SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED}
FOR THE TRANSITION PERIOD FROM __________________ TO ______________________
COMMISSION FILE NUMBER: 0-26087
FIRST RESERVE, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 86-0740730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1360 South Dixie Highway 33146
Coral Gables, Florida (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (305) 667-8871
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Registrant's revenues for its most recent fiscal year are $25,908,304.
The number of shares of Common Stock of the registrant outstanding as of March
30, 2000 is 6,767,050.
Documents Incorporated by Reference
Portions of the proxy statement for the annual shareholders meeting to
be held in 2000 are incorporated by reference into Part III. Portions of the
registration statement on Form 10-SB/A, filed with the SEC on September 13,
1999, are incorporated by reference into Part III, Item 13.
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FIRST RESERVE, INC.
TABLE OF CONTENTS
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Page
PART I
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Item 1. Business ............................................................................ 1
Item 2. Properties ......................................................................... 6
Item 3. Legal Proceedings ................................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders ............................... 7
PART II
Item 5. Market for Registrant's Common Stock Equity and Related Stockholder
Matters ............................................................................. 7
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................................. 7
Item 7. Financial Statements and Supplementary Data ....................................... 9
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures ..................................................... 9
PART III
Item 9. Directors, Executive Officers and Control Persons of the Registrant ............... 9
Item 10. Executive Compensation ............................................................. 9
Item 11. Security Ownership of Certain Beneficial Owners and Management ................... 9
Item 12. Certain Relationships and Related Transactions ..................................... 9
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................... 9
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PART I
ITEM 1. BUSINESS
GENERAL
First Reserve, Inc. (the "Company" or "Registrant") 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. 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
and Columbia Title of Florida, Inc., a full service title insurance and real
estate closing company.
HISTORY
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 its domicile from Arizona to Florida, effectively
becoming a Florida corporation. Our headquarters is located at 1360 South Dixie
Highway, Coral Gables, Florida 33146. Our telephone number is (305) 667-8871 and
the 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 shares of
common stock (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 were 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. and the Company issued additional
shares of common stock. In addition, pursuant to an Agreement of Tax-Free
Reorganization (the "Exchange Merger Agreement"), the shareholders of First
Reserve Florida and the shareholders of Embassy exchanged all of the shares of
common stock 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 brokerage operation. The acquisition was consummated through
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 Byrne Merger Agreement, 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
were retained by EWM. As of May 1, 1998, all of Byrne's pending real estate
transactions have been 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
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estate brokerage operation. The acquisition was consummated through a 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 Gerard Merger Agreement, 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 Gerard Merger Agreement.
OPERATIONS
Our primary operations are conducted through Esslinger-Wooten-Maxwell, Inc., our
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 1999, EWM closed 2,940 real estate
sale transactions and 600 rental transactions having a gross dollar value of
$861,000,000. The average home price was $274,504.
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. We offer our services
in six southern Florida locations. EWM operates from offices located in Coral
Gables/Coconut Grove, South Miami, Miami Beach, Pinecrest/Palmetto area of
Miami-Dade County, Florida, and Plantation and Weston, Broward County Florida.
EWM provides the following services:
/bullet/ Residential Brokerage
/bullet/ Commercial Brokerage
/bullet/ Relocation
/bullet/ Property Management and Leasing
/bullet/ International Brokerage
/bullet/ Business Brokerage
EWM expanded into Broward County by opening an office in Plantation in February,
1999. We believe 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. A second Broward County
location in Weston, Florida is expected to open in April, 2000.
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).
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. Our residential brokerage services offered
to sellers of real estate include:
/bullet/ Pricing a property based on market knowledge and current
research
/bullet/ Individualized marketing program for each property
/bullet/ Preparation of Seller's Net Sheet, setting forth costs of sale
and net profit estimates upon closing
/bullet/ Suggestions for preparing a property for sale
/bullet/ Appointment options
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/bullet/ Inclusion of all properties in the computerized South Florida
Regional Multiple Listing System
/bullet/ Pre-qualifying of potential buyers' ability to purchase
/bullet/ General advice and assistance in preparing forms and attending
closing of transaction
/bullet/ Negotiating the terms and conditions of the sales and purchase
contract
/bullet/ Conducting "open houses" for properties
/bullet/ Obtaining tenants
In exchange for these services, the customer pays our 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 divided
between the Company and the participating sales associate.
EWM assists buyers of real estate by providing the following services:
/bullet/ Locating a property that meets personal and financial
objectives
/bullet/ Showing the buyer properties
/bullet/ Assistance with inspections, repairs, and obtaining
appraisals, etc.
/bullet/ Negotiating the terms and conditions of the sales and purchase
contract
/bullet/ Assisting the buyer in preparing for and attending closing of
transactions.
In exchange for these services, the customer pays to us our 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 agreement 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:
/bullet/ Commercial Sales and Leasing
/bullet/ Property Owner Representation
/bullet/ Tenant Representation
/bullet/ Corporate Relocations
/bullet/ Project Management
/bullet/ Market Surveys
/bullet/ Project Feasibilities
/bullet/ Computer Financial Models
/bullet/ Construction and Permanent Loan Packaging
/bullet/ Land Acquisition and Assemblage
/bullet/ Workouts of Challenging Properties
/bullet/ 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 we believe is the nation's largest relocation organization,
and provides EWM with membership in Cendant's
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nationwide network of over 360 other suppliers of relocation services.
We believe 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 (our 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:
/bullet/ Collecting rent
/bullet/ Accounting and bookkeeping services
/bullet/ Regular property inspections
/bullet/ Coordination of regular maintenance (lawn pool, service
contracts, etc.)
/bullet/ Contract work (paint, repairs, etc.)
/bullet/ Customer services for tenants
/bullet/ Consistent owner contact
/bullet/ Showing rental properties to prospective tenants.
MARKET
The rate of home sales in Miami-Dade County, Florida for 1999 showed a marked
improvement over 1998. 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
year 2000, with new and existing home sales to increase at a rate slightly
higher than the national average.
According to MLS data, there were 20,168 existing home sales in Miami-Dade
County in 1999, compared to 18,480 in 1998 representing a 9.1% increase in sales
for 1999.
While homes under $200,000 accounted for 80% of all homes sold in Miami-Dade
County in 1999, luxury homes continue to sell well in the region. In the past
year, EWM was involved in 18% of the home sale transactions in
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Miami-Dade County through the MLS in the price range over $500,000.
MARKETING
We intend to undertake an aggressive growth strategy by acquiring local
brokerage operations throughout Florida to increase market presence, sales
volume and our geographic base. We intend to continue our expansion of our
mortgage brokerage services and title company services across Southeast Florida.
The Company's 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, an industry 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,
we and our 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, Ft. Lauderdale, Florida
and is a member of the University of Miami Citizens Board.
COMPETITION
All of the businesses in which we are engaged are highly competitive, especially
residential real estate brokerage services. Many of our competitors, in
particular affiliated with franchising organizations, have substantially greater
financial resources than the Company. Many of our competitors are also
undertaking a growth strategy. EWM moved into the number two position (from
number three in 1998) in total dollar sales of transactions for Miami-Dade
County for homes in excess of $200,000. Further, EWM was first in the total
units of sales in Miami-Dade County, based upon South Florida Multiple Listing
Service date. Even though we believe that our ability to specialize in
higher-priced properties, the quality of our services and our knowledge of and
relative strength in the South Florida market position us well with our
competitors, the substantial amount of competition is expected to continue,
which may have an adverse affect on our operations.
EWM believes it has a higher average sales price than that of its major
competitors. Its average residential sales price substantially exceeds the
average sales prices in Miami-Dade County. EWM sales for 1999 including all
residential, commercial and rentals from existing operations and acquisitions
and newly opened offices was approximately $861,000,000, a 17.5% increase from
1998. The total number of residential transactions closed for 1999 was 2,943.
ECONOMIC FACTORS
Our 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 our business and operations.
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REGULATORY ISSUES
Our operations are 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 our 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. We have made, and will continue to make,
expenditures to comply with such laws and regulations. We believe that our
operations are in compliance with all applicable material laws and regulations.
We do not believe that any laws or regulations currently in existence, or, to
the best of our knowledge any laws which are being proposed or contemplated,
will have an adverse affect on our financial condition or our 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 our financial condition and
our operations. Additionally, there are various licensing requirements imposed
on us and our sales associates. While based on our experiences to date, the cost
of compliance has not had, and is not expected to have, a material effect on our
operations, changes in laws and regulations may give rise to additional
compliance costs that could have a material adverse effect on such operations.
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 our operations.
EMPLOYEES
As of December 31, 1999, we employ 48 persons full time as support staff and
engage 425 persons as sales associates. Of the sales associates, 175 are based
in our Coral Gables office, 85 are based in our Pinecrest/Palmetto office, 55
are based in our South Miami office, 60 are based in our Miami Beach office and
45 are based in our Plantation office. These associates have an active real
estate license, but merely refer listings to us in return for a fee. All sales
associates are independent contractors rather than our , which is a standard
structure in the real estate brokerage industry. We require that each associate
sign an Independent Contractor Status Agreement that is a Florida Association of
Realtors standard form.
All of our 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 the full brokerage commission.
REPORTS TO SECURITY HOLDERS
We intend to provide all of our shareholders with an annual report of our
operations, including audited financial statements, for the 12 month period
ended December 31, 1999.
The public may read and copy any materials that we have 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. PROPERTIES
Our facilities consist of six 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
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feet leased office at 6150 S.W. 76 Street, South Miami, Florida; (5) 6,400
square feet leased at 8500 West Broward Boulevard, Plantation, Florida 33324;
and (6) 5,600 square feet to be opened in April 2000 at 4410 Weston Road,
Weston, Florida.
ITEM 3. LEGAL PROCEEDINGS
We are currently not a party to any material litigation which is not incidental
to the ordinary course of our business and operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock is not currently quoted on any national exchange or other
public trading market.
There were 179 shareholders of record of our Common Stock on December 31, 1999.
We have not paid any dividends on our Common Stock and intend to retain all
earnings for use in our operations and to finance the development and the
expansion of our business. We do not anticipate paying any dividends on the
Common Stock in the foreseeable future. The payment of dividends is within the
discretion of the our 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 6. 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 Consolidated
Financial Statements of First Reserve, Inc. and subsidiaries, as of December 31,
1999, and the related notes to the Consolidated Financial Statements, along with
the 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 52.2% for the year
ended December 31, 1999, over those for the 11-month period ended December 31,
1998. The increase is partially attributable to the fact that the 1999 reporting
period was a period of 12 months while the 1998 reporting period was 11 months.
Approximately $1,164,500 of the increase in revenues is attributable to the
opening of a new real estate office in Plantation, Florida in February, 1999 and
the acquisition of Columbia Title of Florida, Inc. in April, 1999. The %
increase resulted from the following sources: (i) new Plantation office (6.7%);
(ii) Columbia Title acquisition (2.99%); (iii) existing sales offices (42.2%);
and (iv) Mortgage Company operations (0.4%).
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OPERATING EXPENSES. Operating expenses increased to approximately $25.56 million
for the year ended December 31, 1999 versus $16.88 million for the 11-month
period ended December 31, 1998. The significant components of the Company's
operating expenses are: commissions to real estate associates (67%), officer and
staff salaries (12.5%), office rental costs (4.1%), advertising expenses (4.5%),
promotional expenses (0.8%) and insurance (1.0%). 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, the
acquisition of a title company and the pre-opening costs associated with the
creation of its two Broward County sales offices.
INTEREST. Interest income increased from approximately $14,000 for the 11-month
period ended December 31, 1998 to approximately $56,000 for the year ended
December 31, 1999 primarily due to higher average daily balances of cash.
PRE-TAX INCOME FROM CONTINUING OPERATIONS AND NET INCOME. The Company had
pre-tax income from operations of approximately $345,000 for the year ended
December 31, 1999 as compared to pre-tax income of approximately $134,000 for
the 11-month period ended December 31, 1998. This increase in pre-tax profit
from continuing operations resulted primarily from increased residential sales
offset by the payment of prior year's settlement.
LIQUIDITY AND CAPITAL RESOURCES
The Company used approximately $593,000 in cash for operating activities for the
year ended December 31, 1999. This was primarily due to an increase in the
amount of commissions and management fees paid and a significant increase in
mortgage loans held for sale.
Cash used for investing activities was approximately $1,050,000 for the year
ended December 31, 1999, primarily attributable to the purchase of property and
equipment, the purchase of certain businesses acquired by the Company and the
purchase of an interest bearing deposit during this period.
Cash provided from financing activities was approximately $1,315,000 for the
year ended December 31, 1999, principally due to the net proceeds received from
loans payable and from the Company's line of credit.
At December 31, 1999, the Company had long term notes payable of approximately
$930,826. The Company has a $1.8 million "warehouse" line of credit to fund
loans to be made in connection with its mortgage banking operations. Each
"warehouse" loan is fully backed by a permanent loan "take-out" commitment from
a national lender of residential financing. As of December 31, 1999 the balance
of this "warehouse" line of credit was approximately $820,680 with a
corresponding asset of "mortgage loans held for sale" of $830,620. Additional
current debt due in 1999 was approximately $190,700.
At December 31, 1999, the Company had shareholder equity of approximately
$2,693,000. For the year ended December 31, 1999 the Company's net working
capital (current assets minus current liabilities) decreased to approximately
$875,175 from approximately $1,048,000 for the 11-month period ended December
31, 1998, primarily as a result of a significant increase in current maturities
of long term debt. The Company believes its current working capital will be
sufficient to support its presently-contemplated strategy for the next 12
months.
The Company's first new office in Broward County was completed on June 1, 1999.
Another Broward County location in Weston, Florida is anticipated to open in
April, 2000. The Company anticipates that these offices will
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increase opportunities to substantially increase sales. The Company's temporary
Broward County office has generated an annualized volume of approximately
$115,000,000 of sales through the end of March, 2000. The company acquired
Columbia Title of Florida, Inc., a 37 year old title insurance business, for
approximately $191,000 in cash in April, 1999. The Company believes this title
business will be profitable during 2000, 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. 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.
FORWARD LOOKING STATEMENTS
From time to time, we make statements about our future results in this Form
10-KSB 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.
ITEM 7. FINANCIAL STATEMENTS
Immediately following the signature page in this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
Certain information required by this Part III is omitted from this report since
we anticipate filing with the SEC a definitive proxy statement for our 2000
Annual Meeting of Stockholders (the "Proxy Statement") no later than 120 days
after the end of the fiscal year covered by this report, and certain information
included therein is incorporated herein by reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS OF THE COMPANY
The information required by this item with respect to Directors, Executive
Officers and Control Persons and compliance with the Section 16(a) reporting
requirements is hereby incorporated by reference to the material appearing in
the Proxy Statement under the captions "Directors, Executive Officers and
Control Persons" and "Section 16(a) Beneficial Ownership Reporting Compliance."
9
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference to the
material appearing in the Proxy Statement under the caption "Executive
Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference to the
material appearing in the Proxy Statement under the caption "Voting Securities
and Principal Holders Thereof."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference to the
material appearing in the Proxy Statement under the captions "Executive
Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions."
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed with or incorporated by reference
into this report. The exhibits which are marked by a single asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from the
Company's Registration Statement on Form 10SB, as filed with the Securities and
Exchange Commission on May 14, 1999. The exhibits which are marked by a double
asterisk (**) were previously filed as part of, and are hereby incorporated by
reference from the Company's Form 10SB/A as filed with the Securities and
Exchange Commission on September 13, 1999. The exhibit numbers correspond to the
exhibit numbers in the referenced documents.
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.).
3.2* Bylaws of First Reserve, Inc.
10.1* Articles of Merger of First Reserve, Inc. (a Florida
corporation) and First Reserve, Inc. (an Arizona corporation).
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).
10.3* Articles of Merger of Byrne-Rinehart & Co. (a Florida
corporation) and Esslinger-Wooten-Maxwell, Inc. (a Florida
corporation).
10.4* Articles of Merger of Gerard International Realty, Inc. (a
Florida corporation) and Esslinger-Wooten-Maxwell, Inc. (a
Florida corporation).
10.5* Employment Agreement dated March 5, 1998 by and between First
Reserve, Inc. and Allen C. Harper.
10.6* Employment Agreement dated March 5, 1998 by and between First
Reserve, Inc. and Ronald A. Shuffield.
10
<PAGE>
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.
27.0 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST RESERVE, INC.
DATE: APRIL 14, 2000 BY: /s/ Allen C. Harper
------------------------------
TITLE: Chairman
BY: /s/ Ronald A. Shuffield
------------------------------
TITLE: Director
BY: /s/ James E. Newmeyer
------------------------------
TITLE: Director
BY:
------------------------------
TITLE: Director(a)
12
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Officers and Directors
First Reserve, Inc. and Subsidiaries
Coral Gables, Florida
We have audited the accompanying consolidated balance sheets of First Reserve,
Inc. and Subsidiaries ("the Company"), as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for the year ended December 31, 1999 and for the eleven-month period ended
December 31, 1998. These financial statements are the responsibility of the
Company's 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1999 and 1998 and the consolidated
results of their operations and their cash flows for the year ended December 31,
1999 and the eleven-month period ended December 31, 1998 in conformity with
generally accepted accounting principles.
McClain & Company, L.C.
February 10, 2000
Miami, Florida
Page 1 of 34
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
ASSETS
1999 1998
----------- -----------
CURRENT ASSETS
Cash $ 727,130 $ 1,055,160
Interest bearing deposit with bank 125,000 --
Receivables 356,331 325,227
Mortgage loans held for sale 830,620 --
Prepaid expenses and other 178,297 157,079
Shareholders' loans receivable -- 80,000
----------- -----------
Total current assets 2,217,378 1,617,466
----------- -----------
PROPERTY AND EQUIPMENT
Furniture and fixtures 898,579 402,905
Office equipment 762,748 497,929
Transportation equipment 28,102 --
Leasehold improvements 435,323 74,626
Equipment held under capital leases 35,730 --
----------- -----------
2,160,482 975,460
Less accumulated depreciation (823,743) (541,656)
----------- -----------
Net property and equipment 1,336,739 433,804
----------- -----------
OTHER ASSETS
Goodwill, net 1,348,397 945,834
Deposits and other 87,834 126,781
----------- -----------
Total other assets 1,436,231 1,072,615
----------- -----------
Total assets $ 4,990,348 $ 3,123,885
=========== ===========
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
Page 2 of 34
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
---------- ----------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 297,063 $ 400,592
Deferred mortgage fee income 22,740 --
Escrow deposits 4,909 --
Current portion of obligations under capital
leases 6,109 --
Current maturities of long-term debt, net
of unamortized discount 1,011,382 168,871
---------- ----------
Total current liabilities 1,342,203 569,463
---------- ----------
LONG TERM LIABILITIES
Obligations under capital leases 24,299 --
Note payable, net of unamortized
discount 930,826 616,881
---------- ----------
Total long term liabilities 955,125 616,881
---------- ----------
Total liabilities 2,297,328 1,186,344
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, no par value, 100,000,000
authorized shares; 6,767,050 shares
issued and outstanding in 1999; 6,567,050
shares issued and 6,767,050
shares outstanding in 1998 5,939,507 5,739,507
Accumulated deficit (3,246,487) (3,801,966)
---------- ----------
Total stockholders' equity 2,693,020 1,937,541
---------- ----------
Total liabilities and stockholders'
equity $4,990,348 $3,123,885
========== ==========
Page 3 of 34
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUES $ 25,908,304 $ 17,015,043
------------ ------------
COST AND EXPENSES
Commissions, fees and other incentives 17,311,056 11,261,239
General and administrative expenses 7,962,389 4,416,803
Depreciation and amortization 280,102 153,956
Legal and other settlements 9,300 1,048,812
------------ ------------
Total costs and expenses 25,562,847 16,880,810
------------ ------------
Income from operations before income taxes
and other income and expenses 345,457 134,233
------------ ------------
OTHER INCOME AND (EXPENSES)
Interest income 56,381 14,029
Other income 63,898 --
Interest expense (131,022) (35,832)
Other expenses (1,600) (2,865)
Gain on disposition of property and equipment 222,365 --
------------ ------------
Total other income and (expenses) 210,022 (24,668)
------------ ------------
Income before income taxes 555,479 109,565
PROVISION FOR INCOME TAX -- --
------------ ------------
Net income $ 555,479 $ 109,565
============ ============
EARNINGS PER COMMON SHARE:
BASIC EARNINGS PER COMMON SHARE $ .08 $ 0.02
============ ============
WEIGHTED AVERAGE COMMON SHARES 6,618,009 5,718,504
============ ============
DILUTED EARNINGS PER COMMON SHARE $ .08 $ 0.02
============ ============
WEIGHTED AVERAGE DILUTED COMMON SHARES 6,727,016 5,730,085
============ ============
PROFORMA EARNINGS PER SHARE (FROM CONTINUING
OPERATIONS - SEE NOTE 17):
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>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
Page 4 of 34
<PAGE>
FIRST RESERVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
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>
The accompanying notes to the consolidated financial statements are an integral
part of this consolidated statement.
Page 5 of 34
<PAGE>
FIRST RESERVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON COMMON TOTAL
STOCK STOCK PAID IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1998 6,567,050 $ 5,739,507 $ -- $(3,801,966) $ 1,937,541
No par value stock issued from
acquisition of Gerard International
Realty, Inc. previously held as
contingent shares 200,000 200,000 -- -- 200,000
Net income -- -- -- 555,479 555,479
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1999 6,767,050 $ 5,939,507 $ -- $(3,246,487) $ 2,693,020
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this consolidated statement.
Page 6 of 34
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
THE ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 25,976,747 $ 16,882,003
Interest received 50,567 14,029
Interest paid (144,875) (80)
Cash paid to suppliers and employees (25,473,970) (15,673,531)
Settlements paid (170,487) (298,812)
Net increase in mortgage loans held for sale (830,620) --
------------ ------------
Net cash (used in) provided by operating
activities (592,638) 923,609
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to employees (5,924) --
Net decrease (increase) in deposits 28,743 (59,247)
Purchases of property and equipment (987,699) (219,936)
Payment for purchase of acquired
companies; net of cash received (185,297) (286,291)
Purchase of interest bearing deposit
with bank (125,000) --
Proceeds from disposition of property 6,000
and equipment 225,000 --
------------ ------------
Net cash used in investing activities (1,050,177) (559,474)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrows on loan payable 500,000 --
Net proceeds from line of credit 820,682 --
Payment on loan payable (575) --
Payment of capital lease obligation (5,322) --
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 1,314,785 312,602
------------ ------------
Net (decrease) increase in cash (328,030) 676,737
CASH, beginning of period 1,055,160 378,423
------------ ------------
CASH, end of period $ 727,130 $ 1,055,160
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
Page 7 of 34
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
(USED IN) PROVIDED BY OPERATING
ACTIVITIES:
Net income $ 555,479 $ 109,565
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Depreciation 211,392 120,469
Amortization 68,710 33,487
Gain on disposition of property and
equipment (222,365) --
Loss on abandonment of property
and equipment -- 3,097
Decrease (increase) in prepaid expenses and
other assets 64,975 (94,817)
Increase in receivables (23,104) (122,428)
Increase in mortgage loans held for sale (830,620) --
(Decrease) increase in accounts and notes
(operating) payable and accrued expenses (442,060) 874,236
Increase in deferred mortgage fee income 22,740 --
Increase in escrow deposits 2,215 --
--------- ---------
Net cash (used in) provided by
operating activities $(592,638) $ 923,609
========= =========
</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.
On September 30, 1999, the Company issued 200,000 shares of common stock of
the Company to the former shareholders of Gerard International Realty, Inc.
These shares were previously held in escrow as "contingent" shares as
further discussed on Note 1. As a result, common stock and goodwill
increased by $200,000.
In 1999, the Company expensed $80,000 of shareholders' loan receivables that
were previously advanced to certain shareholders for services performed in
the current year.
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
Page 8 of 34
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
FIRST RESERVE, INC. AND SUBSIDIARIES
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
(CONTINUED)
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.
In 1998, 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.
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
Page 9 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND COMBINATION The accompanying
consolidated financial statements include the accounts of First
Reserve, Inc. and its wholly-owned subsidiaries, Esslinger, Wooten and
Maxwell, Inc. ("EWM"), First Reserve Realty, Inc. ("FRRI"), First
Reserve Management, Inc., First Reserve Equities, Inc., Embassy
Financial Services, Inc. ("Embassy") and Columbia Title of Florida,
Inc. ("Columbia") (collectively "the Company"). 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 December
31, 1999. 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 and control. 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.
The accounts of Embassy are for the year ended December 31, 1998.
All intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
NATURE OF OPERATIONS
EWM and FRRI are primarily engaged in the brokerage and management of
residential and commercial real estate in South Florida. FRRI became a
dormant corporation in 1999.
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 these
loans.
Columbia is a title company engaged in the business of closing real
estate and mortgage loan transactions, primarily in the South Florida
area.
First Reserve Management, Inc. and First Reserve Equities, Inc. are
dormant corporations.
Page 10 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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., a non-operating 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.
BUSINESS COMBINATIONS
On March 31, 1999, the Company acquired all the stock of Columbia in a
business combination accounted for as a purchase. Columbia is a title
company 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 former shareholder of Columbia (seller) received $100
for the stock of Columbia. The agreement also provided for additional
consideration if the assets (including goodwill) of the Key Largo
branch were 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. The total cost of the acquisition was
approximately $191,350. Goodwill of $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 December 31,
1999.
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, 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.
Page 11 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Based on a recent private offering of the Company's stock, the fair
value of the Company's share price on the acquisition date was valued
at $1 per share. 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 beginning May 1, 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. Based on a recent private offering of the
Company's stock, the fair value of the Company's share price on the
acquisition date was valued at $1 per share. As further discussed in
Note 16, an additional 200,000 "contingent" shares of common stock of
the Company were held in escrow pending future gross commission income
to be generated by the former shareholders of Gerard over the next 24
month period and were subsequently recorded as additional purchase
price on September 30, 1999.
The total cost of the Gerard acquisition, excluding the contingent
shares, was approximately $335,000, which includes direct acquisition
costs of approximately $35,000. Goodwill of approximately $259,000
resulting from this transaction is being amortized on the straight-line
method over 40 years. As a result of the issuance of the contingent
shares, additional goodwill in the amount of $200,000 was recorded.
This increase in goodwill is being amortized on the straight-line
method over the remaining life of the asset or 39 years. The results of
operations for Gerard are included in the consolidated statement of
income for the period beginning September 30, 1998.
REVENUE RECOGNITION
EWM and FRRI earn 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.
Page 12 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Embassy charges its customers for loan fees, ancillary fees and
interest related to mortgages for the purchase and refinancing of their
homes. Mortgage loan origination revenues, offset by direct loan
origination costs, are deferred and the net amount is recognized as a
component of gain on sale of mortgage loans when the sale of the loan
has been consummated. Mortgage loan origination revenue consists
primarily of loan origination, application and other fees paid by the
borrowers. Embassy recognizes these fees when the related loan is
delivered to the third party purchaser. All fees and revenues are
included as "revenues" in the financial statements. Direct loan
origination costs consist of commissions paid to Embassy's mortgage
consultants, appraisal fees and credit report fees paid to third
parties. These costs are expensed when the loan is delivered to third
party purchaser. Interest on mortgage loans held for sale is recorded
in income as earned.
Columbia charges its customers title search, recording and other
ancillary fees related to mortgages for the purchase and refinancing of
their homes. Columbia records revenues 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 $0 and $636 net of accumulated amortization at December 31,
1999 and 1998, respectively.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP 98-5), REPORTING ON THE COSTS OF START-UP
ACTIVITIES. SOP 98-5 requires companies to expense organizational costs
as they are incurred and is effective for fiscal years beginning after
December 15, 1998. The Company adopted SOP 98-5 for the year beginning
January 1, 1999. The Company expensed $636 for the year ended December
31, 1999.
DIRECT ACQUISITION COSTS
Direct acquisition costs are amortized on the straight-line method over
five years. Direct acquisition costs are reflected in other assets and
amounted to $61,013 and $47,615, net of accumulated amortization at
December 31, 1999 and 1998, respectively. Amortization expense charged
to operations for the year ended December 31, 1999 and the eleven-month
period ended December 31, 1998 were $13,398 and $5,980, respectively.
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, excluding cash held in trust.
Page 13 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST BEARING DEPOSIT WITH BANK
Interest bearing deposit with bank consists of a one-year certificate
of deposit held at a financial institution bearing interest at 4.75%
per annum and maturing in January 2000.
CASH HELD IN TRUST
The Company maintains separately designated Trust accounts for home
buyers' earnest money, property owners, tenants and other third
parties. The Company holds such funds until sold properties are closed
and leases have expired. Funds are disbursed in accordance with the
settlement instructions or rental management agreements. These funds
are not recorded in the Company's financial statements as they are held
in a fiduciary capacity. At December 31, 1999 and 1998, the Company
held $2,958,250 and $2,447,690 of funds in trust, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using
straight-line and accelerated methods over the following estimated
useful lives of the assets:
Furniture and fixtures 5 - 10 years
Office equipment 5 - 7 years
Transportation equipment 5 years
Leasehold improvements Shorter of the life of the
underlying lease or the
estimated useful life of
the improvement.
Equipment held under capital leases Shorter of the life of the
underlying lease or the
estimated useful life of
the equipment
Depreciation expense charged to operations for the year ended December
31, 1999 and the eleven-month period ended December 31, 1998 was
$211,392 and $120,469, respectively.
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.
Page 14 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
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 for tax purposes,
goodwill, property and equipment.
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.
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.
RECLASSIFICATIONS
For comparative purposes, certain items in the December 31, 1998
financial statements have been reclassified to conform with the
December 31, 1999 presentation.
Page 15 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT PRONOUNCEMENTS
During 1999, the Company adopted SFAS No. 134, ACCOUNTING FOR
MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF
MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE. It
requires an entity engaged in mortgage banking activities to classify
the resulting mortgage-backed securities or other retained interests
based on its ability and intent to sell or hold those investments. The
adoption of SFAS 134 will have no effect on the Company's financial
condition or results of operations.
In 1998, the FASB issued SFAS No. 133 ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes
accounting and reporting standards that require every derivative
instrument be recorded in the balance sheet as either an asset or
liability at its fair value. SFAS 133 must be adopted for the Company's
year 2000 financial statements. The Company anticipates that the
adoption of SFAS 133 will have no effect on the Company's financial
condition or results of operations as the Company does not presently
have any derivative or hedging-type investment as defined by SFAS 133.
Effective for the year ended December 31, 1998, the Company adopted
Financial Accounting Standards Board Statement No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which 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 adoption of SFAS No. 131
did not have an impact on the Company's financial condition or results
of operation (see Note 7 for segment information).
During 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME. It requires disclosure of non-owner changes in stockholder's
equity and is defined as net income plus direct adjustments to
stockholder's equity. The Company did not have any items of
comprehensive income. The adoption of SFAS No. 130 did not have an
effect on the Company's financial condition or results of operations.
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.
Page 16 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
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.
NOTE 4 - SHAREHOLDERS' LOANS RECEIVABLE
These loans pertain to money advanced to majority shareholders of the
Company for services to be performed in the near term related to
raising additional capital for the Company. These services were
performed in 1999 and such amounts were expensed in 1999.
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 year ended December 31, 1999 and the eleven-month period ended
December 31, 1998 were $54,676 and $27,507, respectively.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (SFAS 107) requires the
Company to disclose the fair value of financial instruments for which
it is practicable to estimate that value. SFAS 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 the
outstanding commitment price from investors. The carrying amount
approximates their fair value.
Page 17 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
SHAREHOLDERS' LOANS RECEIVABLE
Carrying amounts of shareholders' loans receivable approximate their
fair value.
COMMITMENT TO EXTEND CREDIT
The fair value of mortgage commitments (see Note 12) to extend credit
is estimated by comparing the Company's cost to acquire mortgages to
the current price for similar mortgage loans, taking into account the
terms of the commitments and creditworthiness of the counter parties.
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.
CAPITAL LEASES
The carrying amounts of capital leases approximate their fair value.
The estimated fair values of the Company's financial instruments at
December 31, 1999 and 1998, were as follows:
DECEMBER 31, 1999
CARRYING FAIR
AMOUNT VALUE
---------- ----------
Cash and cash equivalents $ 727,130 $ 727,130
Interest bearing deposit with bank $ 125,000 $ 125,000
Mortgage loans held for sale $ 830,620 $ 830,620
Notes payable $1,942,208 $1,942,208
Capital leases $ 30,408 $ 30,408
Commitment to extend credit $ -- $ 2,444
DECEMBER 31, 1998
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
Page 18 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 7 - BUSINESS SEGMENT INFORMATION
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 consist of residential and commercial real estate brokerage
and relocation services. Embassy's product services have been in the
capacity of a mortgage lender and mortgage broker 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>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------------
ESSLINGER, EMBASSY COLUMBIA
WOOTEN, FINANCIAL TITLE OF FIRST
MAXWELL, INC. SERVICES, INC. FLORIDA INC. RESERVE, INC. TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $24,263,977 $ 1,128,555 $ 500,693 $ 15,079 $25,908,304
Net income (loss) $ 840,535 $ (16,368) $ 128,459 $ (397,147) $ 555,479
Identifiable assets
at year end $ 3,479,439 $ 1,115,331 $ 147,850 $ 247,728 $ 4,990,348
ELEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
------------------------------------------------------------
ESSLINGER, EMBASSY
WOOTEN, FINANCIAL FIRST
MAXWELL, INC. SERVICES, INC. RESERVE, INC. TOTAL
----------- ----------- ----------- -----------
Revenue $15,893,097 $ 1,060,938 $ 61,008 $17,015,043
Net income (loss) $ 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>
Page 19 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 8 - NOTES PAYABLE
At December 31, 1999 and 1998, notes payable consist of the following:
DECEMBER 31, 1999
------------------------------------
UNAMORTIZED
PRINCIPAL DISCOUNT TOTAL
---------- ---------- ----------
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 share-
holder of the Company (unamortized
discount is based on imputed
interest rate of 10.175%). $ 616,880 $ 95,620 $ 712,500
Loanwith a financing company, interest
at 10.5% per year, payable in
monthly principal and interest
installments of $354.03, matures
January 2001, secured by a vehicle. 4,646 -- 4,646
Notepayable with an unrelated third
party lender, interest at 9.5% per
year, payable in interest only
monthly installments of $3,750,
principal due on January 31, 2001,
unsecured, personally guaranteed by
a share- holder of the Company. 500,000 -- 500,000
$1,800,000 line of credit with bank,
interest at prime less 3.75% (4.75%
at December 31, 1999), payable in
monthly installments of interest
only on the unpaid principal
balance, payable on demand with 30
days written notice, collateralized
by mortgage loans held for sale. 820,682 -- 820,682
---------- ---------- ----------
1,942,208 95,620 2,037,828
Less current portion 1,011,382 51,446 1,062,828
---------- ---------- ----------
$ 930,826 $ 44,174 $ 975,000
========== ========== ==========
Page 20 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 8 - NOTES PAYABLE (CONTINUED)
DECEMBER 31, 1998
------------------------------------
UNAMORTIZED
PRINCIPAL DISCOUNT TOTAL
---------- ---------- ----------
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
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
========== ========== ==========
Principal payments and amortized discount on the notes payable for the
next five years and in the aggregate are as follows:
UNAMORTIZED
PRINCIPAL DISCOUNT TOTAL
---------- ---------- ----------
2000 $1,011,382 $ 51,446 $1,062,828
2001 704,984 32,516 737,500
2002 225,842 11,658 237,500
2003 -- -- --
2004 -- -- --
---------- ---------- ----------
$1,942,208 $ 95,620 $2,037,828
========== ========== ==========
NOTE 9 - CAPITAL LEASES
During 1999, the Company entered into a lease of certain equipment
under a capital lease expiring in the year 2003. The assets and
liabilities under the capital lease are recorded at the lower of the
present value of the minimum lease payments or the fair value of the
asset and are included in net property and equipment. The assets are
depreciated over the lesser of their estimated useful lives or the term
of the lease. Depreciation of assets under capital leases is included
in depreciation expense for the year ended December 31, 1999.
Page 21 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 9 - CAPITAL LEASES (CONTINUED)
Minimum future lease payments under the capital lease for the next four
years and in the aggregate are as follows:
2000 $ 9,947
2001 9,947
2002 9,947
2003 9,947
--------
Total minimum lease payments 39,788
Less amount representing interest (9,380)
--------
Present value of net minimum lease
payment 30,408
Less current portion (6,109)
--------
$ 24,299
Interest rate on the capitalized lease is 13.9% and is imputed based on
the lower of the Company's incremental borrowing rate at the inception
of the lease or the lessor's implicit rate of return. Imputed interest
expense for the year ended December 31, 1999, was approximately $4,625.
NOTE 10 - 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,
expiring 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, expiring 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.
On 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.
Page 22 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 10 - EMPLOYMENT AGREEMENTS (CONTINUED)
Minimum future commitment under these employment agreements are as
follows:
2000 $ 770,000
2001 742,000
2002 768,700
2003 118,798
-----------
$ 2,399,498
The total commitment, excluding incentives and bonuses for the year
ended December 31, 1999 and the eleven-month period ended December 31,
1998 was $825,272 and $686,992, respectively.
NOTE 11 - OPERATING LEASES
The Company had entered into several real estate, automobile, and
equipment leases accounted for as operating leases. These leases expire
in various years through 2009. As a result of the mergers with Byrne,
Gerard and Columbia, the Company assumed operating lease agreements
expiring at various dates.
Certain of the real estate leases are subject to annual escalation
based on a Price Index, annual increases in operating expenses, or a
fixed percentage increase.
Minimum future lease payments under all operating leases for the next
five years and in the aggregate are as follows:
YEARS ENDING
DECEMBER 31,
------------
2000 $1,018,178
2001 609,025
2002 576,404
2003 563,593
2004 361,606
Beyond 683,713
----------
$3,812,519
==========
Rent expense under these leases for the year ended December 31, 1999
and the eleven-month period ended December 31, 1998 was $1,123,469 and
$614,218, respectively.
Page 23 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 12 - CONCENTRATION OF CREDIT RISK
The Company has experienced credit risk in connection with its bank
accounts. At various times during the year, it maintained deposits with
financial institutions in excess of amounts insured by the FDIC. The
exposure to the Company is solely dependent on daily bank balances and
the financial strength of the respective institutions.
The Company sells its services to homeowners and buyers. The Company is
affected by the cyclical nature of the residential real estate industry
and the availability of financing for the home buyer.
The Company conducts most of its business in the South Florida area and
is affected by the cyclical nature of the residential real estate
industry in this region.
Embassy is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit to customers and forward commitments to sell mortgage loans to
investors. The instruments involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
financial statements.
Embassy uses the same credit policies in making commitments and
conditional obligations as it does for making loans. In the opinion of
management, Embassy's outstanding commitments do not reflect any
unusual risk.
Total commitments outstanding at December 31, 1999 and 1998 are as
follows:
1999 1998
-------- --------
Financial instruments whose contract amounts
represent credit risk;
Commitments to extend credit $400,000 $ --
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Loan applications must be approved by the Company's
underwriting department, before a commitment is issued, for compliance
with underwriting criteria of the Federal National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), or other
investors.
Page 24 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 12 - CONCENTRATION OF CREDIT RISK (CONTINUED)
Embassy customarily sells, without recourse, all its mortgage loans to
investors.
Embassy does not engage in any direct efforts to manage the interest
rate risk associated with the time a loan is originated to the time it
is sold to the third party lender. However, since loans are sold within
5 to 12 days of funding, management believes any interest rate
fluctuations during this period would not be material to the financial
statements.
At December 31, 1999, Embassy had obtained a permanent loan "take-out
commitment" from one national lender of residential financing in the
amount of $830,620. These commitments comprised 100% of Embassy's
mortgage loans held for sale. Embassy sells all the mortgages it
originates to this national lender. Management believes that the risk
associated with these loans is reduced because each loan is backed by a
permanent loan "take-out" commitment from this lender prior to
originating the loan.
Columbia underwrites title insurance primarily with one national title
company. Management believes that should the title company not be able
to underwrite policies, it can select other title companies it has
relationships with.
NOTE 13 - 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 year
ended December 31, 1999 and the eleven-month period ended December 31,
1998, is based upon current statutory rates and is summarized as
follows:
DECEMBER 31, 1999
---------------------------
CURRENT DEFERRED TOTAL
------- ------- -------
Florida $ -- $ -- $ --
Federal -- -- --
------- ------- -------
$ $ $
======= ======= =======
DECEMBER 31, 1998
---------------------------
CURRENT DEFERRED TOTAL
------- ------- -------
Florida $ -- $ -- $ --
Federal -- -- --
------- ------- -------
$ $ $
======= ======= =======
Page 25 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 13 - 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, 1999 and 1998:
1999 1998
--------- ---------
Deferred tax assets:
Net operating loss $ 347,402 $ 463,301
Valuation allowance (330,467) (458,926)
--------- ---------
Deferred tax assets after
valuation allowance 16,935 4,375
--------- ---------
Deferred tax liabilities:
Property and equipment (9,541) (2,332)
Goodwill (7,394) (2,043)
--------- ---------
Gross deferred tax liabilities (16,935) (4,375)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
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:
1999 1998
--------- ---------
Federal and state statutory rate applied
to pre-tax income at 31.5% $ 174,976 $ 34,513
Non-deductible expenses (46,517) (27,643)
Change in valuation allowance (128,459) (6,870)
--------- ---------
$ -- $ --
========= =========
At December 31, 1999, the Company's net operating loss carryforwards
for income tax purposes amounted to approximately $1,778,000 and are
available to offset future taxable income through the year 2013.
Page 26 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 14 - 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 year ended December 31, 1999 and the eleven-month period ended
December 31, 1998, employer contributions to the plan were
approximately $8,579 and $7,217, respectively.
The Company is deemed to be a controlled group under the Employee
Retirement Income Security Act of 1974 (ERISA) regulations. As such,
all employees of all the subsidiaries of the Company, not just EWM,
must be covered under the Plan. The Company will make the necessary
amendments to the Plan to include all employees. Management believes
that additional contributions, if any, that the Company would have to
make on behalf of all non-covered employees will not be material to the
financial statements.
NOTE 15 - 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.
Page 27 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 15 - LEGAL AND OTHER SETTLEMENTS (CONTINUED)
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%. For the year ended December 31,
1999 and the eleven-month period ended December 31, 1998, total
interest expense related to this note amounted to $68,629 and $35,752,
respectively.
Also, included in legal and other settlements are costs incurred by EWM
in settling various disputes arising with customers or tenants in the
ordinary course of business. These costs amounted to $9,300 for the
year ended December 31, 1999 and $48,812 for the eleven-month period
ended December 31, 1998.
NOTE 16 - 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.
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.
Page 28 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 16 - STOCKHOLDERS' EQUITY (CONTINUED)
CONTINGENT SHARES
Under the terms of the September 30, 1998 merger agreement between EWM
and 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 were held in escrow. At
September 30, 1999, the former shareholders of Gerard had met the gross
commission income requirements stated in the agreement and 200,000 of
contingent shares were issued as common stock. These shares are
included in the earnings per share calculation. As a result, common
stock and goodwill amounting to $200,000 were recorded.
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 and expire on August 31, 2003.
In accordance with the warrant agreement, the exercise price of these
warrants are to be adjusted each time the Company sells shares of
common stock for a consideration per share less than the warrant
exercise price per share, or issue any shares of common stock as a
stock dividend, or subdivide or combine the outstanding shares of
common stock into a greater or lesser number of shares. In no event
shall the exercise price be adjusted in excess of the exercise price in
effect immediately prior to such repricing. As a result of this
provision in the warrant agreement, during 1998, the warrants' exercise
price has been adjusted. The first warrant has an adjusted exercise
price of $2.57 per share, and the second warrant has an adjusted
exercise price of $2.96 per share.
Page 29 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 16 - STOCKHOLDERS' EQUITY (CONTINUED)
The following is a summary of the activity of the Company's warrants
for the year ended December 31, 1999 and the eleven-month period ended
December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN-MONTH PERIOD ENDED
DECEMBER 31 1999 DECEMBER, 31 1998
---------------------------- -----------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE OF NUMBER OF AVERAGE OF
WARRANTS EXERCISE PRICE WARRANTS EXERCISE PRICE
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Outstanding beginning of
the year 1,000,000 $ 2.77 1,000,000 $ 3.25
Granted -- $ -- 1,000,000 $ 2.95
Canceled -- $ -- (1,000,000) $ 3.25
Exercised -- $ -- -- $ --
---------- ------------- ---------- -------------
Outstanding at end of year 1,000,000 $ 2.77 1,000,000 $ 2.95
========== ============= ========== =============
Exercisable at end of year 1,000,000 1,000,000
Weighted average fair value of warrants issued
during the year ended December 31, 1999 and
the eleven- month period ending December 31,
1998 $ .38 $ 0.46
</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, 1999
-------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER
PRICE OUTSTANDING LIFE PRICE EXERCISABLE
--------- --------- --------- --------- -------
$ 2.57 500,000 3.7 years $ 2.57 500,000
$ 2.96 500,000 3.7 years $ 2.96 500,000
---------
1,000,000 $ 2.77
=========
DECEMBER 31, 1998
-------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER
PRICE OUTSTANDING LIFE PRICE EXERCISABLE
--------- --------- --------- --------- -------
$ 2.57 500,000 4.7 years $ 2.73 500,000
$ 2.96 500,000 4.7 years $ 3.16 500,000
---------
1,000,000 $ 2.95
=========
Page 30 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 17 - 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 year
ended December 31, 1999 and the eleven-month period ended December 31,
1998:
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
---------- ----------
Basic earnings per common share:
Numerator
Net income (loss) before extra-
ordinary items applicable to
common stockholders $ 555,479 $ 109,565
Extraordinary items, net -- --
---------- ----------
Income (loss) applicable to
common stockholders 555,479 109,565
========== ==========
Denominator
Weighted average common
shares 6,618,009 5,718,504
---------- ----------
Basic EPS $ 0.08 $ 0.02
========== ==========
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
---------- ----------
Diluted earnings per common share:
Numerator
Net income (loss) before
extraordinary items
applicable to common
stockholders $ 555,479 $ 109,565
Extraordinary items, net -- --
---------- ----------
Income (loss) applicable to
common stockholders $ 555,479 $ 109,565
========== ==========
Denominator
Weighted average common
shares 6,618,009 5,718,504
Weighted average contingent
common shares 109,007 11,581
---------- ----------
Total 6,727,016 5,730,085
---------- ----------
Diluted EPS $ 0.08 $ 0.02
========== ==========
Page 31 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 17 - EARNINGS PER SHARE (CONTINUED)
Warrants to purchase 500,000 shares of common stock at $2.57 per share
and 500,000 shares of common stock at $2.96 per share were outstanding
for the year ended December 31, 1999 and for the eleven-month period
ended December 31, 1998, but were not included in the computation of
diluted EPS because the warrants' exercise price was greater than the
average market price of the common shares. The warrants, which expire
on August 31, 2003, were still outstanding at the end of the year.
The following pro forma tax and earnings per share data assumes that
Embassy was a tax paying entity for the entire 1998 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 eleven-month period ended December 31, 1998.
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 18 - RELATED PARTY TRANSACTIONS
Related parties consist of entities associated by common ownership or
controlled by officers or directors of the Company.
Columbia rents an office building from an employee. The lease is for a
period of five years expiring on March 31, 2004 with an option to renew
for two five-year terms. The lease calls for an annual rent of $72,000
plus all applicable sales tax, with an annual rental increase based on
the Consumer Price Index, with a ceiling of 5%.
EWM 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 $6,070.
EWM 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.
Page 32 of 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTE 18 - RELATED PARTY TRANSACTIONS (CONTINUED)
EWM charges $5,000 per month for administrative fees to a corporation
owned by a shareholder of the Company.
EWM receives referral fees income from a corporation owned by two
shareholders of the Company. These fees are net of commissions and
other expenses incurred from listings referred to EWM by this
corporation.
The Company had the following balances and transactions with related
parties for the year ended December 31, 1999 and the eleven-month
period ended December 31, 1998:
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
Prepaid and other current assets $ 5,000 $ --
Shareholder loans $ -- $ 80,000
Revenues $ 17,762 $ --
Other income $ 55,000 $ --
Rent expense $217,902 $ 44,267
NOTE 19 - UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF INCOME
The assets and liabilities of Byrne, Gerard and Columbia (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, September 30, 1998 for Gerard and March 31, 1999
for Columbia. The following pro forma consolidated statement of income
gives effect to the acquisitions of all of the outstanding shares of
Byrne, Gerard, and Columbia as if they had occurred as of February 1,
1998, and Columbia as if it had occurred on January 1, 1999, after
giving effect to certain adjustments, including increased amortization
of goodwill generated from the acquisition. The pro forma adjustments
are based upon available information and certain assumptions that the
Company believes are reasonable.
NOTE 19 - UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
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:
Page 33 of 34
<PAGE>
ELEVEN-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
----------- -----------
Total revenue $26,051,361 $20,839,104
=========== ===========
Net income $ 541,960 $ 223,922
=========== ===========
Earnings per share
Basic $ .08 $ 0.04
=========== ===========
Weighted average shares 6,618,009 5,718,504
=========== ===========
Diluted $ .08 $ 0.04
=========== ===========
Weighted average shares 6,727,016 5,730,085
=========== ===========
NOTE 20 - SELECTED QUARTERLY DATA FOR 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
-------------- ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
CALENDAR YEAR 1999
Revenues $ 5,022,329 $ 6,832,790 $ 6,742,950 $ 7,310,235 $ 25,908,304
Operating income
(loss) $ 80,888 $ 174,637 $ 224,376 $ (134,444) $ 345,457
Net income (loss) $ (93,366) $ 529,423 $ 204,670 $ (85,248) $ 555,479
Earnings per share
Basic $ (.01) $ .08 $ .03 $ (.02) $ .08
============== ============ =========== ============ ==============
Weighted average
shares 6,567,050 6,567,050 6,567,783 6,617,593 6,618,009
============== ============ =========== ============ ==============
Diluted $ (.01) $ .08 $ .03 $ (.02) $ .08
============== ============ =========== ============ ==============
Weighted average
shares 6,651,629 6,720,625 6,712,792 6,725,502 6,727,016
============== ============ =========== ============ ==============
</TABLE>
NOTE 21 - REGULATORY MATTERS
HUD REQUIREMENTS
Embassy is a nonsupervised loan correspondent for purposes of the U.S.
Department of Housing and Urban Development ("HUD"). As such, 24 -CFR
Part 202 of the HUD handbook requires Embassy to have an Adjusted Net
Worth of at least $50,000. Embassy is in compliance with this
requirement.
STATE OF FLORIDA REQUIREMENTS
On July 1, 1999, Embassy became a licensed mortgage lender under
Chapter 494 of the State of Florida. As such, Embassy is required to
have a minimum net worth of $250,000. Embassy is in compliance with
this requirement.
Page 34 of 34
<PAGE>
EXHIBIT INDEX
EXHIBITS DESCRIPTION
-------- -----------
23.2 Consent of Independent Accountants
27 Financial Data Schedule.
EXHIBIT 23.2
[MCCLAIN & COMPANY, L.C. LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation of our audit of the consolidated financial
statements of First Reserve, Inc. and Subsidiaries as of December 31, 1999
which report is included in this Annual Report on Form 10-KSB.
/s/ McClain & Company, L.C.
- ---------------------------
McClain & Company, L.C.
Miami, Florida
April 13, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 727,130
<SECURITIES> 125,000
<RECEIVABLES> 1,186,951
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,217,378
<PP&E> 2,160,482
<DEPRECIATION> 823,743
<TOTAL-ASSETS> 4,990,348
<CURRENT-LIABILITIES> 1,342,043
<BONDS> 0
0
0
<COMMON> 5,939,507
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,990,348
<SALES> 25,908,304
<TOTAL-REVENUES> 26,253,948
<CGS> 25,562,847
<TOTAL-COSTS> 25,562,847
<OTHER-EXPENSES> 1,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131,022
<INCOME-PRETAX> 555,479
<INCOME-TAX> 0
<INCOME-CONTINUING> 555,479
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 555,479
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
