prior year's
base rent. For the six-month period ended June 30, 1999, total
rent paid amounted to $36,173. At June 30, 1999, no amounts were
due to this corporation.
See independent accountants' report.
Page 19 of 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
FIRST RESERVE, INC. AND SUBSIDIARIES
UNAUDITED
NOTE 18 - UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF INCOME The assets
and liabilities of Columbia are reflected in the accompanying
consolidated financial statements. The results of operations of
Columbia are included in the consolidated results from the date
it was acquired, March 31, 1999. The following pro forma
consolidated statement of income gives effect to the acquisition
of all of the outstanding shares of Columbia as if it had
occurred at the beginning of the year. The pro forma adjustments
are based upon available information and certain assumptions
that the Company believes are reasonable. This unaudited pro
forma condensed consolidated information does not purport to
represent what the actual results of operations would have been
assuming the acquisition had taken place on the date assumed
above, nor do they purport to predict the results of operations
in future periods:
SIX-MONTH
PERIOD ENDED
JUNE 30, 1999
--------------
Total revenue $ 11,998,176
Total costs and expenses (11,762,602)
------------
Operating income 235,574
Other income and (expenses) 180,532
------------
Income before tax provision 416,106
Provisions or income taxes --
------------
Net income $ 416,106
============
Earnings per share
Basic $ .06
============
Weighted average shares 6,567,050
============
Diluted $ .06
============
Weighted average shares 6,720,625
============
See independent accountants' report.
Page 20 of 20
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Stock Purchase Agreement dated March 31, 1999 by and between
Marjorie Schwartz and First Reserve, Inc. (acquisition of
Columbia Title of Florida, Inc.).
10.7 Promissory Note for $ 1.2 million between First Reserve, Inc.
and R.T. Construction Interests, Inc., dated July 13, 1998.
10.8 Confidential Private Offering Memorandum, dated April 6, 1998.
10.9 Common Stock Purchase Warrant between the Company and
Valorsec, dated August 31, 1998.
10.10 Common Stock Purchase Warrant between the Company and
Valorsec, dated August 31, 1998
21 Subsidiaries of the registrant.
23.1 Consent of McClain and Company, L.C.
23.2 Consent of McClain and Company, L.C.
23.3 Consent of McClain and Company, L.C.
EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
This Agreement made this 31st day of March, 1999, by and
between MARJORIE SCHWARTZ (hereinafter "SELLER") and FIRST RESERVE, INC., a
Florida corporation (hereinafter ""BUYER").
The BUYER and SELLER have reached an agreement with respect to
the sale and purchase of all the outstanding corporate shares of Columbia Title
of Florida, Inc., a Florida corporation engaged in the business of closing real
estate and mortgage loan transactions (hereinafter the "COMPANY").
It is therefore agreed:
1. SALE OF CORPORATE SHARES. The SELLER shall sell to the BUYER and the
BUYER shall purchase from SELLER all of SELLER's shares of the COMPANY at the
price of One Hundred and no/100ths Dollars ($100.00) on the terms set forth
herein.
As additional consideration for the purchase of all of SELLER's stock
in the COMPANY, BUYER agrees that if SELLER within 90 days after the closing
herein, negotiates to conclusion the sale of the assets of the Key Largo branch
office, SELLER shall receive the net proceeds of the sale of the assets. Net
proceeds is the gross proceeds less any expenses and/or tax liabilities (tax
liabilities estimated to be 15% of the gross sales price) incurred by the
COMPANY. In the event, SELLER is unable to effectuate the sale of the assets of
the Key Largo branch office within 90 days after the closing herein, BUYER
agrees to transfer the Key Largo branch office within 90 days after the closing
herein, BUYER agrees to transfer the Key Largo branch assets to SELLER's
existing corporation, Columbia Title of the Florida Keys, Inc. and BUYER will
absorb up to $3,000.00 in costs associated with the necessary application of
Columbia Title of the Florida Keys, Inc. to be appointed a title insurance agent
and related costs such as E & O insurance and posting of a surety bond. During
the ninety days after closing herein, if the Key Largo branch office has excess
income over and above expenses, BUYER agrees that the COMPANY will pay the
excess income to SELLER as additional salary.
2. CLOSING. The closing of the sale shall take place at 1826 Ponce de
Leon Boulevard, Coral Gables, Florida on March 31, 1999. At the closing, BUYER
shall deliver to SELLER a check for One Hundred Dollars ($100.00) in exchange
for SELLER's
1
<PAGE>
certificate of shares equalizing the total shares of outstanding stock, with all
requisite transfer stamps attached. In addition, BUYER will deposit in COMPANY's
account a check for One Hundred and Fifty Thousand Dollars ($150,000.00) as
additional paid-in capital. BUYER will assume responsibility for the payment of
the unreimbursed corporate expenses and accounts payable of the COMPANY attached
hereto and made a part hereof as Exhibit A.-1.
3. REPRESENTATIONS AND WARRANTIES. The SELLER represents and warrants
as follows:
A. Organization and standing of company. The COMPANY is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Florida. Copies of the COMPANY's Certificate of
Incorporation, and all amendments thereof to date, certified by the Secretary of
the State of Florida, and of the COMPANY's By-Laws as amended to date, certified
by the COMPANY's Secretary have been delivered to the BUYER or shall be
delivered to the BUYER at least one week before the closing; are complete and
correct as of the date of this Agreement. The COMPANY is duly licensed or
qualified as a title insurance agency by the State of Florida.
B. Subsidiaries. The COMPANY has no subsidiaries.
C. Capitalization. The aggregate number of shares which the
COMPANY is authorized to issue is 100 common shares, of which 98 shares are
issued and presently outstanding. All such issued shares have been validly
issued and are fully paid. The COMPANY has no outstanding subscriptions,
contracts, options, warrants or other obligations to issue, sell or otherwise
dispose of, or to purchase, redeem or otherwise acquire any of its shares.
D. Share Ownership. SELLER represents and warrants that she is
the owner, free and clear of any encumbrances, of all of the COMPANY's shares of
outstanding stock and has full right and authority to transfer said shares to
BUYER and that there are no other shares of the COMPANY owned or claimed by any
other person or entity.
E. Absence of certain changes. Since December 31, 1998, there
has not been (1) any change in the COMPANY's financial condition, assets,
liabilities, or business, other than changes in the ordinary course of business,
none of which has been materially adverse; (2) any damage, destruction, or loss,
whether or not covered by insurance, materially and adversely affecting the
COMPANY's assets or business; (3) any declaration
2
<PAGE>
or setting aside, or payment of any dividend or other distribution in respect of
the COMPANY's shares, or any direct or indirect redemption, purchase or other
acquisition of any of such shares; (4) any increase in the compensation payable
or to become payable by the COMPANY to any of its officers, employees, or
agents, or any bonus payment or arrangement made to or with any of them; or (5)
any event or condition of any character, materially and adversely affecting the
COMPANY's business or prospects.
F. Title to assets. The COMPANY has good and marketable title
to all its assets, including those reflected in the Balance Sheet (except as
sold or otherwise disposed of in the ordinary course of business), subject to no
security interests, mortgage, pledge, lien, encumbrance, or charge, except for
liens shown on the Balance Sheet as securing specified liabilities set forth
therein (with respect to which no default exists).
G. Condition of equipment. All COMPANY equipment is in good
operating condition and repair.
H. Contracts. The COMPANY has no contract or commitment
extending beyond 3-31-99, or involving payment by the COMPANY of more than $300
per month, except as follows: Contract for storage at approximately $200 per
month and subleases for space within COMPANY's leased premises, monthly
contracts for 5 parking spaces at $30.00 per space per month, E & O insurance
and group health insurance. True and complete copies of all of the foregoing
have been delivered to the BUYER. The COMPANY has complied with all the
provisions of such instruments and of all other contracts and commitments to
which it is a party and is not in default under any of them.
I. Litigation. SELLER represents that there is no litigation
or proceeding pending, or the SELLER's knowledge threatened, against or relating
to the COMPANY, its assets or business, nor does the SELLER know or have reason
to know or have reasonable grounds to know of any basis for any such action, or
of any governmental investigation relative to the COMPANY, and/or its business.
J. Leases, Contracts, and Licenses. SELLER represents and
warrants that the transfer of its shares in accordance with the terms of this
agreement will not constitute a prohibited assignment or transfer of any of its
licenses, leases, or contracts, and that all of the foregoing will remain in
full force and effect without acceleration as a result of this transaction.
K. Disclosure. No representation or warrant by the SELLER in
this Agreement, nor any statement or certificate furnished or to be furnished to
the buyer
3
<PAGE>
pursuant hereto, or in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact, or omits or
will omit to state a material fact necessary to make the statements contained
herein or therein not misleading.
4. ACCESS AND INFORMATION. The SELLER shall cause the COMPANY to give
the BUYER and BUYER's counsel, accountants, and other representatives full
access, during normal business hours throughout the period prior to the closing,
to all of the COMPANY's books, contracts, commitments and records and shall
furnish to BUYER during such period with all such information concerning the
company's affairs as the BUYER reasonably may request.
5. CONDUCT OF BUSINESS PENDING CLOSING The SELLER covenants that,
pending the closing:
A. The COMPANY's business will be conducted only in the
ordinary course.
B. No change will be made in the COMPANY's Certificate of
Incorporation or by-Laws, except as may be first approved in writing by the
BUYER.
C. No change will be made in the COMPANY's authorized or
issued corporate shares.
D. No dividend or other distribution or payment will be
declared or made in respect of the COMPANY's corporate shares.
E. No increase will be made in the compensation payable or to
become payable by the COMPANY to any officer, employee, or agent nor will any
bonus payment or arrangement or other benefit be paid by the COMPANY to or with
any officer, employee or agent.
F. NO change will be made affecting the personnel,
compensation payments, or banking or safe deposit arrangements referred to in
subparagraph (m) of paragraph 4, without the BUYER's priori written approval.
G. Except as otherwise requested by the BUYER, the SELLER will
cause the COMPANY to use its best efforts (without making any commitment on the
BUYER's behalf) to preserve the COMPANY's business organization intact; to keep
available to the COMPANY the services of its present officers and employees; and
to preserve for the COMPANY the goodwill of its suppliers, customers and others
having business relations with the COMPANY.
H. All debts will be paid as they become due.
4
<PAGE>
I. No contract right of the COMPANY will be waived.
J. No material physical damage for loss will occur to the
assets or business of the COMPANY.
K. No obligations except current liabilities under contacts
entered into the ordinary course of business will be incurred.
6. COMPANY PERSONNEL. At the closing:
A. Changes. The SELLER shall make available to the buyer,
unless otherwise requested by it, the written resignations of the COMPANY's
directors and officer shall take, or cause to be taken, such action as the BUYER
may request with respect to changes in directors and officers.
B. Employment Contracts. The SELLER shall cause employment
contracts to be entered into between the COMPANY and Marjorie S. Schwartz in the
form which the SELLER has initialed for identification and delivered to the
BUYER, and attached hereto as Exhibit A.
7. CONDITION PRECEDENT FOR BUYER. All obligations of the BUYER under
this agreement are, at its option, subject to the fulfillment, prior to or at
the closing, of each of the following conditions:
A. Representations and Warranties True at Closing. The
SELLER's representations and warranties contained in this Agreement shall be
true at the time of closing as though such representations and warranties were
made at closing.
B. Performance. The SELLER shall have performed and complied
with all agreements and conditions required by this Agreement to be performed or
complied with by them prior to or at the closing.
C. Officer's Certificate. The SELLER shall have delivered to
the BUYER a certificate of the COMPANY's president and treasurer, dated the
closing date, certifying to the fulfillment of the conditions specified in
subparagraphs A and B of this paragraph as set forth in Exhibit B.
D. Officer's Affidavit. The SELLER, as President of the
COMPANY shall have delivered to the BUYER an affidavit dated the closing date,
that the COMPANY's corporate existence, good standing, and authorized and issued
stock are as stated in subparagraphs A and C of paragraph 3, that the COMPANY
has good and marketable title to all its property and assets as set forth in
subparagraph F of paragraph 3, and that except as may be specified, she does not
know or have any reasonable grounds to know
5
<PAGE>
of any litigation, proceeding or governmental investigation pending or
threatened against, or relating to, the COMPANY, its properties or business.
8. INDEMNIFICATION. The SELLER shall indemnify and hold harmless the
COMPANY and the BUYER, at all times after the date of this Agreement, against
and in respect of:
A. Undisclosed Liabilities. All liabilities of the company of
any nature, whether accrued, absolute, contingent, or otherwise, existing at
closing.
B. Misrepresentations. Any damage or deficiency resulting from
any misrepresentation, breach of warranty, or nonfulfillment of any agreement on
the part of the SELLER under this Agreement, or from any misrepresentation in or
omission from any certificate or other instrument furnished to the BUYER
hereunder;
C. Incidental Expenses. All actions, suits, proceeding,
demands, assessments, judgments, costs, attorney's fees and expenses incident to
any of the foregoing. The SELLER shall reimburse the COMPANY or the buyer on
demand, for any payment made by the COMPANY or the buyer at any time after
closing in respect of any liability or claim to which the foregoing indemnity
relates.
9. BROKERAGE. The SELLER represents and warrants that all negotiations
relative to this Agreement have been carried on by her directly with the BUYER,
without the intervention of any person, and the SELLER shall indemnify the BUYER
and hold it harmless against and in respect of any claim for brokerage or any
other commissions relative to this Agreement, or to the transactions
contemplated hereby, and also in respect of all expenses of any character
incurred by the SELLER in connection with this agreement or such transactions.
10. NATURE AND SURVIVAL OF REPRESENTATIONS. All statements contained in
any certificate or other instrument delivered by or on behalf of the seller
pursuant hereto, or in connection with the transactions contemplated hereby,
shall be deemed representations and warranties by the SELLER hereunder. All
representations, warranties, and agreements made by the SELLER in this
agreement, or pursuant hereto, shall survive the closing ANY AND [SIC]
investigation at any time made by or on behalf of the BUYER.
11. BENEFIT. This Agreement shall be binding upon, and inure to the
benefit of the respective legal representatives of the SELLER, and the
successors and assigns of the buyer. Without limiting the foregoing, the
COMPANY's rights hereunder may be enforced by it in its own name. IN the event
that the buyer causes the assets and
6
<PAGE>
business of the company to be transferred to some other corporation, the rights
of the buyer and of the COMPANY hereunder may be enforced by such other
corporation in its own name.
12. CONSTRUCTION. This Agreement is being delivered and is intended to
be performed in the State of Florida and shall be construed and enforced in
accordance with the laws of the State of Florida.
13. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing, and shall be deemed to have been duly given if
delivered or mailed, first class postage prepaid, if to SELLER at 1826 Ponce de
Leon Blvd., Coral Gables, Florida 33134, or at such other address as she may
have furnished to the BUYER in writing, or if to the buyer at 1360 South Dixie
Highway, Coral Gables, Florida 33146, with a copy to Laura L. Russo, Esquire,
Russo & Baker, P.A., 4678 Ponce de Leon Blvd., Suite 301, Coral Gables, Florida
33146.
14. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have duly executed this agreement on
the date indicated.
/S/ LAURIE RUSSO
- ------------------------------- /S/ MARJORIE S. SCHWARTZ
------------------------------------
Marjorie S. Schwartz
SELLER
/S/ DOUGLAS L. YOUNT
- -------------------------------
First Reserve, Inc., a Florida Corp.
BUYER
/S/ LAURIE RUSSO By: /S/ RONALD A. SHUFFIELD
- -------------------------------- ---------------------------------
/S/ DOUGLAS L. YOUNT Attest: /S/ JAMES E. NEWMEYER
- -------------------------------- ---------------------------------
7
<PAGE>
EXHIBIT "A"
EMPLOYMENT CONTRACT
An agreement made this 31st day of March, 1999, by and between
COLUMBIA TITLE OF FLORIDA, INC., a Florida corporation (hereinafter "COMPANY")
and MARJORIE SCHWARTZ, (hereinafter "SCHWARTZ").
In consideration of the several provisions hereinafter
contained, it is agreed between the parties hereto as follows:
The COMPANY hereby employs Schwartz as Senior Vice President
Underwriting of the COMPANY for a term of two years beginning April 1, 1999.
Schwartz agrees to well and faithfully serve the COMPANY in such capacity, and
agrees at all times to devote her whole time, attention, and energies to the
performance of such services, acts, and anything connected therewith as the
COMPANY shall from time to time direct and of a kind properly belonging to the
duties of a Senior Vice President of Underwriting. Schwartz agrees to work
Monday through Friday (a 35 hour week). Schwartz and COMPANY agree that during
the first ninety (90) days of this contract, some of Schwartz's time will be
allocated to the Key Largo branch office.
The COMPANY shall pay to Schwartz a salary of One Hundred
Thousand Dollars per year, payable monthly in the gross amount of Eight Thousand
Three Hundred Thirty Three Dollars and thirty four cents. The COMPANY shall
provide Schwartz with a car (1991 Cadillac) and cover the insurance costs
related thereto. At the end of this agreement, the COMPANY agrees that it will
transfer title of the 1991 Cadillac to Schwartz. The COMPANY also agrees that it
will provide Schwartz with group health insurance during Schwartz's employment
period. The COMPANY shall give Schwartz two (2) weeks per year paid vacation
time and four (4) personal days and six (6) sick days per annum.
IN WITNESS WHEREOF, the parties have executed this agreement
on the date indicated by their signatures.
___________________________________ COLUMBIA TITLE OF FLORIDA, INC.
___________________________________ By:_________________________________
Douglas L. Yount, President
Date:_______________________________
___________________________________ ____________________________________
Marjorie Schwartz
___________________________________ Date:_______________________________
<PAGE>
EXHIBIT A-1
BUYER will assume responsibility for the payment of the unreimbursed Corporate
Expenses and Accounts Payable of the COMPANY as itemized below:
<TABLE>
<CAPTION>
PAYEE ACCOUNT NUMBER AMOUNT
----- -------------- ------
<S> <C> <C>
Internal Revenue Service (past due payroll taxes) $ 9,756.28
Steve Eber (accounting services) 9,300.00
First Union Bank (line of credit) 2905-3000-0028-4253 35,000.00
MBNA America (credit card) 4264-2927-7002-1125 16,800.00
NationsBank/US Air (credit card 4356-0025-0402-7622 1,100.00
American Express/Delta Airlines (credit card) 3712-702555-11008 2,900.00
American Express/Centurion Bank (credit card) 9772-0200-0002-3403 16,900.00
American Express/Optima (credit card) 3737-365260-93008 9,600.00
American Express/Small Business Line of Credit 3723-166030-11008 5,800.00
NationsBank Mastercard (credit card) 5407-9351-0119-8682 8,000.00
SunTrust Visa (credit card) 4229-4249-9910-3426 10,800.00
Citibank Visa (credit card) 4271-3827-0228-3918 8,800.00
American Express/Platinum Card (credit card) 3713-835851-91001 10,400.00
American Express/Small Business Line of Credit 3725-005879-11008 4,843.72
------------
TOTAL PAYMENTS $ 150,000.00
</TABLE>
<PAGE>
EXHIBIT "B"
OFFICER'S CERTIFICATE
I, Marjorie S. Schwartz, as President and Secretary of
Columbia Title of Florida, Inc., hereby certifies the following:
1. That all of SELLER's representatives and warranties
contained in the Stock Purchase Agreement are true as
of March 31, 1999.
2. That SELLER has performed and complied with all
agreements and conditions required by the Stock
Purchase Agreement prior to closing.
Signed and witnessed this 31st day of March, 1999.
Witnesses: COLUMBIA TITLE OF FLORIDA, INC.
__________________________________
__________________________________ ______________________________________
MARJORIE S. SCHWARTZ
President and Secretary
STATE OF FLORIDA
COUNTY OF MIAMI-DADE
I HEREBY CERTIFY that on this day, before me, an officer duly
authorized in the State aforesaid and in the County aforesaid to take
acknowledgments, personally appeared MARJORIE S. SCHWARTZ, who is (a) either
personally known to me, or (b) produced __________________ as identification.
WITNESS my had and official seal in the County and State last
aforesaid, this _____ day of __________________ , 1999.
_______________________________________
Notary Public - State of Florida
_______________________________________
(Stamped Commission of Notary)
EXHIBIT 10.7
PROMISSORY NOTE
1. PROMISE TO PAY
First Reserve, Inc. ("First Reserve"), a Florida corporation, for good
and valuable consideration described herein, the receipt of which is hereby
acknowledged, hereby promises to pay to the order of R.T. Construction
Interests, Inc. ("RTCI") the principal sum of One Million Two Hundred Thousand
Dollars ($1,200,000), pursuant to the installment payment terms below. First
Reserve understands that this Promissory Note (hereafter "Note") may be
transferred or assigned by RTCI at its discretion. RTCI or any entity that takes
this note by transfer or assignment and is entitled to receive payments
hereunder is hereafter referred to as the "Note Holder."
2. INTEREST
This Note shall not bear interest unless and until First Reserve
defaults under the terms stated herein. In the event of a default, the full
amount remaining unpaid at the time of default shall accrue interest at the
maximum legal rate.
3. PAYMENTS
First Reserve shall pay the amounts due to Note Holder under this Note
in five (5) installment payments in the amounts and on the dates described
herein. The first payment to Note Holder shall be made upon the execution of
this Note and shall be in the amount of $250,000; the second payment shall be
due 12 months from the date of this Note and shall be in the amount of $237,500;
the third payment shall be due 24 months from the date of this Note and shall be
in the amount of $237,500; the fourth payment shall be due 36 months from the
date of this Note and shall be in the amount of $237,500; the fifth and final
payment shall be due 48 months from the date of this Note and shall be in the
amount of $237,500. Payments of clear funds shall be made to RTCI at 9200 S.
Dadeland Boulevard, Suite 225, Miami, Florida 33156, unless otherwise designated
in writing by Note Holder.
4. FIRST RESERVES FAILURE TO PAY AS REQUIRED
In the event that First Reserve fails to pay any amount due on the date
it is due, First Reserve shall be in default. If the Note Holder has not
received clear funds in the full amount of any payment due by the end of ten
(10) calendar days after the date it is due, the Note Holder may declare the
entire principal balance remaining unpaid immediately due and payable by sending
written notice to First Reserve at 1360 South Dixie Highway, Coral Gables,
Florida 33146.
5. NOTICE AND WAIVER
Unless applicable law requires a different method, any notice that must
be given under this Note shall be delivered via first class U.S. Mail.
First Reserve, any other person or entity obligated under the terms of
this Note, including the guarantor, Allen C. Harper, waives the rights of
presentment and notice of dishonor. "Presentment"
<PAGE>
means the right to require the Note Holder to demand payment of the amounts due.
"Notice of dishonor" means the right to require the Note Holder to deliver
notice to other persons obligated under the terms of this Note that such amounts
due have not been paid.
6. ATTORNEYS' FEES
In the event of litigation arising under this Note to enforce any of
its terms the prevailing party shall be entitled to recover from the
non-prevailing party all of its attorneys' fees and costs at the pretrial, trial
and appellate levels.
7. CONSIDERATION
The consideration for this promissory note is the payment of $10.00,
the receipt of which is hereby acknowledged. Further consideration for this Note
is the forbearance of RTCI from instituting legal proceedings against First
Reserve and Allen C. Harper ("Harper") relating to that certain guaranty
contained in Section 10 of that certain Agreement dated February 28, 1995
between First Reserve, Inc., a Florida corporation, Allen C. Harper, RTCI, and
others as more specifically described therein ("The 1995 Agreement"). Further
consideration for this Note and the obligations assumed pursuant to its terms is
the release by RTCI of the obligations of First Reserve and Allen C. Harper
under the terms set forth in the 1995 Agreement.
DATED this 13th day of July, 1998
FIRST RESERVE, INC.
a Florida corporation
Witnesses:
/S/ENRIQUE I. ESPINO By:/S/ALLEN C. HARPER
- -------------------------------- ----------------------------
Print Name: ENRIQUE I. ESPINO Print Name: ALLEN C. HARPER
CHAIRMAN/CEO
/S/CHIAFFREDO BELLERO
- --------------------------------
Print Name: CHIAFFREDO BELLERO
<PAGE>
PERSONAL UNCONDITIONAL ABSOLUTE GUARANTY
For the consideration set forth in Paragraph 7 above, Allen C. Harper
hereby unconditionally and absolutely guarantees full payment of any and every
obligation or liability of First Reserve, to the Note Holder, under this
Promissory Note. Allen C. Harper hereby acknowledges that this is a guaranty of
payment and not a guarantee of collection and expressly waives any right to
require that resort be had or any action brought against the maker of this Note.
/S/ALLEN C. HARPER
----------------------
ALLEN C. HARPER
Witnesses:
/S/ENRIQUE I. ESPINO
- --------------------------------
Print Name:ENRIQUE I. ESPINO
Date: 7/13/98
/S/CHIAFFREDO BELLERO
- --------------------------------
Print Name: CHIAFFREDO BELLERO
Date: 7/13/98
EXHIBIT 10.8
- ----------- -------
Copy Number Offeree
CONFIDENTIAL
PRIVATE OFFERING MEMORANDUM
FIRST RESERVE, INC.
A MINIMUM OF $300,000 (300,000 SHARES OF COMMON STOCK) TO
A MAXIMUM OF $1,000,000 (1,000,000 SHARES OF COMMON STOCK)
PURCHASE PRICE: $1.00 PER SHARE
All of the shares of common stock, no par value (the "Common Stock")
offered hereby (the "Shares") are being issued and sold by First Reserve, Inc.
(the "Company"), an Arizona corporation, at an offering price of $1.00 per share
(the "Offering"). This Offering is being made pursuant to Rule 504 of Regulation
D as promulgated under the Securities Act of 1933, as amended. The Company
reserves the right to accept or reject any subscription at its sole discretion.
The minimum investment in this Offering is $5,000, although the Company may
elect, at its discretion, to accept a smaller investment. All funds received
from subscriptions will be deposited in an escrow account with Adorno & Zeder,
P.A. (the "Escrow Agent") as described herein. The Company has agreed to pay an
8% commission to selling brokers who sell shares in this Offering. See "Terms of
the Offering."
------------
THIS OFFERING INVOLVES AN EXTREMELY SPECULATIVE INVESTMENT
WITH VERY HIGH RISK. SEE "RISK FACTORS."
------------
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR WITH THE SECURITIES REGULATORY AUTHORITY OF ANY
STATE. THESE SECURITIES ARE BEING OFFERED PURSUANT TO EXEMPTIONS FROM
REGISTRATION CONTAINED IN THE SECURITIES ACT OF 1933, AS AMENDED (THE
"1933 ACT"), AND THE SECURITIES LAWS OF THE VARIOUS STATES IN WHICH
THIS OFFERING IS BEING MADE. NO GOVERNMENT AGENCY HAS APPROVED OR
DISAPPROVED THESE SECURITIES NOR HAS ANY AGENCY PASSED UPON OR REVIEWED
THE ACCURACY OR ADEQUACY OF THIS PRIVATE OFFERING MEMORANDUM. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
* * * *
PRICE NET PROCEEDS
TO PUBLIC COMMISSIONS(1) TO COMPANY(2)
--------- -------------- -------------
PER SHARE $ 1.00
TOTAL MINIMUM $ 300,000 $24,000 $251,000
TOTAL MAXIMUM $1,000,000 $67,628 $752,722
- ------------
(1) THE COMPANY HAS AGREED TO PAY AN 8% COMMISSION TO SELLING BROKERS. A
FINANCIAL CONSULTANT TO THE COMPANY WILL RECEIVE A TOTAL OF 69,600 SHARES IF
THE MINIMUM OFFERING IS RAISED, AND 154,650 SHARES IF THE MAXIMUM OFFERING
IS RAISED FOR CERTAIN FINANCIAL ADVISORY SERVICES.
(2) REPRESENTS PROCEEDS TO THE COMPANY AFTER DEDUCTING THE 8% COMMISSION, OTHER
COSTS TO THE COMPANY AGGREGATING APPROXIMATLY $25,000, AND THE VALUE OF THE
SHARES BEING ISSUED TO THE COMPANY'S FINANCIAL CONSULTANT. SEE "USE OF
PROCEEDS."
* * * *
THE DATE OF THIS PRIVATE OFFERING MEMORANDUM IS APRIL 6, 1998.
<PAGE>
First Reserve, Inc., an Arizona corporation (the "Company") is seeking
to raise a minimum of $300,000 or a maximum of $1,000,000 (before the payment of
commissions and expenses) by selling a minimum of 300,000 shares of its Common
Stock (the "Minimum Offering"), or 1,000,000 shares of its Common Stock (the
"Maximum Offering") in this Offering. No refunds are planned in the event that
less than the Minimum Offering is achieved. All funds received from
subscriptions will be deposited in an escrow account with Adorno & Zeder, P.A.
(the "Escrow Agent") as described herein. See "Use of Proceeds." This Offering
will terminate on June 15, 1998; however, the Company reserves the right to
extend the Offering in its sole discretion. All of the shares offered hereby are
being sold by certain registered securities dealers, in which case such
registered securities dealers will receive a commission equal to eight percent
of the purchase price of the shares sold thereby.
CALIFORNIA INVESTORS:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE CALIFORNIA CORPORATIONS CODE BY REASON OF SPECIFIC
EXEMPTIONS THEREUNDER RELATING TO THE LIMITED AVAILABILITY OF THE OFFERING.
THESE SECURITIES CANNOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF TO ANY
PERSON OR ENTITY UNLESS SUBSEQUENTLY REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE CALIFORNIA CORPORATIONS CODE, IF SUCH REGISTRATION IS
REQUIRED.
CONNECTICUT INVESTORS:
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE BANKING
COMMISSIONER OF THE STATE OF CONNECTICUT NOR HAS THE COMMISSIONER PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
FLORIDA INVESTORS:
EACH FLORIDA RESIDENT WHO SUBSCRIBES FOR THE PURCHASE HEREIN HAS THE RIGHT,
PURSUANT TO SECTION 517.061(11)(A)5 OF THE FLORIDA STATUTES (THE "FLORIDA
SECURITIES INVESTOR PROTECTION ACT"), TO WITHDRAW HIS SUBSCRIPTION FOR THE
PURCHASE WITHIN THREE BUSINESS DAYS AFTER THE EXECUTION AND DELIVERY OF THE
SUBSCRIPTION AGREEMENT OR PAYMENT FOR THE SECURITIES HAS BEEN MADE, WHICHEVER IS
LATER, AND RECEIVE A FULL REFUND OF ALL MONIES PAID. WITHDRAWAL AND REFUND WILL
BE WITHOUT ANY FURTHER LIABILITY TO ANY PERSON. TO ACCOMPLISH THIS WITHDRAWAL, A
SUBSCRIBER MUST SEND A LETTER OR FAX TO THE COMPANY AT 1360 S. DIXIE HIGHWAY,
CORAL GABLES, FLORIDA 33146, FAX NO. (305) 662-5646, INDICATING HIS INTENTION TO
WITHDRAW. SUCH LETTER MUST BE SENT AND POSTMARKED, AND ANY FAX, COURIER OR HAND
DELIVERY MUST BE RECEIVED, PRIOR TO THE END OF THE AFOREMENTIONED THIRD BUSINESS
DAY. IT IS PRUDENT TO SEND SUCH
ii
<PAGE>
LETTER BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO ENSURE THAT IT IS
RECEIVED AND ALSO TO EVIDENCE THE TIME IT WAS MAILED, UNLESS SAME IS PERSONALLY
DELIVERED. IF THE REQUEST IS MADE VERBALLY TO THE COMPANY (IN PERSON OR BY
TELEPHONE TO AN OFFICER OR DIRECTOR OF THE COMPANY AT (305) 667-8871, A WRITTEN
CONFIRMATION THAT THE REQUEST HAS BEEN RECEIVED SHOULD BE REQUESTED.
MASSACHUSETTS INVESTORS:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE MASSACHUSETTS SECURITIES ACT BY REASON OF SPECIFIC
EXEMPTIONS THEREUNDER RELATING TO THE LIMITED AVAILABILITY OF THE OFFERING.
THESE SECURITIES CANNOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF TO ANY
PERSON OR ENTITY UNLESS SUBSEQUENTLY REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE MASSACHUSETTS SECURITIES ACT, IF SUCH REGISTRATION IS
REQUIRED.
NEW YORK INVESTORS:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE NEW YORK FRAUDULENT PRACTICES ("MARTIN") ACT BY REASON
OF SPECIFIC EXEMPTIONS THEREUNDER RELATING TO THE LIMITED AVAILABILITY OF THE
OFFERING. THESE SECURITIES CANNOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
TO ANY PERSON OR ENTITY UNLESS SUBSEQUENTLY REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR THE NEW YORK FRAUDULENT PRACTICES ("MARTIN") ACT, IF
SUCH REGISTRATION IS REQUIRED.
PENNSYLVANIA INVESTORS:
UNDER THE PROVISIONS OF SECTION 207(M)(2) OF THE PENNSYLVANIA
SECURITIES ACT OF 1972, A PENNSYLVANIA RESIDENT WHO ACCEPTS AN OFFER TO PURCHASE
SECURITIES EXEMPTED FROM REGISTRATION BY SECTION 203(D) DIRECTLY FROM AN ISSUER
OR AFFILIATE OF AN ISSUER SHALL HAVE THE RIGHT TO WITHDRAW HIS ACCEPTANCE
WITHOUT INCURRING ANY LIABILITY TO THE SELLER OR ANY OTHER PERSON WITHIN TWO
BUSINESS DAYS FROM THE DATE OF RECEIPT BY THE ISSUER OF HIS WRITTEN BINDING
CONTRACT OF PURCHASE OR, IN THE CASE OF A TRANSACTION IN WHICH THERE IS NO
WRITTEN BINDING CONTRACT OF PURCHASE, WITHIN TWO BUSINESS DAYS AFTER HE MAKES
THE INITIAL PAYMENT FOR THE SECURITIES BEING OFFERED.
EACH PERSON ENTITLED TO EXERCISE THE RIGHT TO WITHDRAW GRANTED
BY SECTION 207(M), AND WHO WISHES TO EXERCISE SUCH RIGHT, MUST WITHIN
iii
<PAGE>
THE AFOREMENTIONED TWO BUSINESS DAYS CAUSE A WRITTEN NOTICE OR TELEGRAM TO BE
SENT TO THE COMPANY AT THE ADDRESS PROVIDED IN THE PLACEMENT OFFERING MEMORANDUM
INDICATING HIS INTENTION TO WITHDRAW. SUCH LETTER OR TELEGRAM MUST BE SENT AND
POSTMARKED ON OR PRIOR TO THE AFOREMENTIONED SECOND BUSINESS DAY. IF YOU ARE
SENDING A LETTER, IT IS PRUDENT TO SEND IT BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED, TO ENSURE THAT IT IS RECEIVED AND ALSO TO EVIDENCE THE TIME IT WAS
MAILED. SHOULD YOU MAKE THIS REQUEST ORALLY, YOU MUST ASK FOR WRITTEN
CONFIRMATION THAT YOUR REQUEST HAS BEEN RECEIVED.
ALL PENNSYLVANIA INVESTORS WILL BE REQUIRED TO AGREE IN WRITING THAT
THEY WILL NOT SELL THESE SHARES WITHIN TWELVE MONTHS AFTER THE DATE OF PURCHASE
OF SUCH SHARES.
------------
THIS MEMORANDUM IS BEING SUBMITTED TO A LIMITED NUMBER OF INVESTORS AND
MAY NOT BE REPRODUCED OR DELIVERED TO ANY PERSON OTHER THAN THE PERSON WHOSE
NAME APPEARS ON THE COVER PAGE. AN OFFEREE WHO DOES NOT PURCHASE SHARES PURSUANT
HERETO AGREES TO RETURN THIS MEMORANDUM AND ANY COPIES TO THE COMPANY. DURING
THE COURSE OF THIS OFFERING AND PRIOR TO THE SALE OF THE SHARES THE COMPANY WILL
MAKE AVAILABLE TO EACH OFFEREE THE OPPORTUNITY TO ASK IN WRITING QUESTIONS OF,
AND RECEIVE IN WRITING ANSWERS FROM ALLEN C. HARPER, CHAIRMAN/CHIEF EXECUTIVE
OFFICER OF THE COMPANY, AT 1360 SOUTH DIXIE HIGHWAY, CORAL GABLES, FLORIDA
33146, CONCERNING THE TERMS AND CONDITIONS OF THE OFFERING AND TO OBTAIN ANY
ADDITIONAL INFORMATION, TO THE EXTENT THE COMPANY POSSESSES SUCH INFORMATION OR
CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE, REQUESTED BY THE OFFEREE
OR HIS REPRESENTATIVE OR NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION
CONTAINED IN THIS MEMORANDUM. ALL INQUIRIES REGARDING THIS OFFERING SHALL BE
DIRECTED TO ALLEN C. HARPER AT THE ADDRESS SET FORTH ABOVE.
NO PERSON OTHER THAN ALLEN C. HARPER, OR RONALD A. SHUFFIELD, EACH OF
WHOM ARE DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY, is authorized to give
any written information or to make any written representations other than those
contained in this Memorandum, and, if given or made, such information or
representations by other persons may not be relied upon. This Memorandum does
not constitute an offer to sell or solicitation of an offer to buy any
securities other than the shares offered hereby, nor does it constitute an offer
to sell or solicitation of an offer to buy such shares in any jurisdiction or to
any person in which or to whom it is unlawful to make such offer or
solicitation. The delivery of this Memorandum at any time does not imply that
the information herein is correct as of any time subsequent to its date. In the
event any material change occurs with
iv
<PAGE>
respect to the affairs of the Company during the period of this Offering, the
Company will amend this Memorandum to reflect such material change.
v
<PAGE>
TABLE OF CONTENTS
MEMORANDUM SUMMARY..........................................................1
SUITABILITY.................................................................3
TERMS OF THE OFFERING.......................................................4
THE COMPANY.................................................................5
RISK FACTORS................................................................6
DILUTION ..................................................................11
USE OF PROCEEDS............................................................12
BUSINESS ..................................................................14
MANAGEMENT.................................................................25
EXECUTIVE COMPENSATION AND CERTAIN TRANSACTIONS............................27
PRINCIPAL SHAREHOLDERS.....................................................28
DESCRIPTION OF COMPANY STOCK...............................................29
DIVIDENDS..................................................................30
ACCESS TO AND FURNISHING OF ADDITIONAL INFORMATION.........................30
<PAGE>
LIST OF EXHIBITS
Exhibit A - Form of Subscription Agreement
Exhibit B - Form of Offeree Questionnaire
Exhibit C - Fortune 500 Companies with
Miami-Dade County Operations
Exhibit D - First Reserve Florida Financial Statements
<PAGE>
MEMORANDUM SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS MEMORANDUM. SEE "RISK FACTORS" FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE COMMON STOCK OF THE COMPANY.
THE COMPANY
The Company is a full service real estate company that provides
consumers with a wide range of residential, investment and business real estate
services. The Company's primary operations are through its wholly-owned
subsidiary, Esslinger-Wooten-Maxwell, Inc. ("EWM"). EWM is a Florida licensed
real estate brokerage firm which engages 375 sales associates and support staff.
In 1997, EWM brokered $368,000,000 of real property transactions. EWM
concentrates primarily on upscale clients, as reflected by its average sales
price of $218,544.
EWM is the largest independent real estate broker in the metropolitan
Miami, Florida area based on the dollar volume of gross sales prices. EWM
provides the following services:
o Residential Brokerage
o Commercial Brokerage
o Corporate Relocation Services
o Property Management and Leasing
o International Brokerage
o Business Brokerage
EWM operates from offices located in Coral Gables and in the
Pinecrest-Palmetto area of Miami-Dade County, Florida. It is a member of
numerous Florida-based Realtor associations, including the Realtor Association
of Greater Miami and the Beaches, the Realtor Association of Miami-Dade County,
the Ft. Lauderdale Association of Realtors and the Florida Keys Association of
Realtors. EWM's market representation stretches for a distance of more than 50
miles (north to south) in South Florida.
Embassy Financial Services, Inc. ("Embassy"), another Company
subsidiary, is a licensed residential mortgage lender that specializes in
conventional, Federal Housing Administration ("FHA") and Veterans Administration
("VA") mortgages. In 1997, Embassy closed 169 loans for a total value of
approximately $27,000,000, an average of $160,377 per loan.
In January 1998, certain shareholders of First Reserve Florida acquired
the majority of shares of Phoenix Financial Reporting Group, Inc., an Arizona
corporation ("PFRG"), a holding company with no operations. The shareholders of
First Reserve Florida and the shareholders of Embassy exchanged their shares of
First Reserve Florida common stock and Embassy common stock respectively for
shares of PFRG Common Stock, with the result being that First Reserve Florida
and
1
<PAGE>
Embassy became wholly-owned subsidiaries of PFRG. PFRG changed its name to
"First Reserve, Inc." and is hereinafter referred to as the "Company" in this
Memorandum.
The Company hopes to undertake an aggressive growth strategy by
acquiring local brokerage operations throughout Florida to increase market
presence, sales volume and the Company's geographic base. The Company is also
contemplating the expansion of its mortgage brokerage services, acquiring other
real estate services such as title companies or casualty insurance and
establishing an alliance of other high quality real estate and mortgage
brokerage firms for service throughout Central and Southern Florida and possibly
South and Central America.
As of October 31, 1997, First Reserve Florida's combined Balance Sheet,
which includes primarily EWM and Embassy, reflects a net worth of $760,853.
THE OFFERING
This Offering involves a minimum of 300,000 shares and a maximum of
1,000,000 shares, at a per share price of $1.00 The Company intends to sell a
minimum of $300,000 worth shares of Common Stock, with a minimum investor
purchase of $5,000 although the Company may, in its sole discretion, elect to
sell less than that number of shares to any investor. The subscription funds
will be held on behalf of the Company by Adorno & Zeder, P.A. in an escrow
account f/b/o First Reserve, Inc. See "Terms of the Offering" and "Description
of Securities."
USE OF PROCEEDS
The Company plans to utilize the proceeds of this Offering for (i)
general corporate purposes, (ii) working capital, (iii) potential acquisitions,
mergers and growth of the Company's operations, and (iv) to pay the expenses of
an intended public offering of its securities under the 1993 Act to take place
within the near future. See "Use of Proceeds."
SHARES OUTSTANDING
The Company presently has 5,312,000 shares of Common Stock outstanding.
Upon the successful completion of the Minimum Offering, 5,681,600, shares will
be outstanding, and upon the successful completion of the Maximum Offering,
6,312,000 shares will be outstanding.
RISK FACTORS
This Offering involves a significant degree of risk. Prospective
investors should therefore review and consider carefully all of the information
set forth under the caption "Risk Factors" herein.
2
<PAGE>
SUITABILITY
The shares being offered by this Memorandum will not be registered under
the Securities Act of 1933, as amended (the "1933 Act"), or under any state
securities law. In connection with the federal securities laws, the shares are
being offered for sale in transactions that are exempt from registration because
of certain provisions of the 1933 Act or certain rules adopted by the Securities
and Exchange Commission (the "Commission"). As a condition to the availability
of such exemptions, each investor in the shares offered by this Memorandum will
be required to represent, among other things, that he is acquiring the shares
for his own account, for investment purposes only, and not with a view to resale
or distribution.
Certain states in the United States may have additional restrictions on
who may invest in this speculative Offering. Each investor is cautioned to
review the appropriate state warnings set forth at pages i - iv, above.
Because an investment in the shares will involve a substantial degree
of risk and will be highly illiquid, the Company will not sell any shares to any
investor unless the investor is an "accredited investor" within the meaning of
the applicable securities laws and represents, among other things, that the
investor has (i) adequate means of providing for his current needs and possible
personal contingencies, and (ii) no need for liquidity with respect to this
investment. NO ONE SHOULD INVEST IN THE SHARES UNLESS THE INVESTOR CAN AFFORD
THE COMPLETE LOSS OF HIS INVESTMENT. Each investor will be required to complete
in its entirety the Offeree Questionnaire annexed hereto as Exhibit "B" in order
to confirm that such person is an "accredited investor" within the meaning of
the applicable securities laws and otherwise suitable for a purchase of the
shares. See "Risk Factors."
3
<PAGE>
TERMS OF THE OFFERING
The Company is offering a minimum of 300,000 shares of its Common Stock
($300,000), and a maximum of 1,000,000 shares of Common Stock ($1,000,000) at a
purchase price of $1.00 per share through designated persons until June 15,
1998, unless extended by the Company in its sole discretion.
Each investor in this Offering must purchase at least 5,000 shares;
however, the Company reserves the right, in its sole discretion, to sell less
than the minimum required hereby. Investors who wish to subscribe for the shares
must return a fully completed Subscription Agreement (Exhibit "A") and Offeree
Questionnaire (Exhibit "B") and bank or cashier's check in the appropriate
amount made payable to First Reserve, Inc. on or before June 15, 1998. The
Company intends to raise a maximum of $1,000,000 (before the payment of
commissions and expenses) by selling a minimum of 300,000 shares of its Common
Stock (the "Minimum Offering"), or a maximum of 1,000,000 shares of its Common
Stock (the "Maximum Offering") in this Offering, and no refunds are planned in
the event that less than the minimum number of shares offered hereby are sold.
All funds received from subscriptions will be deposited in an escrow account
with Adorno & Zeder, P.A. (the "Escrow Agent") as described herein. See "Use of
Proceeds."
The expenses of this Offering (including legal, accounting, printing
commission and miscellaneous fees and costs) are estimated at $49,000 in the
event the Minimum Offering is achieved or $92,628 ($247,278 including the value
of the Shares issued to the Company's financial consultant) in the event the
Maximum Offering is achieved, and such expenses will be paid by the Company from
the proceeds of the Offering. The total amount of commissions that may be paid
in connection with this Offering is $24,000 in the event the Minimum Offering is
achieved (not including 69,600 Shares to be issued to the Company's financial
consultant for certain financial and advisory services), or $67,628 in the event
the Maximum Offering is achieved (not including 154,650 Shares to the Company's
financial consultant for certain financial and advisory services). See "Use of
Proceeds."
Each investor in this Offering will be required to pay in cash, at the
date of his subscription, an amount equal to the total price of the shares which
he or she has purchased.
The Company reserves the right in its sole discretion to reject any
subscription for the shares.
4
<PAGE>
THE COMPANY
The primary business of the Company operates through its wholly-owned
subsidiary, EWM, a general real estate brokerage firm. EWM was originally
founded in 1964. Allen C. Harper and Ronald A. Shuffield, the current principals
of the Company, purchased EWM in April 1984 through First Reserve, Inc., a
Florida corporation, which they established for the purpose of acquiring EWM.
First Reserve Florida is a holding company that wholly owns EWM and certain
other related entities, including Embassy.
Embassy is a licensed residential mortgage lender that specializes in
conventional FHA and VA mortgages. Embassy originates loans in an agency
capacity on behalf of other mortgage lenders. Embassy does not service any of
the loans they originate. In 1997, Embassy closed 169 loans with a total value
of approximately $27,000,000, an average of $160,377 per loan.
Certain shareholders of First Reserve Florida acquired 83.3% of the
total common shares (5,000,000 shares) of Phoenix Financial Reporting Group,
Inc., an Arizona corporation ("PFRG"), a public holding company with no
operations, pursuant to a Stock Purchase Agreement dated January 7, 1998. The
PFRG shares were acquired from four different shareholders for an aggregate
purchase price of $80,000. The remaining 1,000,000 shares of PFRG common stock
are owned by 219 shareholders that owned shares in PFRG prior to the
consummation of the Stock Purchase Agreement. By acquiring 83.3% of PFRG, the
shareholders of First Reserve Florida acquired control of PFRG.
Subsequent to the acquisition, the shareholders of PFRG voted to change
the name of PFRG to First Reserve, Inc. The Company also issued additional
shares of common stock. In addition, pursuant to an Agreement of Tax-Free
Reorganization ("Exchange Merger Agreement"), the shareholders of First Reserve
Florida and the shareholders of Embassy exchanged all of their common stock
shares of First Reserve Florida and Embassy respectively for shares of the
Company's Common Stock, with the result being that First Reserve Florida and
Embassy became wholly-owned subsidiaries of PFRG. This exchange is intended to
qualify as a tax-free reorganization pursuant to Section 351 of the Internal
Revenue Code of 1986, as amended. After the completion of the share exchange,
First Reserve Florida has been merged into the Company and all the assets of
First Reserve Florida and Embassy respectively have become assets of the
Company. The Company recently approved a 1 for 2 reverse split of its common
stock.
As stated above, the primary operations of the Company are through EWM,
its wholly-owned subsidiary. For a detailed description of EWM and its
operations, see "Business - Company Background and History" herein.
5
<PAGE>
RISK FACTORS
THE SHARES BEING OFFERED BY THIS MEMORANDUM ARE EXTREMELY SPECULATIVE AND
INVOLVE A HIGH DEGREE OF RISK. THEREFORE, NO ONE SHOULD INVEST IN THE SHARES
UNLESS HE CAN AFFORD THE COMPLETE LOSS OF HIS INVESTMENT, AND EACH PROSPECTIVE
INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO MAKING AN
INVESTMENT IN THE SHARES:
COMPETITION
All of the businesses in which EWM is engaged are highly
competitive, especially residential real estate brokerage services. Many of its
competitors, in particular those who benefit by affiliated franchising
organizations, have substantially greater financial resources than the Company.
Many of the Company's competitors are also undertaking a growth strategy. While
EWM has a higher average sales price than its primary competitors, these primary
competitors close substantially more residential listings than EWM and have
substantially higher gross sales. See "Business-Competition". Even though the
Company believes that its ability to specialize in higher-priced properties, the
quality of its services and its knowledge of and relative strength in the South
Florida market position itself well with its competitors, the substantial amount
of competition is expected to continue, which may have an adverse effect on the
Company and its operations.
ECONOMIC FACTORS
The Company's operations are directly dependent on the South
Florida economy in general, and the South Florida real estate market in
particular. South Florida's real estate market has been historically cyclical.
Downturns in South Florida's economy will likely have an adverse effect on the
Company's business and operations.
ABILITY TO CONSUMMATE ACQUISITIONS
The Company's growth strategy includes its intended
acquisitions or mergers with certain real estate brokerage operations throughout
Florida and/or the acquisition or merger with other entities that provide
ancillary services and complementary real estate services. See "Business-Plan of
Operations". To date, the Company has only had preliminary discussions with
acquisition and/or merger candidates and has not entered into any definitive
agreements to purchase or merge with any such entities. There is no guarantee
that the Company will be able to enter into any such definitive agreements. Even
if the Company enters into definitive agreements for its intended mergers or
acquisitions, the Company may not be able to do so on its original or intended
terms and conditions. Further, there is no guarantee that after a definitive
agreement is signed the acquisition or merger will occur. Failure to consummate
the Company's intended acquisitions and/or mergers will have an adverse effect
on the Company's future growth prospects. Assuming that the intended
acquisitions do occur, while the Company believes that they can operate the
acquired businesses profitability, there is no guarantee that they will be able
to do so.
6
<PAGE>
REGULATORY ISSUES
The Company believes it currently complies with all existing
laws and regulations, and such laws and regulations do not have a material
effect on the Company. However, the subsequent adoption or modification of state
and local laws and regulations imposing environmental controls, disclosure
rules, zoning and other land use restrictions may materially and adversely
affect the marketability of real estate, which would likely have a negative
effect on the Company's financial conditions and its operations. Additionally,
there are various licensing requirements imposed on the Company and its sales
associates. The Company has made, and will continue to make, expenditures to
comply with such laws and regulations. While based on the Company's experiences
to date, the cost of compliance has not had, and is not expected to have, a
material effect on the Company, changes in laws and regulations may give rise to
additional compliance costs that could have a material adverse effect on the
Company. Further, licenses may be revoked for a variety of reasons, including
the violation of regulations and the failure to maintain certain financial
requirements. Revocation of licenses would also have material and adverse effect
on the Company and its operations. See "Business - Regulation."
CONCENTRATION OF CREDIT RISK
EWM has experienced credit risk in connection with its bank
accounts. At various times during its fiscal year, EWM maintains deposits with
financial institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation ("FDIC"). The exposure to EWM is solely dependent on daily
bank balances and the financial strength of the respective institutions. To the
extent that any financial institutions holding deposits of EWM are unable to pay
such deposits in excess of FDIC insured amounts, this will have a material and
adverse effect on the Company's ability to meet its short-term cash and
liquidity needs.
DEPENDENCE UPON OFFERING FOR EXPANSION
The Company intends to pursue an aggressive growth strategy.
The growth of the Company is dependent in part upon the Company's ability to
acquire other entities requiring the proceeds raised from this Offering. If less
than all of the Shares offered hereby are sold, the Company may have to delay or
significantly modify its plans. Any such delay or modification of the Company's
plans would likely have an adverse effect on the Company.
UNCERTAINTY AS TO SUFFICIENCY OF FUNDS
Assuming that all 1,000,000 Shares hereunder are sold, the
Company believes that the net proceeds to the Company from the sale of the
Shares will provide the Company with sufficient capital with which to carry out
its near-term business goals. However, if fewer than the maximum number of
Shares are sold, the Company may not have sufficient funds to achieve its
intended goals. Therefore, the Company may be required to seek alternative
financing on terms less favorable to it or may be unable to find such financing
on any terms. Such occurrence would have the effect of increasing the risk of
loss of investment during the period before the entire 1,000,000 Shares have
been sold to those persons who invest in the Company. There can be no assurance
that if additional
7
<PAGE>
funds are required, such funds will be available, or if available, they will be
on terms favorable to the Company. See "Business" and "Use of Proceeds."
CAPITAL NEEDS
Through this Offering the Company is seeking external capital
for general corporate purposes, and to consummate the potential acquisitions
discussed herein, as well as to fund the costs of its anticipated Public
Offering. Even if this Offering proves successful, the ability of the Company to
achieve its long-term objectives may depend on the success of its contemplated
Public Offering and/or other financing efforts. In order to pursue its
contemplated growth strategy, the Company will likely need to raise additional
net proceeds beyond the proceeds of this Offering in order to commence its
acquisition and merger efforts and broaden its operations in order to achieve
its long-term goals. Even if this Offering and the Public Offering prove
successful, the Company may still require additional financing in order to
commence and maintain its operations and/or to deal with unknown contingencies.
There can be no assurances that any such financing will be available on terms
acceptable to the Company. If the Company's financing efforts prove
unsuccessful, the shares will likely have little or no value.
NO TRADING MARKET FOR COMMON STOCK;
LIMITATIONS ON DISPOSITION
There is no present trading market for the Company's Common
Stock, and there can be no assurance that, through the Public Offering or
otherwise, a trading market will develop and be sustained. The sale, transfer or
other disposition of the Shares is substantially restricted and may not be made
unless the shares are registered under the 1933 Act or, in the opinion of
Company counsel, such disposition is exempt from the 1933 Act's registration
requirements.
TRANSFERABILITY OF THE SHARES
Any transferee of the Shares will be required to comply with
the investor suitability standards imposed by the investor's state of residence
or, if such investor's state of residence does not impose such standards or the
Company standards are stricter, such standards imposed by the Company will
apply. However, transfers of the Shares will be allowed to or from family
members, to or from a trust for the benefit of a shareholder or his family, to
or from a partnership, the partner of which is a shareholder or his family, and
by will or intestate succession. Shareholders should therefore expect to hold
their shares for an indefinite period of time.
NO REGISTRATION OF OFFERING OF SHARES
The Shares being offered hereby are not being registered under
the 1933 Act or under any state securities laws. Consequently, investors in the
Shares will not receive the special disclosure and protection which would come
with a registered offering. As a condition to the availability of an exemption
from the registration provisions of the 1933 Act and certain state securities
laws, investors in the Offering will be required to acknowledge in writing that
they are purchasing the Shares for investment purposes only and not for purposes
of resale or distribution.
8
<PAGE>
CONTINGENT THIRD-PARTY LIABILITY
The Company may expend certain funds in connection with the
settlement of a contingent obligation with a third party. This obligation
($1,000,000, plus interest) is joint and several with the Company's Chief
Executive Officer and Chairman, Allen C. Harper, and is subject to the
availability of funds to satisfy this obligation. The Company is currently
negotiating a settlement of this matter for a payment of cash and stock;
however, there can be no assurance that the Company will reach this agreement
for such settlement. Further, if such an agreement is reached, a portion of the
Company's proceeds and equity may be needed to satisfy this obligation or the
settlement thereof. See "Use of Proceeds."
EFFECTIVE VOTING CONTROL BY EXISTING SHAREHOLDERS
Upon the completion of this Offering, the Company's existing
shareholders collectively will own approximately 84.2% of the outstanding Common
Stock, assuming the successful completion of the Maximum Offering and 93.5%
assuming successful completion of the Minimum Offering. The Company's executive
officers and directors and directors will own approximately 40.63% of the
outstanding Common Stock assuming the successful completion of the Maximum
Offering and 45.14% assuming the completion of the Minimum Offering.
Accordingly, if they vote their shares of Common Stock in the same manner, they
will have sufficient voting power (without the consent of the Company's other
shareholders) to elect all of the members of the Board of Directors of the
Company and, in general, to determine the outcome of various matters submitted
to the shareholders for approval, including fundamental corporate transactions.
DILUTION
Purchasers of Common Stock will experience immediate and
substantial dilution of $.76 per share or 76% in net tangible book value,
assuming maximum subscriptions, and $.822 per share or 82.2%, assuming minimum
subscriptions. See "Dilution."
MINIMUM OFFERING; BROAD DISCRETION IN APPLICATION
OF PROCEEDS; BENEFIT TO RELATED PARTIES
There is a $300,000 minimum for this Offering; no refunds are
planned in the event that less than 300,000 shares are sold. All funds received
from subscriptions will be deposited in an escrow account with Adorno & Zeder,
P.A. as Escrow Agent as described herein. If the Company is unable to raise the
Minimum Offering sought pursuant to this Offering, it may be unable to
consummate the Public Offering, which would render it unable to achieve its
long-term goals due to a lack of capital. If this Offering proves unsuccessful,
funds already raised from investors may already have been spent or committed and
may therefore be unavailable for refund in the event that the Company does not
carry forward with its contemplated growth strategy. Under those circumstances,
such investors may suffer a significant loss of their investments. See "Use of
Proceeds."
9
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent upon its management
team, particularly Allen C. Harper, its (and EWM's) Chairman of the Board of
Directors and Chief Executive Officer, and Ronald A. Shuffield, a Director and
President/Chief Operating Officer of both the Company and EWM. The loss of
either of Messrs. Harper or Shuffield would likely have a material adverse
impact on the Company.
NO DIVIDENDS
The Company does not expect to pay cash dividends on its
Common Stock in the foreseeable future. See "Dividends."
ARBITRARY OFFERING PRICE
The purchase price for the Common Stock was determined by the
Company and does not necessarily bear any relationship to the Company's asset
value or net worth. Factors considered by the Company in setting the purchase
price include management's view of the potential worth of the Company, the price
per share of other successful real estate brokerage offerings and the percentage
of ownership of the Company that management desires to sell, among others. Each
prospective investor should make an independent evaluation of the fairness of
the purchase price.
10
<PAGE>
DILUTION
At October 31, 1997, the Company had a net tangible book value of
$760,853 or $.143 per share of Common Stock (based on 5,312,000 outstanding
shares). Net tangible book value per share represents the Company's total
tangible assets less total liabilities, divided by the number of outstanding
shares of Common Stock.
Assuming the sale of $300,000 of shares (the Minimum Offering), less
commissions and estimated offering expenses, the pro forma net tangible book
value of the Company at October 31, 1997, would have been $1,011,853 or $.178
per share of Common Stock. This represents an immediate increase in net tangible
book value of $.035 per share to the existing shareholders and an immediate
dilution of $.822 per share to new investors.
Assuming the sale of $1,000,000 of shares (the Maximum Offering), less
commissions and estimated offering expenses, the pro forma net tangible book
value of the Company at October 31, 1997, would have been $1,513,575 or $.24 per
share of Common Stock. This represents an immediate increase in net tangible
book value of $.097 per share to the existing shareholders and an immediate
dilution of $.76 per share to new investors.
"Dilution" is determined by subtracting net tangible book value per
share after the Offering from the Offering price to investors in the Offering.
The following table illustrates this dilution on a per share basis:
MINIMUM MAXIMUM
OFFERING OFFERING
---------- ----------
Net Tangible Book Value $ 760,853 $ 760,853
Offering 300,000 845,350
Offering Expenses (49,000) (92,628)
---------- ----------
$1,011,853 $1,513,575
========== ==========
Shares
Before Offering 5,312,000 5,312,000
Offering Shares 369,600 1,000,000
---------- ----------
Total After Offering 5,681,600 6,312,000
========== ==========
Price per share
Before Offering $ .143 $ .143
Offering Price $ 1.00 $ 1.00
After Offering $ .178 $ .24
11
<PAGE>
The following table sets forth, at October 31, 1997, the number of
shares of Common Stock purchased from the Company, the total consideration paid
to the Company and the average price per share paid by the existing shareholders
and by new investors purchasing Shares sold by the Company in this Offering,
assuming an offering price of $1.00 per Share, and before deducting commissions
and estimated Offering expenses associated with this Offering payable by the
Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE PER
AMOUNT PERCENT AMOUNT PERCENT SHARE
--------- ------ --------- ------ -----
<S> <C> <C> <C> <C> <C>
Minimum Offering:
Existing Shareholders 5,312,000 93.5 760,853 75,19 .143
New Investors 369,600 6.5 251,000 24.81 $1.00
--------- ------ --------- ------ -----
Total: 5,681,600 100.00 1,011,853 100.00 .178
Maximum Offering:
Existing Shareholders 5,312,000 84.1 760,853 50.3 .143
New Investors 1,000,000 15.9 752,722 49.7 1.00
--------- ------ --------- ------ -----
Total: 6,312,000 100.0 1,513,575 100.00 .24
</TABLE>
USE OF PROCEEDS
The net proceeds (after commissions and before the expenses of the
Offering) to the Company from the sale of either the minimum or the maximum
shares of Common Stock in this Offering, at a price of $1.00 per Share are
estimated to be $251,000 and $895,000, respectively. The table sets forth
information assuming the Minimum Offering ($300,000 less 8% commissions
($24,000) and less $25,000 of other offering expenses) or the Maximum Offering
($1,000,000 less 8% commissions ($80,000) and less $25,000 of other offering
expenses) is sold. If less than the maximum offered amount is raised, the
Company will allocate the proceeds of this Offering for the purposes designated
below in such amounts as it may deem appropriate.
MINIMUM MAXIMUM
OFFERING OFFERING
-------- ----------
Expenses associated with $ 25,000 $ 25,000
this offering including
legal and accounting fees
Commission to Selling Brokers $ 24,000 $ 67,628
Value of Securities Issued for (1) $ 69,600 $ 154,650
Certain Consulting Services
Working Capital and Funds for $251,000 $ 752,722
Acquisition and /or Mergers (including
costs associated with the acquisition of
PFRG) (2)
-------- ----------
Totals: $369,600 $1,000,000
12
<PAGE>
(1) The Company has agreed to issue shares to a certain financial consultant as
partial consideration for certain financial consulting and advisory services
provided to the Company. The dollar values listed above assume a value of
$1.00 per each share issued to such consultant.
(2) The Company may expend certain funds in connection with the settlement of a
contingent obligation with a third party. See "Risk Factors - Contingent
Third Party Liability." A portion of the proceeds raised in this Offering
may be used to satisfy this obligation or the settlement thereof.
The amounts set forth in the foregoing table merely indicate the proposed use
of proceeds, and actual expenditures may vary substantially from these estimates
depending upon economic conditions and the success, if any, of the Company's
intended future activities, as discussed herein.
The Company hopes that soon after this Offering it will undertake a
Public Offering to have its common stock trade on the NASDAQ Electronic Bulletin
Board System.
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<PAGE>
BUSINESS
OPERATIONS
The primary operations of the Company are through EWM, its wholly owned
subsidiary. EWM is a Florida licensed real estate brokerage firm which engages
375 sales associates and support staff. In 1997, EWM closed 1,570 real estate
"sale" transactions and 754 "rental" transactions having a gross dollar value of
$368,000,000. The average home price was $218,544.
The Company provides the following real estate services:
o Residential Brokerage
o Commercial Brokerage
o Corporate Relocation Services
o Property Management and Leasing
o International Brokerage
o Business Brokerage
EWM operates from offices located in Coral Gables and in the
Pinecrest-Palmetto area of Miami-Dade County, Florida. See "Business -
Properties". It is a member of the Realtor Association of Greater Miami and the
Beaches, the Realtor Association of Miami-Dade County, Ft. Lauderdale
Association of Realtors and the Florida Keys Association of Realtors. Its scope
of representation stretches for a distance of more than 50 miles (north to
south) in South Florida. A summary of its various types of real estate services
is provided below.
RESIDENTIAL BROKERAGE
EWM acts as a broker or agent in residential real estate transactions.
EWM markets homes in every price range throughout Miami-Dade County, with a
market niche in luxury properties (over $500,000). EWM's 1997 average
residential sales price of $218,544 was higher than its primary competitors. See
"Business-Competition" herein.
All customers who list their property for sale with EWM must sign an
Exclusive Right of Sale Listing Agreement, which provides that EWM shall be the
exclusive sales agent for a set period of time. The Company's residential
brokerage services to sellers of real estate include:
o Pricing a property based on market knowledge and current
research
o Individualized marketing program for each property
o Seller's Net Sheet, containing costs of sale and net profit
estimates upon closing
o Suggestions for preparing a property for sale
o Appointment options
o Inclusion of all properties in the computerized Miami-Dade
County Multiple Listing System
o Pre-qualifying of potential buyers' ability to purchase
o General advice and assistance in preparing forms and attending
closing of transaction
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<PAGE>
o Negotiating the terms and conditions of the sales and purchase
contract
o Open Houses for properties
o Securing tenants
In exchange for these services, the customer pays to the Company a
commission which is generally fixed at 6% of the sales price of which 3% is paid
to the "listing" broker and 3% is paid to the "selling" broker.
EWM also acts a broker for buyers of real estate. When acting as a
broker for a buyer, the Company's services include:
o Locating a property that meets personal and financial
objectives
o Showing the buyer properties
o Assistance with inspections, repairs, and obtaining
appraisals, etc.
o Negotiating the terms and conditions of the sales and purchase
contract
o Assisting the buyer in preparing for and attending closing of
transactions.
In exchange for these services, the customer pays to the Company a
commission which is also generally fixed at 6% of the sales price. This
commission is usually, with the consent of the listing broker (i.e., the
seller's broker), deducted from and payable out of, the commission payable to
such listing broker.
The agreements signed by the customer and the buyer/seller of its real
estate is the form Contract for Sale and Purchase that is approved by the
Florida Association of Realtors and the Florida Bar and is customarily used in
the State of Florida. Under Florida real estate law, EWM does not represent the
Buyer or Seller directly, but rather operates as a "transaction" broker.
COMMERCIAL BROKERAGE
EWM's commercial brokerage services provide specialized services to
financial institutions, investors, developers and land owners of every type.
EWM's services include but are not limited to:
o Commercial Sales and Leasing
o Property Owner Representation
o Tenant Representation
o Corporate Relocations
o Project Management
o Market Surveys
o Project Feasibilities
o Computer Financial Models
o Construction and Permanent Loan Packaging
o Land Acquisition and Assemblage
o Workouts of Challenging Properties
o Real Estate Consulting
15
<PAGE>
RELOCATION
EWM has an extensive corporate relocation division, specializing in
corporate relocations. EWM is affiliated with several of the industry's largest
relocation networks. In particular, EWM maintains a Strategic Alliance Agreement
with the Cendant Mobility Relocation Network (successor to PHH Relocation
Network) ("Cendant"), the nation's largest relocation organization, which
provides EWM with membership in Cendant's nationwide network of more than 400
other suppliers of relocation services. Ron Shuffield, EWM's President, served
on the PHH National Advisory Council (predecessor to Cendant) from 1993-1996.
The Company believes that the Miami, Florida area is strongly
positioned for corporate relocations. The area serves as a hub of domestic and
international business. Because of the favorable geographic location of
Miami-Dade County, coupled with its trained commercial and industrial labor
force, many Fortune 500 companies have a Latin American and Caribbean base in
Miami. According to Miami-Dade County statistics obtained from the Miami-Dade
County Beacon Council (the county's economic development council), in Coral
Gables, Florida alone, the Company's main office location, the following
corporations have operations: Walt Disney, Texaco West Africa/Latin America,
Hilton Hotel-International, Apple Computer, and IBM. In addition, such major
corporations as Burger King, Borden and Eastman Kodak have significant South
Florida operations. The Beacon Council has provided the list attached as Exhibit
C hereto of Fortune 500 companies with a Miami-Dade County presence. To
capitalize on the growing need to assist international executives, EWM has an
entire division devoted solely to assisting relocating executives.
The services that EWM provides in connection with corporate relocations
include, but is not limited to, sales and marketing of a transferred employee's
existing properties, assisting relocated employees in finding new properties,
education and school placement counseling, rental assistance, area tours,
short-term housing, financial service assistance, mortgage prequalification,
assistance with coordination of moving personal property, and personal and
repair service professionals, including a list of pre-qualified baby sitters,
interior design consultants and home repair specialists.
A referral fee equal to 25% to 30% of the gross listing or selling
commission received by EWM is paid to the referring party for any business
referred to EWM. All outgoing referral fees earned by EWM are split between the
referring associate and the Company. All outgoing referrals must be placed
through the Cendant Relocation Network.
PROPERTY MANAGEMENT
The Property Management Division of EWM serves as an agent for the
property owner, overseeing all facets of the leasing and management process,
including customary landlord activities.
EWM provides property management for single family homes, condominiums,
and apartment complexes. Specific property management services include:
o Collecting rent
o accounting and bookkeeping services
o Regular property inspections
o Coordination of regular maintenance (lawn, pool, service
contracts, etc.)
16
<PAGE>
o Contract work (paint, repairs, etc.)
o Customer services for tenants
o Consistent owner contact
o Showing rental properties to prospective tenants.
INTERNATIONAL BROKERAGE SERVICES
EWM is a member of many International Chambers of Commerce and
Miami-Dade County's Beacon Council. EWM sales associates speak 13 different
languages, which helps meet the needs of Miami-Dade County's international
community.
EMPLOYEES
As of February 10, 1998, the Company employs 25 persons full time as
support staff and engages 350 persons as sales associates. Of the sales
associates, 165 are based in the Coral Gables office and 85 are based at the
Pinecrest-Palmetto office. Of the Company's sales associates, 250 are regular
sales associates, and 100 are referral associates licensed with an affiliated
company, EWM Referral Services, Inc. These associates have an active real estate
license but merely refer listings to the Company in return for a fee. All sales
associates are independent contractors rather than employees of the Company,
which is a standard structure in the real estate brokerage industry. The Company
requires that each associate sign an Independent Contractor Status Agreement
that is a Florida Association of Realtors standard form.
All of the Company's sales associates are paid by commission solely
on the basis of closed sales transactions. Typically, the share of a total
commission is split evenly between the listing broker and the selling broker,
with each broker entitled to a commission of 3% of the property sales price for
residential listings and 5% for commercial, business brokerage and rental
listings. Approximately 40% of EWM sales are "in-house," where EWM represents
both the buyer and seller and therefore receives both halves of the brokerage
commission.
All sales associates are paid commissions according to the schedule
below. As an associate's annual total commission earnings increase (including
all listing, sales and rentals), the percentage of commission paid by EWM to the
associate increases, based on the seven levels of commissions as follows:
<TABLE>
<CAPTION>
TOTAL COMMISSIONS % OF LISTING % OF SELLING
COMMISSION EARNED JANUARY 1ST COMMISSION COMMISSION
LEVEL THROUGH DECEMBER 31ST PAID TO ASSOCIATE PAID TO ASSOCIATE
---------- ------------------------------- ----------------- -----------------
<S> <C> <C> <C>
Level 1 $ 0 to $ 15,000 50% 50%
Level 2 $ 15,001 to $ 20,000 55% 55%
Level 3 $ 20,001 to $ 35,000 55% 60%
Level 4 $ 35,001 to $ 65,000 60% 65%
Level 5 $ 65,001 to $ 100,000 65% 70%
Level 6 $ 100,001 to $ 150,000 70% 75%
Level 7 Over $150,000 or $50,000 75% 75%
or more of Listing Only Income
</TABLE>
17
<PAGE>
Additionally, all sales associates pay an Administrative Fee which is
paid in an amount equal to either (at the option of the sale associate) $60 per
month or 6% of total commissions earned paid off the top of the commissions,
with no limit. None of the Company's employees are covered under any collective
bargaining agreement. The Company has never experienced a strike and believes
its relations with its independent contractor associates to be excellent.
SALES AND MARKETING
The Company services are marketed in a variety of outlets throughout
South Florida. EWM's marketing efforts include, without limitation, advertising
in all major newspapers, full-color magazine pictorials, targeted mailings,
press releases and inclusion of all properties in the county-wide Multiple
Listing Systems. EWM targets new sellers and buyers of its properties by placing
advertisements for its properties in each Sunday's MIAMI HERALD REAL ESTATE
GUIDE. Further, EWM places a monthly pictorial centerfold and back cover of
advertising in Harmon's Real Estate Market Magazine, a magazine published
monthly and widely distributed throughout South Florida. Further, EWM mails its
"Open House Sundays" literature monthly to over 35,000 potential customers and
its "Crown Collection" quarterly mailer to approximately 20,000 potential
customers, which features homes priced in excess of $500,000. EWM provides its
associates with advertising dollar value credits, based on their property's
sales price, for use in various advertising means.
In addition to the above described traditional avenues of sales and
marketing, EWM and its executives and associates are extremely active members of
the community. EWM is a sponsor of such South Florida charities as the American
Red Cross, Miami Opera, United Way, Junior Orange Bowl, Junior Achievement, the
College Assistance Program and the local arts and crafts festivals, just to name
a few. Further, EWM is a member of all local Chambers of Commerce, and is a
trustee for chambers in Miami, Coral Gables, Homestead, Florida and is a member
of the University of Miami Citizens Board.
PROPERTIES
EWM operates from offices located in Coral Gables and in the
Pinecrest-Palmetto area of Miami-Dade County, Florida. The Company's Coral
Gables office, its principal office, is located at 1360 S. Dixie Highway, Coral
Gables, Florida 33146. The Company currently leases a total of 11,930 square
feet of space at its principal office, which includes its property management,
relocation division and Embassy. Its current primary lease term is through July
2000 with options to extend through July 2020. The Pinecrest Office, located at
12651 South Dixie Highway, Miami, Florida 33156, is also leased, and consists of
7,468 square feet. Its lease term is through February 2001 with options to
extend through February 2011.
18
<PAGE>
TRADE NAMES AND TRADEMARKS
Esslinger-Wooten-Maxwell is a trade name used in connection with the
Company's business. The Company owns a federal registered trademark for the
Crown Collection of Internationally Fine PropertiesR used in connection with its
sale of luxury properties. In addition to the federal trademark rights for the
Crown Collection of Internationally Fine PropertiesR, the Company relies on
common law theories of trade name protection, including the law of unfair
competition to protect its trademarks and services. The Company is not aware of
any pending claims of infringement or other challenges to the Company's rights
to use its trade name or trademarks.
REGULATION
The operation of the Company is subject to various federal, state and
local laws and regulations. EWM is licensed by the State of Florida Department
of Business and Professional Regulation to sell real estate in the State of
Florida. In addition, each of the Company's real estate associates must be
licensed with the State of Florida Department of Business and Professional
Regulation as a real estate broker or real estate sales agent. The licenses must
be updated every two years by passing an administered examination. The Company
has made, and will continue to make, expenditures to comply with such laws and
regulations. The Company believes that it is in compliance with all material
laws and regulations.
The adoption of state and local laws and regulations imposing
environmental controls, disclosure rules, zoning and other land use restrictions
may materially and adversely affect the marketability of real estate. However,
the Company does not believe that any such laws or regulations that are
currently in existence, or to the best of the Company's knowledge are proposed
or contemplated, that will have such an adverse effect on the Company's
financial condition or its operations.
LEGAL PROCEEDINGS
The Company is currently a party to three pending legal proceedings
which are lawsuits where EWM was named as a third party. Two of these suits are
between the buyers and sellers of single family homes over the issue of the
disclosure of latent defects and the third suit is between a condominium
association and one of the condominium owners. The Company's liability in such
legal action is being covered by its Errors & Omissions Insurance. Naming a
broker as a party in a legal action between the buyer and seller in a real
estate transaction is common. The Company does not believe that the results of
these legal proceedings, even if adverse, will have a material effect on the
Company's operations. Neither the Company nor any of its affiliates have ever
been the subject of governmental or regulatory investigation.
COMPETITION
All of the businesses in which EWM is engaged are highly competitive,
in particular residential properties. Many of its competitors, through
affiliated franchising organizations, have substantially greater financial
resources than the Company. EWM's major competitors are Coldwell Banker Real
Estate, Prudential Florida Realty, and The Keyes Company Realtors. Coldwell
Banker has been pursuing an aggressive acquisition strategy. In January 1998,
Coldwell Banker acquired 37 offices of Gimelstob Realty, a South Florida realtor
primarily based in Broward and Palm Beach Counties, and Coldwell Banker has
19
<PAGE>
publicly stated its intent to acquire additional brokerage operations in South
Florida. Prudential Florida Realty has also made recent acquisitions, including
Jeanne Baker, Inc. Realty. The substantial trend in the real estate industry is
consolidation through acquisitions by national chains, such as Cendant
Corporation ("Cendant") Cendant owns Century 21 Realty, ERA Realty, Coldwell
Banker Realty and Cendant Relocation Services. National chains now represent 35%
of the total U.S. real estate brokerage operations.
A comparison of EWM to their competitors with residential properties
follows. The statistics represented were obtained from the Multiple Listing
Service ("MLS"), an independent real estate data reporting entity, whose sales
data represents approximately 85% of the total sales in the greater Miami,
Florida area.
JANUARY 1, 1997 THRU DECEMBER 31, 1997 RANKING BY NUMBER OF
RESIDENTIAL LISTINGS CLOSED IN MIAMI-DADE COUNTY.
1. Coldwell Banker 3,280 Transactions
2. Prudential Florida 3,238 Transactions
3. The Keyes Company 1,983 Transactions
4. EWM 1,186 Transactions
JANUARY 1, 1997 THRU DECEMBER 31, 1997 RANKING BY DOLLAR
VOLUME OF RESIDENTIAL LISTINGS CLOSED IN MIAMI-DADE COUNTY.
AVERAGE
GROSS SALES HOME PRICE
----------- ----------
1. Prudential Florida $559,268,000 $172,720
2. Coldwell Banker $489,092,000 $149,113
3. EWM $262,892,000 $221,663
4. The Keyes Company $214,258,000 $108,047
As the above statistics note, while EWM is not the volume leader in
South Florida, it has the highest average sales price of its competitors. Its
average residential sales price substantially exceeds the average sales prices
in Miami-Dade County. See "Business - South Florida Real Estate Market" below.
The above figures include only residential sales and do not include sales made
outside the MLS. EWM sales for 1997 including all residential, commercial and
rentals were approximately $368,000,000.
SOUTH FLORIDA REAL ESTATE MARKET
The rate of home sales in Miami-Dade County, Florida has been flat
since 1994; however, the sales statistics for the last half of 1997 showed a
marked improvement over 1996. While sales across the County were down over 6%
for the first half of 1997, significant activity for the last two quarters
reduced the 1997 mid year-to-date decrease to 0.10% (See Facts & Trends MLS Data
Report for January-December 1997). According to the Miami Herald, market
forecasters predict strong sales in Miami-Dade County, Florida in
20
<PAGE>
1998. Analysts believe that strong consumer confidence, low interest rates, weak
inflation and gains from a surging stock market should lead to a very strong
real estate market in South Florida for 1998, with new and existing home sales
to increase at a rate slightly higher than the national average. Analysts expect
mortgage rates to drop to near 30 year lows, which should allow more people to
qualify for home purchases.
According to MLS data, there were 16,145 existing home sales in
Miami-Dade County in 1997, compared to 16,161 in 1996. The Miami Herald reported
3,761 new home sales through third-quarter 1997, compared to 3,109 new home
sales for the same period in 1996.
According to the Miami Herald, through the third quarter of 1997, new
home prices in Miami-Dade County increased by 10.2% from the previous year (with
an average sales price of $153,973) and existing home prices increased by 3.2%
for the same period (with an average sales price of $135,520). Condominium sales
in Miami-Dade County increased by 13% from the previous year (with an average
sales price of $185,797) through third quarter 1997 and existing condominium
prices increased by 10.4% for the same period (with an average sales price of
$97,698). The Miami Herald quotes analysts that predict a 3 to 5% appreciation
of home prices in Miami-Dade County in 1998. Rising values are partly
attributable to demand, as demographers expect 47,000 more people to move to
South Florida by 2000.
While homes less than $200,000 accounted for 84% of all homes sold in
Miami-Dade County in 1997, luxury homes continue to sell well in the region. In
the past year, EWM was involved in 83 home sale transactions through the MLS in
the price range over $500,000. This equals 9% of the 906 total Miami-Dade County
transactions in this price range through the MLS.
FINANCIAL CONDITION AND COMPANY PERFORMANCE
Enclosed as an Appendix to this Memorandum is the Company's audited
Financial Statement as of October 31, 1997 (the "Financial Statements"). The
Financial Statements constitute a material part of this Memorandum and should be
reviewed carefully.
The Financial Statements combine the operations of First Reserve
Florida, EWM, First Reserve Enterprises, Inc. (an inactive corporation with no
operations) and Embassy. The Financial Statements were adjusted to account for
the purchase by the preferred shareholders of First Reserve Florida of 889.67
shares of $1 par value common stock of First Reserve Florida. Those preferred
shareholders, who surrendered their preferred stock and all rights to accrued
and unpaid dividends on such preferred stock, were a part of the First Reserve
Florida shareholders who exchanged their shares for shares of the Company
pursuant to the Exchange Merger Agreement.
First Reserve Florida has net operating loss carryovers of
approximately $2,600,000 which expire at various dates through 2011. These net
operating loss carryovers, stemming from losses from real estate investments and
not from brokerage operations, result in deferred tax assets which can be used
by the Company to offset future tax liabilities.
EWM's total real estate exclusive right-of-sale listings as of January
15, 1998 are as follows:
21
<PAGE>
NUMBER OF DOLLAR COMMISSION
LISTINGS AMOUNT RATE
--------- ------ ----------
TYPE
- ----
Residential Listings 465 $134,676,996 6%
Vacant Land 48 $24,594,255 6%
Residential Rental Listings 76 $1,610,640 10%
Duplex/Triplex/Fourplex 11 $2,114,050 6%
Commercial 31 $13,310,500 10%
Multi-Family, Apts 4 $2,333,000 6%
Business Brokerage 11 $4,876,000 10%
--- ------------
Total Properties Listed for Sale 646 $183,515,441
=== ============
In 1997, EWM had 2,325 total transactions (1,571 sales and 754 rentals)
with a total dollar value of $368,000,000. The average price of a residential
sold property was $218,544 and the average price of a residential rental was
$1,408 per month. EWM closed on 1,364 properties (homes and condominiums) in
1997.
In 1997, EWM's total transactions of home sales (thru the MLS and
outside the MLS) by price are as follows:
PRICE SALES % OF TOTAL
----- ----- ----------
under $200,000 935 59.5%
$200,000 -299,999 317 20.2%
$300,000 -$399,999 146 9.3%
$400,000 -$499,999 63 4.0%
$500,000 -$599,999 72 4.6%
over $750,000 38 2.4%
----- -----
1,571 100.0%
EWM's niche is in the "over $500,000" price range. Sales in this market
increased 20.16% from 1996 to 1997. EWM increased its annual closed sales 12.4%
from 1996 to 1997. The total dollar volume of real estate written during the
first eight weeks of 1998 exceeded by 9% the first eight weeks of 1997.
22
<PAGE>
PLAN OF OPERATIONS
The Company plans to undertake an aggressive growth strategy in three
general areas: real estate brokerage, financial services and real estate
services.
The Company intends to grow its real estate brokerage areas by
acquiring local brokerage operations throughout Florida to increase market
presence, sales volume and the Company's geographic base. Acquisitions in this
area are targeted for residential and commercial real estate brokerages and
business brokerages. The Company hopes to establish an alliance of other high
quality real estate and mortgage brokerage firms to provide services throughout
Central and Southern Florida and possibly South and Central America. This
alliance would promote the Florida and/or South America regions through joint
marketing efforts.
The Company has certain acquisition targets with whom it has commenced
preliminary discussions. The smallest of these firms is presently selling in
excess of $100,000,000 of properties per year. The Company also has meetings
planned with additional Miami-Dade County real estate brokerage firms.
The Company hopes to expand its property management services by
offering such services to all components of its expanded brokerage operations
subsequent to the implementation of its growth strategy.
The Company believes that commercial and business brokerage services
are a substantial opportunity for future growth. The Company believes that 1997
U.S. tax law revisions relating to the acquisition and disposition of real
property have made ownership of "primary home" residential properties more
attractive due to a $500,000 net gain exemption from personal income taxes for
homes held over two years as one's primary residence. The areas in Miami-Dade
County hardest hit by Hurricane Andrew in 1992 are steadily improving and the
Company believes that demand for new residential and commercial land in this
part of Miami-Dade County has been brisk. EWM's Pinecrest-Palmetto office is
centrally located in the areas of renewed commercial activity and the Company
believes it is better poised to take advantage of this growth than any of its
competitors due to their extensive direct mail advertising program.
The Company is also contemplating the expansion of its financial
services, including its mortgage brokerage services and the acquisition of a
local financial institution. Embassy has recently hired additional mortgage
processors and mortgage brokers. If EWM can successfully acquire the real estate
brokerage operations as discussed above, some of which have in-house mortgage
operations, this would allow for additional staff and volume, and a possible
merger with Embassy.
The possible acquisition of a financial institution creates the
potential for a substantial synergy of ancillary services and expanded customer
base for such areas as mortgage finance, credit cards, commercial finance and
other areas.
23
<PAGE>
Finally, the Company hopes to expand in the real estate services areas
by acquiring or opening new services such as title insurance companies or
casualty insurance entities. The Company is contemplating the possible
acquisition or start up of a title insurance company. Acquiring or otherwise
commencing casualty insurance operations will be investigated when the real
estate brokerage division reaches annual gross sales of approximately
$1,000,000,000.
The Company's contemplated growth strategy is a result of its belief
that the United States real estate industry is undergoing a structural change.
The industry is consolidating as a result of the high cost of technology, the
need to offer ancillary services and the increase in "chain" real estate
companies. The Company believes that the "mom and pop" real estate operations
will eventually lose market share to national or regional operations, similar to
the video rental industry. Accordingly, the Company hopes to become an industry
leader through its growth strategy. Its anticipated Public Offering will allow
the Company to accomplish this growth by raising additional capital, creating a
nationally-recognized and respected name, and offering an attractive investment
to its shareholders.
There can be no assurances that the foregoing plan will not change
materially due to changed circumstances after the completion of this Offering.
CAPITAL RESOURCES
In order to achieve its long range plans for expansion of its
operations, the Company anticipates that it will need to raise significant
additional net capital beyond the maximum amount sought to be raised in this
Offering. The Company anticipates raising these additional funds through the
Public Offering of equity and/or debt securities during 1998.
If the Company is unable to successfully consummate the Public Offering
or to promptly raise the needed capital from other sources, the Company will
likely be unable to undertake its intended plan of operations discussed above.
Further, in order to consummate the Public Offering and/or additional financing,
the investors' interests in the shares may be substantially diluted.
If the Company is able to successfully raise additional capital, it
plans to spend those funds to implement the growth strategy specified in
"Business-Plan of Operations" above.
24
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION(S)
---- --- -----------
Allen C. Harper 53 Chairman of
the Board of
Directors/Chief
Executive Officer
Ronald A. Shuffield 47 President/Chief
Operating Officer/
Director
President of EWM
Thierry Manni 31 Director
James E. Newmeyer 50 Secretary/Treasurer and
Director/President of
Embassy Financial
Services, Inc.
MANAGEMENT
A brief description of the key management of the Company is as follows:
ALLEN C. HARPER
Since 1984 Allen C. Harper has been principally employed as the
Chairman and Chief Executive Officer and is a principal shareholder of First
Reserve, Inc., the holding company of EWM.
Mr. Harper has more than 30 years of business experience, primarily in
the areas of real estate management and development and rail transportation. He
is still active in a variety of businesses. Mr. Harper is currently the Chairman
of the Board of Directors and Chief Executive Officer for First American
Railways, Inc. and has been since its inception in 1994. Since September 1989,
Mr. Harper has served as a Director on the Tri-County Rail Authority and has
been chairman of the board for two terms. He has also served as a director of
Florida East Coast Railway Co., a railroad company based in St. Augustine
Florida, since May of 1994, and Vacation Break U.S.A., Inc. a travel and time
share corporation based in Ft. Lauderdale, Florida.
25
<PAGE>
RONALD A. SHUFFIELD
Ronald A. Shuffield is the President and Chief Operating Officer (COO)
of both the Company and EWM, and a member of each entity's Board of Directors.
He has been the President of EWM since 1984. He acts as the chief operating
officer and supervises the day-to-day operations of the Company and EWM. Mr.
Shuffield is a licensed Florida real estate broker and certified general
contractor. Mr. Shuffield has been a member of the Realtor Association of Dade
County since 1984 and has served in a variety of officer and director positions
thereon. Mr. Shuffield served on the National Advisory Council of the PHH
Relocation Network (now Cendant Mobility Servicers) from 1993-1996. Mr.
Shuffield's community memberships include the Coral Gables Chamber of Commerce
(where he serves as President from 1992-93 and where he was awarded the Robert
B. Knight Outstanding Citizen of Coral Gables Award), the Greater Miami Chamber
of Commerce (where he serves on the Board of Governors) and the Rotary Club of
Coral Gables. Mr. Shuffield received a Bachelor of Science degree in business
administration from the University of Tennessee.
JAMES E. NEWMEYER
Mr. Newmeyer has been President of Embassy Financial Services, Inc.
since 1996, where he oversees all operations of the mortgage business. He is
also Secretary/Treasurer of the Company Prior to joining Embassy, Mr. Newmeyer
has been an executive with numerous real estate mortgage companies for over
twenty years, including PHH Mortgage Services, Source One Mortgage Services
Corporation, MHSI/Chemical Residential Mortgage/ CenTrust Mortgage, Amerifirst
Mortgage and Southeast Mortgage Company. Mr. Newmeyer has a Bachelor of Arts
degree from Furman University and a Masters Degree from Florida International
University.
MANAGERS
Blair C. Strickroot, Vice President, has been with the firm since 1981
and manages the Corporate Relocation Division. She also oversees the management
of the corporate and bank owned properties.
Ann W. Raff, Vice President, is in charge of corporate training and has
been with the firm since 1985.
Sherrie L. Jones has been with the firm since 1987 and is currently the
Director of Administrative Services.
Beth Butler has been with the Company since 1995 and is the Sales
Manager of the Coral Gables office.
Norma Rosenberg is the Sales Manager of the Pinecrest-Palmetto office
and has been with the Company since 1994.
Marlene Martinez has been with the company for two years. She is the
Manager of the Property Management Division.
26
<PAGE>
EXECUTIVE COMPENSATION AND CERTAIN TRANSACTIONS
COMPENSATION OF DIRECTORS
The Company will reimburse members of the Board of Directors for their
expenses incurred in connection with their services as directors. In addition,
each director will be paid $500 for every directors meeting they attend and $100
for each committee meeting they attend for directors' committees of which such
director is a member. Further, the Company may issue stock options in the future
to "employee" directors pursuant to its Stock Option Plan.
COMPENSATION OF OFFICERS
The Company recently entered into employment agreements with Messrs.
Harper and Shuffield. The agreements memorialize the employment relationships
that have existed since 1984 between the respective individuals and the Company.
The agreements expire five years from the date thereof, with an option of the
employee to extend for an additional five year term. Mr. Shuffield's agreement
provides for his employment as President of EWM at a base salary of $320,000 per
year. Mr. Harper's agreement provides for his employment as Chairman and Chief
Executive Officer of EWM at a base salary of $270,000 per year. Each executive
may also be entitled to a bonus at the discretion of the Company's Board of
Directors. The Company provides disability and life insurance for both Messrs.
Harper and Shuffield and provides each with full medical and health insurance
coverage, a 401(K) plan and a monthly automobile allowance.
27
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Memorandum,
certain information with respect to the beneficial ownership of the Company's
Common Stock by (i) each person who is known by the Company to beneficially own
5% or more of the Common Stock, (ii) each of the Company's executive officers
and directors, and (iii) all executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE AFTER
NAME AND ADDRESS POSITIONS NUMBER BEFORE OFFERING
BENEFICIAL OWNER(1) WITH COMPANY OF SHARES OFFERING MINIMUM MAXIMUM
- ------------------- ------------ --------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Allen C. Harper Chairman/CEO 1,113,500 20.96% 19.66% 17.64%
1360 S. Dixie Highway Director
Coral Gables, Fl 33146
Ronald A. Shuffield President/COO 1,113,500 20.96% 19.66% 17.64%
1360 S. Dixie Highway Director
Coral Gables, FL 33146
Valorsec Vermaltungs &
Treu-Anstalt 2,160,000 40.66% 38.02% 34.22%
8/10 Rue de la Ferne
92100 Boulogne, France
James E. Newmeyer Secretary/Treasurer 337,500 6.35% 5.94% 5.35%
1360 S. Dixie Highway Director
Coral Gables, FL 33146
all Executive officers 2,564,500 48.27% 45.14% 41.34%
and directors, as a group
</TABLE>
The following table sets forth, as of the date hereof, information regarding
outstanding options to purchase shares of the Company's Common Stock held by
each officer and director of the Company.
<TABLE>
<CAPTION>
NAME OF HOLDER OPTION SHARES EXERCISE PRICE EXERCISE EXPIRATION DATE
-------------- ------------- -------------- ------------------------
<S> <C> <C> <C>
Valorsec Vermaltungs 500,000 $3.00 November 30, 2002
& Treu-Anstalt
Valorsec Vermaltungs 500,000 $3.50 November 30, 2002
& Treu-Anstalt
</TABLE>
28
<PAGE>
DESCRIPTION OF COMPANY STOCK
The Company is authorized to issue 100,000,000 shares of Common Stock,
no par value. There are 5,312,000 shares of Common Stock currently outstanding.
If the Maximum Offering amount hereunder is completed, the Company will have
6,312,000 shares of Common Stock outstanding and 5,681,600 shares of Common
Stock outstanding if the Minimum Offering is completed. Each holder of Common
Stock is entitled to one vote per share owned on all matters submitted to a vote
of the shareholders. Holders of Common Stock will be entitled to receive ratably
any dividends declared by the Board of Directors out of funds legally available
for dividends. If the Company is liquidated, dissolved or wound up, holders of
the Common Stock have the right to a ratable portion of the assets remaining
after payment of liabilities. All shares of Common Stock outstanding and to be
outstanding upon completion of this Offering are and will be fully paid and
non-assessable.
The Company recently approved a Stock Option Plan to provide for the
issuance of options of the Company's Common Stock from time to time to key
employees, directors (who are also employees of the Company), consultants
(including sales associates, loan officers and managers) and advisors (provided
that such advisory services are not in connection with the offer and sale of
securities in a capital raising transaction). The specific participants in the
Stock Option Plan and the exercise price for any option are determined by the
Administrative Stock Option Committee designated by the Company's Board of
Directors, which will contain at least two non-employee directors or if none is
designated, the Board of Directors itself. To date, the Company has not
designated an Administrative Stock Option Committee, nor have any stock options
been granted under the Stock Option Plan.
Holders of Common Stock have no cumulative voting rights and,
therefore, the holders of more than half of the shares voting for the election
of directors can elect all the directors. Furthermore, the Bylaws of the Company
provide that only the Board of Directors, the President, or shareholders holding
at least 10% of the stock of the Company may call a special shareholders'
meeting, which may prevent a shareholder or group of shareholders holding less
than 10% of the stock of the Company from calling such a meeting.
The Company has the authority to issue ten million (10,000,000) shares
of preferred stock, undesignated as to par value. The Board of Directors may
divide the shares of preferred stock, into series, and may fix and determine the
designations, preferences, privileges, and ratify powers, if any, and the
restrictions and qualifications of the share of each series as established. To
date, the Company has not issued any preferred stock and has no plans to issue
such stock in the foreseeable future.
American Securities Transfer & Trust Co., Denver, Colorado, serves as
the Company's transfer agent for its Common Stock.
29
<PAGE>
DIVIDENDS
The anticipated capital requirements of the Company make it unlikely
that any cash dividends will be paid in the near future. The Company plans to
use all of its net earnings for the foreseeable future to finance its growth.
ACCESS TO AND FURNISHING OF ADDITIONAL INFORMATION
EACH PROSPECTIVE INVESTOR IS HEREBY GIVEN THE OPPORTUNITY AND IS
ENCOURAGED TO ASK QUESTIONS OF, AND RECEIVE ANSWERS FROM ALLEN C. HARPER, A
DIRECTOR OF THE COMPANY, CONCERNING THE TERMS AND CONDITIONS OF THIS OFFERING
AND TO OBTAIN ANY ADDITIONAL INFORMATION (TO THE EXTENT THE COMPANY POSSESSES
SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE)
NECESSARY TO VERIFY THE ACCURACY OF OR SUPPLEMENT THE INFORMATION CONTAINED IN
THIS PRIVATE OFFERING MEMORANDUM, INCLUDING COPIES OF THE COMPANY'S CERTIFICATE
OF INCORPORATION AND BYLAWS AND ALL MATERIAL BOOKS AND RECORDS OF THE COMPANY.
ANY QUESTIONS REGARDING THIS PRIVATE OFFERING MEMORANDUM SHOULD BE DIRECTED TO
ALLEN C. HARPER, OR RONALD A. SHUFFIELD EACH OF WHOM ARE DIRECTORS AND EXECUTIVE
OFFICERS OF THE COMPANY, BY FAX (305) 667-0781, OR BY PHONE (305) 667-8871.
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EXHIBIT 10.9
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND THEY MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR
TRANSFERRED EXCEPT (I) PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACT WHICH
HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO THESE SECURITIES, OR (II)
PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE ACT BUT ONLY UPON A
HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE
COMPANY, OR OTHER COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, THAT THE
PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE ACT AS
WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAW.
AUGUST 31, 1998
FIRST RESERVE, INC.
COMMON STOCK PURCHASE WARRANT
The Transferability of this Warrant is
Restricted as Provided in SECTION 3 hereof.
500,000 Warrants
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged by FIRST RESERVE, INC., a Florida corporation, and
its successor by merger or consolidation (the "Company"), VALORSEC Verwaltungs &
Treu-Anstalt, a Swiss company, is hereby granted the right to purchase, subject
to redemption hereof in accordance with SECTION 7 hereof, at the initial
exercise price of three dollars fifty cents ($3.50) per share (subject to
adjustment as set forth herein), five hundred thousand (500,000) shares of
Common Stock of the Company (the "Shares"). Each Common Stock Purchase Warrant
("Warrant") may be exercised from the date hereof until August 31, 2003. The
Shares and the Warrants are sometimes referred to herein as the "Securities."
Each Warrant initially is exercisable at a price of three dollars fifty
cents ($3.50) per Share payable in cash or by certified or official bank check
in New York Clearing House funds, subject to adjustments as provided in SECTION
6 hereof. Upon surrender of this Warrant, with the annexed Subscription Form
duly executed, together with payment of the Purchase Price (as hereinafter
<PAGE>
defined) for the Shares purchased at the offices of the Company, the registered
holder of this Warrant (the "Holder") shall be entitled to receive a certificate
or certificates for the Shares so purchased.
1. EXERCISE OF WARRANT.
The purchase rights represented by this Warrant are exercisable at the
option of the Holder, in whole or in part (but not as to fractional Shares
underlying this Warrant), during any period in which this Warrant may be
exercised as set forth above. In the case of the purchase of less than all the
Shares purchasable under this Warrant, the Company shall cancel this Warrant
certificate upon the surrender hereof and shall execute and deliver a new
Warrant of like tenor for the balance of the Shares purchasable hereunder.
2. ISSUANCE OF CERTIFICATES.
Upon the exercise of this Warrant and payment in full for the Shares,
the issuance of certificates for Shares underlying this Warrant shall be made
forthwith (and in any event within five (5) business days thereafter) without
charge to the Holder, including, without limitation, any tax which may be
payable in respect of the issuance thereof, and such certificates shall (subject
to the provisions of SECTION 3 hereof) be issued in the name of, or in such
names as may be directed by, the Holder; PROVIDED, HOWEVER, that the Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid. The certificates representing the Shares underlying this
Warrant shall be executed on behalf of the Company by the manual or facsimile
signature of the present or any future President or Vice President and Secretary
or Assistant Secretary of the Company.
3. RESTRICTION ON TRANSFER.
Neither this Warrant nor any Share issuable upon exercise hereof has
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), and none of such securities may be offered, sold, pledged, hypothecated,
assigned or transferred except (i) pursuant to a registration statement under
the Securities Act which has become effective and is current with respect to
such securities, or, (ii) pursuant to a specific exemption from registration
under the Securities Act but only upon a Holder hereof first having obtained the
written opinion of counsel to the Company, or other counsel reasonably
acceptable to the Company, that the proposed disposition is consistent with all
applicable provisions of the Securities Act as well as any applicable "Blue Sky"
or similar state securities law. Upon exercise, in part or in whole, of this
Warrant, each certificate issued representing the Shares shall bear a legend to
the foregoing effect.
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4. REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
4.1 THE COMPANY'S REGISTRATION. As soon as practicable, but in
any event not later than 90 days after the Company is a "reporting company"
pursuant to the Securities Exchange Act of 1937, as amended, (the "Exchange
Act") the Company shall prepare and file with the Securities and Exchange
Commission (the "Commission"), a registration statement and such other
documents, including a prospectus, as may be necessary in the opinion of counsel
for the Company and counsel for the holders of the Securities and of any other
securities of the Company with registration rights similar to those granted in
this Section 4 (collectively, the "Registration Rights Holders"), in order to
comply with the provisions of the Securities Act, so as to permit a public
offering and sale of the Shares, (the "Registration Rights Securities") for a
consecutive period ending twenty-four (24) months after the earlier of (i) the
full exercise and (ii) the expiration, of all of the Warrants. The costs and
expenses associated with the preparation, filing and prosecution of such
registration statement(s) shall be borne by the Company.
4.2 COVENANTS WITH RESPECT TO REGISTRATION. In connection with
any registration under Section 4.1 hereof, the Company covenants and agrees as
follows:
(a) The Company shall pay all costs (excluding fees
and expenses of Registration Rights Holder(s)' counsel and any underwriting or
selling commissions or other charges of any broker-dealer acting on behalf of
Registration Rights Holder(s)), fees and expenses in connection with all
registration statements filed pursuant to Section 4.1 hereof including, without
limitation, the Company's legal and accounting fees, printing expenses and blue
sky fees and expenses.
(b) The Company will take all necessary action which
may be required in qualifying or registering the securities included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the Registration Rights
Holder(s), provided that the Company shall not be obligated to qualify as a
foreign corporation to do business under the laws of any such jurisdiction.
(c) The Company shall indemnify the Registration
Rights Holder(s), each of their directors and officers and each person, if any,
who controls such Registration Rights Holder(s) within the meaning of Section 15
of the Securities Act or Section 20(a) of the Exchange Act, against all loss,
claim, damage, expense or liability (including all expenses reasonably incurred
in investigating, preparing or defending against any claim whatsoever) to which
any of them may become subject under the Securities Act, the Exchange Act or any
other statute, common law or otherwise, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement executed by the Company or based upon written information
furnished by the Company filed in any jurisdiction in order to qualify the
Registration Rights Securities under the securities laws thereof or filed with
the Commission, any state securities commission or agency, the National
Association of Securities Dealers, Inc., The Nasdaq Stock Market or any
securities exchange, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements contained
therein not misleading, unless such statement or omission was made in reliance
upon and in strict conformity with written
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<PAGE>
information furnished to the Company by the Registration Rights Holder(s)
expressly for use in such registration statement, any amendment or supplement
thereto or any application, as the case may be. If any action is brought against
the Registration Rights Holder(s) or any controlling person of the Registration
Rights Holder(s) in respect of which indemnity may be sought against the Company
pursuant to this Section 4.2(c), the Registration Rights Holder(s) or such
controlling person shall, within thirty (30) days after the receipt of a summons
or complaint, notify the Company in writing of the institution of such action
and the Company shall assume the defense of such action, including the
employment and payment of reasonable fees and expenses of counsel (which counsel
shall be reasonably satisfactory to the Registration Rights Holder(s) or such
controlling person), but the failure to give such notice shall not affect such
indemnified person's right to indemnification hereunder except to the extent
that the Company's defense of such action was materially adversely affected
thereby. The Registration Rights Holder(s) or such controlling person shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of the Registration Rights
Holder(s) or such controlling person unless the employment of such counsel shall
have been authorized in writing by the Company in connection with the defense of
such action, or the Company shall not have employed counsel to have charge of
the defense of such action or such indemnified party or parties shall have
reasonably concluded that there may be defenses available to it or them which
are different from or additional to those available to the Company (in which
case the Company shall not have the right to direct the defense of such action
on behalf of the indemnified party or parties), in any of which events the fees
and expenses of not more than one additional firm of attorneys for all of the
Registration Rights Holder(s) and/or such controlling person shall be borne by
the Company. Except as expressly provided in the previous sentence, in the event
that the Company shall have assumed the defense of any such action or claim, the
Company shall not thereafter be liable to the Registration Rights Holder(s) or
such controlling person in investigating, preparing or defending any such action
or claim. The Company agrees to notify promptly the Registration Rights
Holder(s) of the commencement of any litigation or proceedings against the
Company or any of its officers, directors or controlling persons in connection
with the resale of any of the Registration Rights Securities in connection with
such registration statement. The Company further agrees that upon demand by an
indemnified person, at any time or from time to time, it will promptly reimburse
such indemnified person for any loss, claim, damage, liability, cost or expense
actually and reasonably paid by the indemnified person as to which the Company
has indemnified such person pursuant hereto. Notwithstanding the foregoing
provisions of this Section 4.2(c), any such payment or reimbursement by the
Company of fees, expenses or disbursements incurred by an indemnified person in
any proceeding in which a final judgment by a court of competent jurisdiction
(after all appeals or the expiration of time to appeal) is entered against any
Registration Rights Holder or such indemnified person as a direct result of any
Registration Rights Holder or such person's gross negligence or willful
misfeasance will be promptly repaid to the Company.
(d) The Registration Rights Holder(s), and their
successors and assigns, shall severally, and not jointly, indemnify the Company,
its officers and directors and each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act or Section 20(a) of the
Exchange Act, against all loss, claim, damage, expense or liability (including
all expenses reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which
4
<PAGE>
they may become subject under the Securities Act, the Exchange Act or any other
statute, common law or otherwise, arising from written information furnished by
or on behalf of such Registration Rights Holder(s), or their successors or
assigns, expressly for use in such registration statement. The Registration
Rights Holder(s) further agree(s) that upon demand by an indemnified person, at
any time or from time to time, they will promptly reimburse such indemnified
person for any loss, claim, damage, liability, cost or expense actually and
reasonably paid by the indemnified person as to which the Registration Rights
Holder(s) have indemnified such person pursuant hereto. Notwithstanding the
foregoing provisions of this Section 4.4(d), any such payment or reimbursement
by the Registration Rights Holder(s) of fees, expenses or disbursements incurred
by an indemnified person in any proceeding in which a final judgment by a court
of competent jurisdiction (after all appeals or the expiration of time to
appeal) is entered against the Company or such indemnified person as a direct
result of the Company or such person's gross negligence or willful misfeasance
will be promptly repaid to the Registration Rights Holder(s).
(e) Nothing contained in this Agreement shall be
construed as requiring the Registration Rights Holder(s) to convert, exchange or
exercise any securities convertible, exchangeable or exercisable for Common
Stock prior to the initial filing of any registration statement or the
effectiveness thereof.
5. PRICE.
INITIAL AND ADJUSTED PURCHASE PRICE. The term "Purchase Price"
herein shall mean the initial purchase price or the adjusted purchase price,
depending upon the context. The initial purchase price shall be three dollars
fifty cents ($3.50) per Share. The adjusted purchase price shall be the price
which shall result from time to time from any and all adjustments of the initial
purchase price in accordance with the provisions of SECTION 6 hereof.
6. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES OR COMMON STOCK
DELIVERABLE.
(a) (i) Except as hereinafter provided, in the event
the Company shall, at any time or from time to time after the date hereof, sell
any shares of Common Stock for a consideration per share less than the Purchase
Price or issue any shares of Common Stock as a stock dividend to the holders of
Common Stock, or subdivide or combine the outstanding shares of Common Stock
into a greater or lesser number of shares (any such sale, issuance, subdivision
or combination being herein called a "Change of Shares"), then, and thereafter
upon each further Change of Shares, the Purchase Price for the Warrants (whether
or not the same shall be issued and outstanding) in effect immediately prior to
such Change of Shares shall be changed to a price (including any applicable
fraction of a cent to the nearest cent) determined by dividing (A) the sum of
(x) the total number of shares of Common Stock outstanding immediately prior to
such Change of Shares, multiplied by the Purchase Price in effect immediately
prior to such Change of Shares, and (y) the consideration, if any, received by
the Company upon such sale, issuance, subdivision or combination by (B) the
total number of shares of Common Stock outstanding immediately after such Change
of Shares; PROVIDED, HOWEVER, that in no event shall the Purchase Price be
adjusted pursuant
5
<PAGE>
to this computation to an amount in excess of the Purchase Price in effect
immediately prior to such computation, except in the case of a combination of
outstanding shares of Common Stock.
For the purposes of any adjustment to be made in accordance
with this SECTION 6(a)(i) the following provisions shall be applicable:
(A) In case of the issuance or sale of shares of Common Stock
(or of other securities deemed hereunder to involve the issuance or sale of
shares of Common Stock) for a consideration part or all of which shall be cash,
the amount of the cash portion of the consideration therefor deemed to have been
received by the Company shall be (i) the subscription price, if shares of Common
Stock are offered by the Company for subscription, or (ii) the public offering
price (before deducting therefrom any compensation paid or discount allowed in
the sale, underwriting or purchase thereof by underwriters or dealers or others
performing similar services, or any expenses incurred in connection therewith),
if such securities are sold to underwriters or dealers for public offering
without a subscription offering, or (iii) the gross amount of cash actually
received by the Company for such securities, in any other case.
(B) In case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company, and otherwise than
on the exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash deemed to have been
received by the Company shall be the value of such consideration as determined
in good faith by the Board of Directors of the Company on the basis of a record
of values of similar property or services.
(C) Shares of Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the day following the record
date for the determination of shareholders entitled to receive such dividend or
other distribution and shall be deemed to have been issued without
consideration.
(D) The reclassification of securities of the Company other
than shares of Common Stock into securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in subsection (B) of this SECTION 6(a)(i).
(E) The number of shares of Common Stock at any one time
outstanding shall be deemed to include the aggregate maximum number of shares
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the conversion or exchange of
convertible or exchangeable securities.
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<PAGE>
(ii) Upon each adjustment of the Purchase Price
pursuant to this SECTION 6, the number of shares of Common Stock purchasable
upon the exercise of this Warrant shall be the number derived by multiplying the
number of shares of Common Stock purchasable immediately prior to such
adjustment by the Purchase Price in effect prior to such adjustment and dividing
the product so obtained by the applicable adjusted Purchase Price.
(b) In case the Company shall at any time after the
date hereof issue options, rights or warrants to subscribe for shares of Common
Stock, or issue any securities convertible into or exchangeable for shares of
Common Stock, for a consideration per share (determined as provided in SECTION
6(a)(i) hereof and as provided below) less than the Purchase Price in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities,.or without consideration (including the
issuance of any such securities by way of dividend or other distribution), the
Purchase Price for the Warrants (whether or not the same shall be issued and
outstanding) in effect immediately prior to the issuance of such options, rights
or warrants, or such convertible or exchangeable securities, as the case may be,
shall be reduced to a price determined by making the computation in accordance
with the provisions of SECTION 6(a)(i) hereof, provided that:
(A) The aggregate maximum number of shares of Common Stock, as
the case may be, issuable or that may become issuable under such options, rights
or warrants (assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, for a consideration equal
to the minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration, if any, received by
the Company for such options, rights or warrants; PROVIDED, HOWEVER, that upon
the expiration or other termination of such options, rights or warrants, if any
thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this subsection (A) (and for the
purposes of subsection (E) of SECTION 6(a)(i) hereof) shall be reduced by the
number of shares as to which options, warrants and/or rights shall have expired,
and such number of shares shall no longer be deemed to be issued and
outstanding, and the Purchase Price then in effect shall forthwith be readjusted
and thereafter be the price that it would have been had adjustment been made on
the basis of the issuance only of the shares actually issued plus the shares
remaining issuable upon the exercise of those options, rights or warrants as to
which the exercise rights shall not have expired or terminated unexercised.
(B) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable upon conversion or exchange of any
convertible or exchangeable securities (assuming conversion or exchange in full
even if not then currently convertible or exchangeable in full) shall be deemed
to be issued and outstanding at the time of issuance of such securities, for a
consideration equal to the consideration received by the Company for such
securities, plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; PROVIDED, HOWEVER, that upon the
termination of the right to convert or exchange such convertible or exchangeable
securities (whether by reason of redemption or otherwise), the number of shares
of Common Stock deemed to be issued and outstanding pursuant to this subsection
(B) (and for the
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<PAGE>
purposes of subsection (E) of SECTION 6(a)(i) hereof) shall be reduced by the
number of shares as to which the conversion or exchange rights shall have
expired or terminated unexercised, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Purchase Price then in effect shall
forthwith be readjusted and thereafter be the price that it would have been had
adjustment been made on the basis of the issuance only of the shares actually
issued plus the shares remaining issuable upon conversion or exchange of those
convertible or exchangeable securities as to which the conversion or exchange
rights shall not have expired or terminated unexercised.
(C) If any change shall occur in the price per share provided
for in any of the options, rights or warrants referred to in subsection (A) of
this SECTION 6(b), or in the price per share or ratio at which the securities
referred to in subsection (B) of this SECTION 6(b) are convertible or
exchangeable, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, shall be deemed to
have expired or terminated on the date when such price change became effective
in respect of shares not theretofore issued pursuant to the exercise or
conversion or exchange thereof, and the Company shall be deemed to have issued
upon such date new options, rights or warrants or convertible or exchangeable
securities.
(c) In case of any reclassification or change of
outstanding shares of Common Stock issuable upon exercise of the Warrants (other
than a change in par value, or from par value to no par value, or from no par
value to par value or as a result of a subdivision or combination), or in case
of any consolidation or merger of the Company with or into another corporation
(other than a merger with a Subsidiary in which merger the Company is the
continuing corporation and which does not result in any reclassification or
change of the then outstanding shares of Common Stock or other capital stock
issuable upon exercise of the Warrants), or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, then, as a condition of such reclassification,
change, consolidation, merger, sale or conveyance, the Company, or such
successor or purchasing corporation, as the case may be, shall make lawful and
adequate provision whereby the Registered Holder of each Warrant then
outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Warrant immediately
prior to such reclassification, change, consolidation, merger, sale or
conveyance and shall forthwith file at the Company's corporate office a
statement signed by its Chariman of the Board, President or a Vice President and
by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary evidencing such provision. Such provisions shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in SECTIONS 6(a) and 6(b) hereof. The above provisions
of this SECTION 6(c) shall similarly apply to successive reclassifications and
changes of shares of Common Stock and to successive consolidations, mergers,
sales or conveyances.
(d) Irrespective of any adjustments or changes in the
Purchase Price or the number of shares of Common Stock purchasable upon exercise
of the Warrants, the Warrant Certificates theretofore and thereafter issued
shall, unless the Company shall exercise its option to issue new Warrant
Certificates pursuant to the terms hereof, continue to express the Purchase
Price
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<PAGE>
per share and the number of shares purchasable thereunder as the Purchase Price
per share and the number of shares purchasable thereunder were expressed in the
Warrant Certificates when the same were originally issued.
(e) After each adjustment of the Purchase Price
pursuant to this SECTION 6, the Company will promptly prepare a certificate
signed by the Chairman of the Board, President, or a Vice President and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
of the Company setting forth: (i) the Purchase Price as so adjusted, (ii) the
number of shares of Common Stock purchasable upon exercise of each Warrant,
after such adjustment, and (iii) a brief statement of the facts accounting for
such adjustment. The Company will promptly file such certificate with the
Company and cause a brief summary thereof to be sent by ordinary first class
mail to each Registered Holder at his last address as it shall appear on the
registry books of the Company. No failure to mail such notice nor any defect
therein or in the mailing thereof shall affect the validity thereof except as to
the holder to whom the Company failed to mail such notice, or except as to the
holder whose notice was defective. The affidavit of an officer of the Company or
the Secretary or an Assistant Secretary of the Company that such notice has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(f) No adjustment of the Purchase Price shall be made
as a result of or in connection with (A) the issuance or sale of shares of
Common Stock pursuant to options, warrants, stock purchase agreements and
convertible or exchangeable securities outstanding or in effect on the date
hereof, (B) the issuance or sale of shares of Common Stock upon the exercise of
any "incentive stock options" (as such term is defined in the Internal Revenue
Code of 1986, as amended), whether or not such options were outstanding on the
date hereof, or (C) the issuance or sale of shares of Common Stock if the amount
of said adjustment shall be less than ten cents ($.10); PROVIDED, HOWEVER, that
in such case, any adjustment that would otherwise be required then to be made
shall be carried forward and shall be made at the time of and together with the
next subsequent adjustment that shall amount, together with any adjustment so
carried forward, to at least ten cents ($.10). In addition, Holders shall not be
entitled to cash dividends paid by the-Company prior to the exercise of any
Warrant or Warrants held by them.
7. MERGER OR CONSOLIDATION.
In case of any consolidation of the Company with, or merger of the
Company with, or merger of the Company into, another corporation (other than a
consolidation or merger which does not result in any reclassification or change
of the outstanding common stock of the Company), the corporation formed by such
consolidation or merger shall execute and deliver to the Holder a supplemental
warrant agreement providing that the Holder shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of this
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger by a holder of the number
of shares of Common Stock of the Company for which its Warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in SECTION 6. The above provisions of this
SECTION shall apply to successive consolidations or mergers.
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8. EXCHANGE AND REPLACEMENT OF WARRANT.
This Warrant is exchangeable without expense, upon the surrender hereof
by the registered Holder at the principal executive office of the Company for a
new Warrant of like tenor and date representing in the aggregate the right to
purchase the same number of Shares as are purchasable hereunder in such
denominations as shall be designated by the Holder hereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and, in case of loss, theft or destruction, of indemnity or security
reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
this Warrant, if mutilated, the Company will make and deliver a new Warrant of
like tenor, in lieu of this Warrant.
9. ELIMINATION OF FRACTIONAL INTERESTS.
The Company shall not be required to issue certificates representing
fractions of Shares on the exercise of this Warrant, nor shall it be required to
issue scrip or pay cash in lieu of fractional interests, it being the intent of
the parties that all fractional interests shall be eliminated.
10. RESERVATION OF SECURITIES.
The Company shall at all times reserve and keep available out of its
authorized Common Stock, solely for the purpose of issuance upon the exercise of
this Warrant, such number of Shares as shall be issuable upon the exercise
hereof. The Company covenants and agrees that, upon exercise of this Warrant and
payment of the Purchase Price therefor, all Shares issuable upon such exercise
shall be duly and validly issued, fully paid and nonassessable.
11. NOTICES TO WARRANT HOLDERS.
Nothing contained in this Warrant shall be construed as conferring upon
the Holder hereof the right to vote or to consent or to receive notice as a
stockholder in respect of any meetings of stockholders for the election of
directors or any other matter, or as having any rights whatsoever as a
stockholder of the Company.
12. NOTICES.
All notices, requests, consents and other communications required or
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed or sent by certified, registered, or express mail, postage prepaid,
and shall be deemed given when so delivered personally, telegraphed or, if
mailed, five days after the date of deposit in the United States mails, as
follows:
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(a) If to the Company, to:
First Reserve, Inc.
1360 South Dixie Highway
Coral Gables, Florida 33146
Attn: Allen C. Harper
(b) If to the Holder, to the address of such Holder
as shown on the books of the Company.
13. SUCCESSORS.
All the covenants, agreements, representations and warranties contained
in this Warrant shall bind the parties hereto and their respective heirs,
executors, administrators, distributees, successors and assigns.
14. HEADINGS.
The headings in this Warrant are inserted for purposes of convenience
only and shall have no substantive effect.
15. LAW GOVERNING.
This Warrant shall be construed and enforced in accordance with, and
governed by, the laws of the State of Florida, without giving effect to
conflicts of law, rules or principles.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its corporate name by, and such signature to be attested to by, a duly
authorized officer and has caused its corporate seal to be affixed hereto on the
date first above written.
FIRST RESERVE, INC.
By: /S/ ALLEN C. HARPER
------------------------------
Allen C. Harper
Chairman and CEO
Attest:
/S/ JAMES E. NEWMEYER
- ----------------------------
James E. Newmeyer, Secretary
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SUBSCRIPTION FORM
(To be Executed by the Registered Holder
in order to Exercise the Warrant)
The undersigned hereby irrevocably elects to exercise the right to
purchase Shares represented by this Warrant in accordance to the conditions
hereof and herewith makes payment of the Purchase Price of such Shares in full.
VALORSEC Verwaltungs & Treu-Anstalt
By: /S/ FABIO ROSSI
-------------------------------------
Fabio Rossi
Director
By: /S/ MARCO CASPESCHA
-------------------------------------
Marco Caspescha
Director
Via Cantonale 16
6900 Lugano
Switzerland
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EXHIBIT 10.10
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND THEY MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR
TRANSFERRED EXCEPT (I) PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACT WHICH
HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO THESE SECURITIES, OR (II)
PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE ACT BUT ONLY UPON A
HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE
COMPANY, OR OTHER COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, THAT THE
PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE ACT AS
WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR STATE SECURITIES LAW.
AUGUST 31, 1998
FIRST RESERVE, INC.
COMMON STOCK PURCHASE WARRANT
The Transferability of this Warrant is
Restricted as Provided in SECTION 3 hereof.
500,000 Warrants
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged by FIRST RESERVE, INC., a Florida corporation, and
its successor by merger or consolidation (the "Company"), VALORSEC Verwaltungs &
Treu-Anstalt, a Swiss company, is hereby granted the right to purchase, subject
to redemption hereof in accordance with SECTION 7 hereof, at the initial
exercise price of three dollars ($3.00) per share (subject to adjustment as set
forth herein), five hundred thousand (500,000) shares of Common Stock of the
Company (the "Shares"). Each Common Stock Purchase Warrant ("Warrant") may be
exercised from the date hereof until August 31, 2003. The Shares and the
Warrants are sometimes referred to herein as the "Securities."
Each Warrant initially is exercisable at a price of three dollars
($3.00) per Share payable in cash or by certified or official bank check in New
York Clearing House funds, subject to adjustments as provided in SECTION 6
hereof. Upon surrender of this Warrant, with the annexed Subscription Form duly
executed, together with payment of the Purchase Price (as hereinafter defined)
for the Shares purchased at the offices of the Company, the registered holder of
this Warrant (the "Holder") shall be entitled to receive a certificate or
certificates for the Shares so purchased.
<PAGE>
1. EXERCISE OF WARRANT.
The purchase rights represented by this Warrant are
exercisable at the option of the Holder, in whole or in part (but not as to
fractional Shares underlying this Warrant), during any period in which this
Warrant may be exercised as set forth above. In the case of the purchase of less
than all the Shares purchasable under this Warrant, the Company shall cancel
this Warrant certificate upon the surrender hereof and shall execute and deliver
a new Warrant of like tenor for the balance of the Shares purchasable hereunder.
2. ISSUANCE OF CERTIFICATES.
Upon the exercise of this Warrant and payment in full for the Shares,
the issuance of certificates for Shares underlying this Warrant shall be made
forthwith (and in any event within five (5) business days thereafter) without
charge to the Holder, including, without limitation, any tax which may be
payable in respect of the issuance thereof, and such certificates shall (subject
to the provisions of SECTION 3 hereof) be issued in the name of, or in such
names as may be directed by, the Holder; PROVIDED, HOWEVER, that the Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid. The certificates representing the Shares underlying this
Warrant shall be executed on behalf of the Company by the manual or facsimile
signature of the present or any future President or Vice President and Secretary
or Assistant Secretary of the Company.
3. RESTRICTION ON TRANSFER.
Neither this Warrant nor any Share issuable upon exercise hereof has
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), and none of such securities may be offered, sold, pledged, hypothecated,
assigned or transferred except (i) pursuant to a registration statement under
the Securities Act which has become effective and is current with respect to
such securities, or, (ii) pursuant to a specific exemption from registration
under the Securities Act but only upon a Holder hereof first having obtained the
written opinion of counsel to the Company, or other counsel reasonably
acceptable to the Company, that the proposed disposition is consistent with all
applicable provisions of the Securities Act as well as any applicable "Blue Sky"
or similar state securities law. Upon exercise, in part or in whole, of this
Warrant, each certificate issued representing the Shares shall bear a legend to
the foregoing effect.
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4. REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
4.1 THE COMPANY'S REGISTRATION. As soon as practicable, but in
any event not later than 90 days after the Company is a "reporting company"
pursuant to the Securities Exchange Act of 1937, as amended, (the "Exchange
Act") the Company shall prepare and file with the Securities and Exchange
Commission (the "Commission"), a registration statement and such other
documents, including a prospectus, as may be necessary in the opinion of counsel
for the Company and counsel for the holders of the Securities and of any other
securities of the Company with registration rights similar to those granted in
this Section 4 (collectively, the "Registration Rights Holders"), in order to
comply with the provisions of the Securities Act, so as to permit a public
offering and sale of the Shares, (the "Registration Rights Securities") for a
consecutive period ending twenty-four (24) months after the earlier of (i) the
full exercise and (ii) the expiration, of all of the Warrants. The costs and
expenses associated with the preparation, filing and prosecution of such
registration statement(s) shall be borne by the Company.
4.2 COVENANTS WITH RESPECT TO REGISTRATION. In connection with
any registration under Section 4.1 hereof, the Company covenants and agrees as
follows:
(a) The Company shall pay all costs (excluding fees
and expenses of Registration Rights Holder(s)' counsel and any underwriting or
selling commissions or other charges of any broker-dealer acting on behalf of
Registration Rights Holder(s)), fees and expenses in connection with all
registration statements filed pursuant to Section 4.1 hereof including, without
limitation, the Company's legal and accounting fees, printing expenses and blue
sky fees and expenses.
(b) The Company will take all necessary action which
may be required in qualifying or registering the securities included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the Registration Rights
Holder(s), provided that the Company shall not be obligated to qualify as a
foreign corporation to do business under the laws of any such jurisdiction.
(c) The Company shall indemnify the Registration
Rights Holder(s), each of their directors and officers and each person, if any,
who controls such Registration Rights Holder(s) within the meaning of Section 15
of the Securities Act or Section 20(a) of the Exchange Act, against all loss,
claim, damage, expense or liability (including all expenses reasonably incurred
in investigating, preparing or defending against any claim whatsoever) to which
any of them may become subject under the Securities Act, the Exchange Act or any
other statute, common law or otherwise, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement executed by the Company or based upon written information
furnished by the Company filed in any jurisdiction in order to qualify the
Registration Rights Securities under the securities laws thereof or filed with
the Commission, any state securities commission or agency, the National
Association of Securities Dealers, Inc., The Nasdaq Stock Market or any
securities exchange, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements contained
therein not misleading, unless such statement or omission was made in reliance
upon and in strict conformity with written
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information furnished to the Company by the Registration Rights Holder(s)
expressly for use in such registration statement, any amendment or supplement
thereto or any application, as the case may be. If any action is brought against
the Registration Rights Holder(s) or any controlling person of the Registration
Rights Holder(s) in respect of which indemnity may be sought against the Company
pursuant to this Section 4.2(c), the Registration Rights Holder(s) or such
controlling person shall, within thirty (30) days after the receipt of a summons
or complaint, notify the Company in writing of the institution of such action
and the Company shall assume the defense of such action, including the
employment and payment of reasonable fees and expenses of counsel (which counsel
shall be reasonably satisfactory to the Registration Rights Holder(s) or such
controlling person), but the failure to give such notice shall not affect such
indemnified person's right to indemnification hereunder except to the extent
that the Company's defense of such action was materially adversely affected
thereby. The Registration Rights Holder(s) or such controlling person shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of the Registration Rights
Holder(s) or such controlling person unless the employment of such counsel shall
have been authorized in writing by the Company in connection with the defense of
such action, or the Company shall not have employed counsel to have charge of
the defense of such action or such indemnified party or parties shall have
reasonably concluded that there may be defenses available to it or them which
are different from or additional to those available to the Company (in which
case the Company shall not have the right to direct the defense of such action
on behalf of the indemnified party or parties), in any of which events the fees
and expenses of not more than one additional firm of attorneys for all of the
Registration Rights Holder(s) and/or such controlling person shall be borne by
the Company. Except as expressly provided in the previous sentence, in the event
that the Company shall have assumed the defense of any such action or claim, the
Company shall not thereafter be liable to the Registration Rights Holder(s) or
such controlling person in investigating, preparing or defending any such action
or claim. The Company agrees to notify promptly the Registration Rights
Holder(s) of the commencement of any litigation or proceedings against the
Company or any of its officers, directors or controlling persons in connection
with the resale of any of the Registration Rights Securities in connection with
such registration statement. The Company further agrees that upon demand by an
indemnified person, at any time or from time to time, it will promptly reimburse
such indemnified person for any loss, claim, damage, liability, cost or expense
actually and reasonably paid by the indemnified person as to which the Company
has indemnified such person pursuant hereto. Notwithstanding the foregoing
provisions of this Section 4.2(c), any such payment or reimbursement by the
Company of fees, expenses or disbursements incurred by an indemnified person in
any proceeding in which a final judgment by a court of competent jurisdiction
(after all appeals or the expiration of time to appeal) is entered against any
Registration Rights Holder or such indemnified person as a direct result of any
Registration Rights Holder or such person's gross negligence or willful
misfeasance will be promptly repaid to the Company.
(d) The Registration Rights Holder(s), and their
successors and assigns, shall severally, and not jointly, indemnify the Company,
its officers and directors and each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act or Section 20(a) of the
Exchange Act, against all loss, claim, damage, expense or liability (including
all expenses reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which
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<PAGE>
they may become subject under the Securities Act, the Exchange Act or any other
statute, common law or otherwise, arising from written information furnished by
or on behalf of such Registration Rights Holder(s), or their successors or
assigns, expressly for use in such registration statement. The Registration
Rights Holder(s) further agree(s) that upon demand by an indemnified person, at
any time or from time to time, they will promptly reimburse such indemnified
person for any loss, claim, damage, liability, cost or expense actually and
reasonably paid by the indemnified person as to which the Registration Rights
Holder(s) have indemnified such person pursuant hereto. Notwithstanding the
foregoing provisions of this Section 4.4(d), any such payment or reimbursement
by the Registration Rights Holder(s) of fees, expenses or disbursements incurred
by an indemnified person in any proceeding in which a final judgment by a court
of competent jurisdiction (after all appeals or the expiration of time to
appeal) is entered against the Company or such indemnified person as a direct
result of the Company or such person's gross negligence or willful misfeasance
will be promptly repaid to the Registration Rights Holder(s).
(e) Nothing contained in this Agreement shall be
construed as requiring the Registration Rights Holder(s) to convert, exchange or
exercise any securities convertible, exchangeable or exercisable for Common
Stock prior to the initial filing of any registration statement or the
effectiveness thereof.
5. PRICE.
INITIAL AND ADJUSTED PURCHASE PRICE. The term "Purchase Price"
herein shall mean the initial purchase price or the adjusted purchase price,
depending upon the context. The initial purchase price shall be three dollars
($3.00) per Share. The adjusted purchase price shall be the price which shall
result from time to time from any and all adjustments of the initial purchase
price in accordance with the provisions of SECTION 6 hereof.
6. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES OR COMMON STOCK
DELIVERABLE.
(a) (i) Except as hereinafter provided, in the event
the Company shall, at any time or from time to time after the date hereof, sell
any shares of Common Stock for a consideration per share less than the Purchase
Price or issue any shares of Common Stock as a stock dividend to the holders of
Common Stock, or subdivide or combine the outstanding shares of Common Stock
into a greater or lesser number of shares (any such sale, issuance, subdivision
or combination being herein called a "Change of Shares"), then, and thereafter
upon each further Change of Shares, the Purchase Price for the Warrants (whether
or not the same shall be issued and outstanding) in effect immediately prior to
such Change of Shares shall be changed to a price (including any applicable
fraction of a cent to the nearest cent) determined by dividing (A) the sum of
(x) the total number of shares of Common Stock outstanding immediately prior to
such Change of Shares, multiplied by the Purchase Price in effect immediately
prior to such Change of Shares, and (y) the consideration, if any, received by
the Company upon such sale, issuance, subdivision or combination by (B) the
total number of shares of Common Stock outstanding immediately after such Change
of Shares; PROVIDED, HOWEVER, that in no event shall the Purchase Price be
adjusted pursuant
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to this computation to an amount in excess of the Purchase Price in effect
immediately prior to such computation, except in the case of a combination of
outstanding shares of Common Stock.
For the purposes of any adjustment to be made in accordance
with this SECTION 6(a)(i) the following provisions shall be applicable:
(A) In case of the issuance or sale of shares of Common Stock
(or of other securities deemed hereunder to involve the issuance or sale of
shares of Common Stock) for a consideration part or all of which shall be cash,
the amount of the cash portion of the consideration therefor deemed to have been
received by the Company shall be (i) the subscription price, if shares of Common
Stock are offered by the Company for subscription, or (ii) the public offering
price (before deducting therefrom any compensation paid or discount allowed in
the sale, underwriting or purchase thereof by underwriters or dealers or others
performing similar services, or any expenses incurred in connection therewith),
if such securities are sold to underwriters or dealers for public offering
without a subscription offering, or (iii) the gross amount of cash actually
received by the Company for such securities, in any other case.
(B) In case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company, and otherwise than
on the exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash deemed to have been
received by the Company shall be the value of such consideration as determined
in good faith by the Board of Directors of the Company on the basis of a record
of values of similar property or services.
(C) Shares of Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the day following the record
date for the determination of shareholders entitled to receive such dividend or
other distribution and shall be deemed to have been issued without
consideration.
(D) The reclassification of securities of the Company other
than shares of Common Stock into securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in subsection (B) of this SECTION 6(a)(i).
(E) The number of shares of Common Stock at any one time
outstanding shall be deemed to include the aggregate maximum number of shares
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the conversion or exchange of
convertible or exchangeable securities.
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(ii) Upon each adjustment of the Purchase Price
pursuant to this SECTION 6, the number of shares of Common Stock purchasable
upon the exercise of this Warrant shall be the number derived by multiplying the
number of shares of Common Stock purchasable immediately prior to such
adjustment by the Purchase Price in effect prior to such adjustment and dividing
the product so obtained by the applicable adjusted Purchase Price.
(b) In case the Company shall at any time after the
date hereof issue options, rights or warrants to subscribe for shares of Common
Stock, or issue any securities convertible into or exchangeable for shares of
Common Stock, for a consideration per share (determined as provided in SECTION
6(a)(i) hereof and as provided below) less than the Purchase Price in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities,.or without consideration (including the
issuance of any such securities by way of dividend or other distribution), the
Purchase Price for the Warrants (whether or not the same shall be issued and
outstanding) in effect immediately prior to the issuance of such options, rights
or warrants, or such convertible or exchangeable securities, as the case may be,
shall be reduced to a price determined by making the computation in accordance
with the provisions of SECTION 6(a)(i) hereof, provided that:
(A) The aggregate maximum number of shares of Common Stock, as
the case may be, issuable or that may become issuable under such options, rights
or warrants (assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, for a consideration equal
to the minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration, if any, received by
the Company for such options, rights or warrants; PROVIDED, HOWEVER, that upon
the expiration or other termination of such options, rights or warrants, if any
thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this subsection (A) (and for the
purposes of subsection (E) of SECTION 6(a)(i) hereof) shall be reduced by the
number of shares as to which options, warrants and/or rights shall have expired,
and such number of shares shall no longer be deemed to be issued and
outstanding, and the Purchase Price then in effect shall forthwith be readjusted
and thereafter be the price that it would have been had adjustment been made on
the basis of the issuance only of the shares actually issued plus the shares
remaining issuable upon the exercise of those options, rights or warrants as to
which the exercise rights shall not have expired or terminated unexercised.
(B) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable upon conversion or exchange of any
convertible or exchangeable securities (assuming conversion or exchange in full
even if not then currently convertible or exchangeable in full) shall be deemed
to be issued and outstanding at the time of issuance of such securities, for a
consideration equal to the consideration received by the Company for such
securities, plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; PROVIDED, HOWEVER, that upon the
termination of the right to convert or exchange such convertible or exchangeable
securities (whether by reason of redemption or otherwise), the number of shares
of Common Stock deemed to be issued and outstanding pursuant to this subsection
(B) (and for the
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purposes of subsection (E) of SECTION 6(a)(i) hereof) shall be reduced by the
number of shares as to which the conversion or exchange rights shall have
expired or terminated unexercised, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Purchase Price then in effect shall
forthwith be readjusted and thereafter be the price that it would have been had
adjustment been made on the basis of the issuance only of the shares actually
issued plus the shares remaining issuable upon conversion or exchange of those
convertible or exchangeable securities as to which the conversion or exchange
rights shall not have expired or terminated unexercised.
(C) If any change shall occur in the price per share provided
for in any of the options, rights or warrants referred to in subsection (A) of
this SECTION 6(b), or in the price per share or ratio at which the securities
referred to in subsection (B) of this SECTION 6(b) are convertible or
exchangeable, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, shall be deemed to
have expired or terminated on the date when such price change became effective
in respect of shares not theretofore issued pursuant to the exercise or
conversion or exchange thereof, and the Company shall be deemed to have issued
upon such date new options, rights or warrants or convertible or exchangeable
securities.
(c) In case of any reclassification or change of
outstanding shares of Common Stock issuable upon exercise of the Warrants (other
than a change in par value, or from par value to no par value, or from no par
value to par value or as a result of a subdivision or combination), or in case
of any consolidation or merger of the Company with or into another corporation
(other than a merger with a Subsidiary in which merger the Company is the
continuing corporation and which does not result in any reclassification or
change of the then outstanding shares of Common Stock or other capital stock
issuable upon exercise of the Warrants), or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, then, as a condition of such reclassification,
change, consolidation, merger, sale or conveyance, the Company, or such
successor or purchasing corporation, as the case may be, shall make lawful and
adequate provision whereby the Registered Holder of each Warrant then
outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Warrant immediately
prior to such reclassification, change, consolidation, merger, sale or
conveyance and shall forthwith file at the Company's corporate office a
statement signed by its Chariman of the Board, President or a Vice President and
by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary evidencing such provision. Such provisions shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in SECTIONS 6(a) and 6(b) hereof. The above provisions
of this SECTION 6(c) shall similarly apply to successive reclassifications and
changes of shares of Common Stock and to successive consolidations, mergers,
sales or conveyances.
(d) Irrespective of any adjustments or changes in the
Purchase Price or the number of shares of Common Stock purchasable upon exercise
of the Warrants, the Warrant Certificates theretofore and thereafter issued
shall, unless the Company shall exercise its option to issue new Warrant
Certificates pursuant to the terms hereof, continue to express the Purchase
Price
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per share and the number of shares purchasable thereunder as the Purchase Price
per share and the number of shares purchasable thereunder were expressed in the
Warrant Certificates when the same were originally issued.
(e) After each adjustment of the Purchase Price
pursuant to this SECTION 6, the Company will promptly prepare a certificate
signed by the Chairman of the Board, President, or a Vice President and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary
of the Company setting forth: (i) the Purchase Price as so adjusted, (ii) the
number of shares of Common Stock purchasable upon exercise of each Warrant,
after such adjustment, and (iii) a brief statement of the facts accounting for
such adjustment. The Company will promptly file such certificate with the
Company and cause a brief summary thereof to be sent by ordinary first class
mail to each Registered Holder at his last address as it shall appear on the
registry books of the Company. No failure to mail such notice nor any defect
therein or in the mailing thereof shall affect the validity thereof except as to
the holder to whom the Company failed to mail such notice, or except as to the
holder whose notice was defective. The affidavit of an officer of the Company or
the Secretary or an Assistant Secretary of the Company that such notice has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(f) No adjustment of the Purchase Price shall be made
as a result of or in connection with (A) the issuance or sale of shares of
Common Stock pursuant to options, warrants, stock purchase agreements and
convertible or exchangeable securities outstanding or in effect on the date
hereof, (B) the issuance or sale of shares of Common Stock upon the exercise of
any "incentive stock options" (as such term is defined in the Internal Revenue
Code of 1986, as amended), whether or not such options were outstanding on the
date hereof, or (C) the issuance or sale of shares of Common Stock if the amount
of said adjustment shall be less than ten cents ($.10); PROVIDED, HOWEVER, that
in such case, any adjustment that would otherwise be required then to be made
shall be carried forward and shall be made at the time of and together with the
next subsequent adjustment that shall amount, together with any adjustment so
carried forward, to at least ten cents ($.10). In addition, Holders shall not be
entitled to cash dividends paid by the-Company prior to the exercise of any
Warrant or Warrants held by them.
7. MERGER OR CONSOLIDATION.
In case of any consolidation of the Company with, or merger of the
Company with, or merger of the Company into, another corporation (other than a
consolidation or merger which does not result in any reclassification or change
of the outstanding common stock of the Company), the corporation formed by such
consolidation or merger shall execute and deliver to the Holder a supplemental
warrant agreement providing that the Holder shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of this
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger by a holder of the number
of shares of Common Stock of the Company for which its Warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in SECTION 6. The above provisions of this
SECTION shall apply to successive consolidations or mergers.
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8. EXCHANGE AND REPLACEMENT OF WARRANT.
This Warrant is exchangeable without expense, upon the surrender hereof
by the registered Holder at the principal executive office of the Company for a
new Warrant of like tenor and date representing in the aggregate the right to
purchase the same number of Shares as are purchasable hereunder in such
denominations as shall be designated by the Holder hereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and, in case of loss, theft or destruction, of indemnity or security
reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
this Warrant, if mutilated, the Company will make and deliver a new Warrant of
like tenor, in lieu of this Warrant.
9. ELIMINATION OF FRACTIONAL INTERESTS.
The Company shall not be required to issue certificates representing
fractions of Shares on the exercise of this Warrant, nor shall it be required to
issue scrip or pay cash in lieu of fractional interests, it being the intent of
the parties that all fractional interests shall be eliminated.
10. RESERVATION OF SECURITIES.
The Company shall at all times reserve and keep available out of its
authorized Common Stock, solely for the purpose of issuance upon the exercise of
this Warrant, such number of Shares as shall be issuable upon the exercise
hereof. The Company covenants and agrees that, upon exercise of this Warrant and
payment of the Purchase Price therefor, all Shares issuable upon such exercise
shall be duly and validly issued, fully paid and nonassessable.
11. NOTICES TO WARRANT HOLDERS.
Nothing contained in this Warrant shall be construed as conferring upon
the Holder hereof the right to vote or to consent or to receive notice as a
stockholder in respect of any meetings of stockholders for the election of
directors or any other matter, or as having any rights whatsoever as a
stockholder of the Company.
12. NOTICES.
All notices, requests, consents and other communications required or
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed or sent by certified, registered, or express mail, postage prepaid,
and shall be deemed given when so delivered personally, telegraphed or, if
mailed, five days after the date of deposit in the United States mails, as
follows:
10
<PAGE>
(a) If to the Company, to:
First Reserve, Inc.
1360 South Dixie Highway
Coral Gables, Florida 33146
Attn: Allen C. Harper
(b) If to the Holder, to the address of such Holder
as shown on the books of the Company.
13. SUCCESSORS.
All the covenants, agreements, representations and warranties contained
in this Warrant shall bind the parties hereto and their respective heirs,
executors, administrators, distributees, successors and assigns.
14. HEADINGS.
The headings in this Warrant are inserted for purposes of convenience
only and shall have no substantive effect.
15. LAW GOVERNING.
This Warrant shall be construed and enforced in accordance with, and
governed by, the laws of the State of Florida, without giving effect to
conflicts of law, rules or principles.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its corporate name by, and such signature to be attested to by, a duly
authorized officer and has caused its corporate seal to be affixed hereto on the
date first above written.
FIRST RESERVE, INC.
By: /S/ ALLEN C. HARPER
------------------------
Allen C. Harper
Chairman and CEO
Attest:
/S/ JAMES E. NEWMEYER
- ----------------------------
James E. Newmeyer, Secretary
11
<PAGE>
SUBSCRIPTION FORM
(To be Executed by the Registered Holder
in order to Exercise the Warrant)
The undersigned hereby irrevocably elects to exercise the right to
purchase Shares represented by this Warrant in accordance to the conditions
hereof and herewith makes payment of the Purchase Price of such Shares in full.
VALORSEC Verwaltungs & Treu-Anstalt
By: /S/ FABIO ROSSI
----------------------------------
Fabio Rossi
Director
By: /S/MARCO CASPESCHA
----------------------------------
Marco Caspescha
Director
Via Cantonale 16
6900 Lugano
Switzerland
12
EXHIBIT 21
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
Esslinger-Wooten-Maxwell, Inc.
First Reserve Realty, Inc.
Columbia Title of Florida, Inc.
Embassy Financial Services, Inc.
EXHIBIT 23.1
[MCCLAIN & COMPANY, L.C. LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion of our audit of the combined restated financial
statements of First Reserve, Inc. and Subsidiaries and Embassy Financial
Services, Inc. as of January 31, 1998 as part of this Form 10-SB/A.
/S/ MCCLAIN & COMPANY, L.C.
- ---------------------------
McClain & Company, L.C.
Miami, Florida
September 13, 1999
EXHIBIT 23.2
[MCCLAIN & COMPANY, L.C. LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion of our audit of the consolidated restated financial
statements of First Reserve, Inc. and Subsidiaries as of December 31, 1998 as
part of this Form 10-SB/A.
/S/ MCCLAIN & COMPANY, L.C.
- ---------------------------
McClain & Company, L.C.
Miami, Florida
September 13, 1999
EXHIBIT 23.3
[MCCLAIN & COMPANY, L.C. LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion of our audit of the consolidated unaudited financial
statements of First Reserve, Inc. and Subsidiaries as of June 30, 1999 as part
of this Form 10-SB/A.
/S/ MCCLAIN & COMPANY, L.C.
- ---------------------------
McClain & Company, L.C.
Miami, Florida
September 13, 1999
