U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
XX ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-1008
M CORP
(Name of small business issuer in its charter)
Montana
(State or other jurisdiction of
incorporation or organization)
81-0268769
(I.R.S. Employer Identification Number)
110 Second Street South, Great Falls, Montana 59405
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (406) 727-2600
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class
NONE
Name of Each Exchange On Which Registered
N/A
Securities registered under Section 12(g) of the Exchange Act:
Common Stock $1.00 Par Value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 XX No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year $9,085,465.
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as
of a specified date within the past 60 days. (See definition of affiliate in
Rule 12b-2 of the Exchange Act). As of February 28, 1998, 108,268 shares held
by nonaffiliates were outstanding. The registrant's stock is not traded on any
securities exchange. To registrant's knowledge, neither bid nor asked
quotations for registrant's stock have appeared in any established quotation
system during the past sixty business days. To registrant's knowledge,
neither bid nor asked quotations for registrant's stock are reported in any
newspapers nor are records kept of any quotations by the National Quotation
Bureau, Inc. There exists no public market for registrant's stock.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
1,078,358 shares $1.00 value common stock are outstanding as of February
28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the form 10-KSB (e.g., Part I, Part II, etc.)
into which the documents are incorporated: (1) any annual report to security
holders: (2) any proxy or information statement; and (3) any prospectus
filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933
("Securities Act"). The listed documents should be clearly described for
identification.
DOCUMENTS FORM 10-KSB REFERENCE
Annual Report to Shareholders for Part I, Items 1 and 2
the year ended December 31, 1997. Part II, Items 5, 6 and 7
Part III, Item 12
Part IV, Item 13
Transitional Small Business Disclosure Format (check one): Yes ; No X .
<PAGE>
M CORP
PART I
ITEM 1. DESCRIPTION OF BUSINESS
A description of the Company's business is set forth on Page 1 and in Notes
12 and 14 (Pages 16 and 18, respectively) of the Notes to Consolidated
Financial Statements in Exhibit 13, the Annual Report to Shareholders for the
year ended December 31, 1997 which description is incorporated herein by
reference.
The Company has no foreign operations.
ITEM 2. DESCRIPTION OF PROPERTY
A description of the Company's properties is set forth on Page 1 and in Note
13 (Page 17) of the Notes to Consolidated Financial Statements in Exhibit 13,
the Annual Report to Shareholders for the year ended December 31, 1997, which
description is incorporated herein by reference.
In addition to the properties owned by the Company, office space is leased
for the Company's title insurance agency operations in Billings and Forsyth,
Montana. The lease for office space in Billings expires in 2002, but may be
terminated upon six (6) months notice. The lease for the office space in
Forsyth expires in 2000. See Note 9 - Commitments, of the Notes to
Consolidated Financial Statements on Page 15 of Exhibit 13, the Annual Report
to Shareholders for the year ended December 31, 1997 which note is
incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
No legal proceedings presently pending by or against M Corp and its
consolidated subsidiaries are described herein as management believes that
the outcome of such litigation should not have a material adverse effect on
the financial position of the Company and its subsidiaries taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997 a meeting of security holders was held at
which the Company's entire Board of Directors was elected. The Company's
security holders also authorized the Board of Directors to grant to each
shareholder of record of the Company, and only each shareholder of record of
the Company, the nontransferable right to purchase one additional share of
the Company's common stock for each two shares of the Company's common
stock held by the shareholder of record at the purchase price of two dollars
per share cash, The Company's shareholders also authorized the Board of
Directors to select an independent certified public accounting firm to audit
the Company's financial statements for 1997.
I-1
1.
<PAGE>
M CORP
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS;
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION; AND
ITEM 7. FINANCIAL STATEMENTS
Items 5, 6 and 7 are set forth on Page 19, Pages 1 and 2 and Pages 3 to 18,
respectively, of Exhibit 13, the Annual Report to Shareholders for the year
ended December 31, 1997, which report is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements concerning accounting principles or
practices or financial statement disclosures between the Company and the
Company's independent auditor during the two most recent years.
II-1
2.
<PAGE>
M CORP
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT.
The following are the directors and executive officers of the Company. All
directors and officers serve as such until the 1998 annual meeting of
shareholders or until their successors are elected and qualify.
NAME, AGE, AND YEAR ELECTED DIRECTOR POSITION
R. Bruce Robson, 56, 1994 Director
G. Robert Crotty, Jr., 70, 1995 Director
S. M. McCann, 34, 1994 Director,
President
R. Bruce Robson is a director and secretary-treasurer of Medical Information
Processing Systems, Inc. and a director of TSI, Inc., a subsidiary of the
Company.
G. Robert Crotty, Jr., an attorney at law, is a director of TSI, Inc.
S. M. McCann, an attorney at law, is a director of UAC, Inc. and Diversified
Realty, Inc., subsidiaries of the Company.
Family Relationships
S. M. McCann is a daughter of Anne Marie and Paul J. McCann (see item 11(a)
beginning on the following page). There are no other family relationships
among the directors and officers listed above and there are no arrangements
or understandings pursuant to which any of them were elected as directors or
officers.
Business Experience of Executive Officers
R. Bruce Robson has been a Director of the Company since February, 1994. Mr.
Robson is the Data Processing Manager, Sletten Construction Co., Great Falls,
Montana.
G. Robert Crotty, Jr. is an attorney at law and a partner in the law firm of
Graybill, Ostrem & Crotty in Great Falls, Montana.
S. M. McCann is an attorney at law and an investor in San Luis Obispo,
California.
Based solely on its review of reports of persons subject to Section 16 of the
Securities and Exchange Act, the Company believes that required reports were
filed in a timely manner disclosing transactions involving the Company's
common stock.
III-1
3.
<PAGE>
M CORP
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table lists the cash compensation
paid by the Company and the Company's consolidated subsidaries to the
Company's President for 1997, 1996 and 1995. No officer or director of the
Company or the Company's consolidated subsidaries received total cash
compensation in excess of $100,000 for 1997, 1996 or 1995.
Summary Compensation Table
Name and Calender Total Cash
Principal Position Year Compensation
S. M. McCann 1997 $ 0
President, Director 1996 $ 0
1995 $ 0
The Company does not have any compensatory stock appreciation rights plans
or compensatory stock option plans. During 1996, the Company's Board of
Directors granted S. M. McCann the option to purchase 36,000 shares of the
Company's unissued common stock at the exercise price of five dollars per
share. During 1996, the Company's Board of Directors granted Paul J. McCann
the option to purchase 175,000 shares of the Company's unissued common
stock at the exercise price of five dollars per share. The options were
exercised during 1997. The Company has not adopted a formal plan for the
compensation of directors. During 1997 the Company and its consolidated
subsidiaries paid a total of $950 to directors of the Company and the
Company's consolidated subsidiaries.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Set forth below is certain information concerning persons who are known by
the Company to own beneficially more than 5% of the Company's voting shares
on February 28, 1998.
Amount and
Nature
Title of Name and Address of of Beneficial Percent
Class Beneficial Owner Ownership of Class
$1.00 Par GNI, Inc. 700,341 64.9%
Value Common 110 Second Street South
Stock Great Falls, MT 59403
$1.00 Par FDC, Inc. 57,217 5.3%
Value Common 110 Second Street South
Stock Great Falls, MT 59403
$1.00 Par Jefferson Management Co. 211,000 19.6%
Value Common 110 Second Street South
Stock Great Falls, MT 59403
$1.00 Par Anne Marie and Paul J. 970,078 (1) 90.0%
Value Common McCann Family Members
P.O. Box 2249
Great Falls, MT 59403
(1) See Note (1) on the following page.
III-2
4.
<PAGE>
M CORP
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -
Continued
(a) Security Ownership of Certain Beneficial Owners - Continued
(1) Includes the 700,341 shares owned by GNI, Inc., of which company members
of the Anne Marie and Paul J. McCann family own, directly or indirectly, over
50% of the outstanding stock, 57,217 shares owned by FDC, Inc., of which
company members of the Anne Marie and Paul J. McCann family own directly or
indirectly over 50% of the outstanding stock, 211,000 shares owned by Jefferson
Management Co., of which company members of the Anne Marie and Paul J. McCann
family own directly or indirectly over 50% of the outstanding stock and
1,520 shares owned outright by members of the Anne Marie and Paul J. McCann
family. S.M. McCann is the record owner of 400 shares of stock of the Company.
Paul J. McCann disclaims beneficial ownership in any shares of stock not
directly owned of record by him. Anne Marie McCann disclaims beneficial
ownership in any shares of stock not directly owned of record by her. Neither
Anne Marie McCann nor Paul J. McCann own of record any shares of stock of the
Company.
(b) Security Ownership of Management
The following table sets forth as of February 28, 1998, information
concerning the beneficial ownership of the Company's common stock by each
director, each executive officer named in the Company's Summary Compensation
Table and by all directors and executive officers of the Company as a group:
Amount and Nature
Name of Beneficial Owner of Beneficial Ownership Percent
R. Bruce Robson 10 --
G. Robert Crotty, Jr. -- --
S.M. McCann 400 (1) --
All Directors and Officers
as a Group 410 (1) --
(1) See Note (1) item 11(a) beginning at the top of this page.
(c) Changes In Control
The Company knows of no contractual arrangements which may at a
subsequent date result in a change in control of the Company.
III-3
5.
<PAGE>
M CORP
ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions between the Company (and its consolidated subsidiaries) and
related persons are disclosed in Note 11 (Page 16) of the Notes to
Consolidated Financial Statements in Exhibit 13, the Annual Report to
Shareholders for the year ended December 31, 1997 which description is
incorporated herein by reference. The total compensation paid to members of
Anne Marie and Paul J. McCann's family was $94,395 for the year 1997 and
$105,225 for the year 1996.
III-4
6.
M CORP
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. 13 - M Corp Annual Report to Shareholders for the year ended
December 31, 1997.
No. 22 - Subsidiaries of the Registrant.
No. 27 - Financial Data Schedule
(b) Reports on Form 8-K
No current reports on Form 8-K were filed by the Company during
the three months ended December 31, 1997.
IV-1
7.
<PAGE>
M CORP
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
M CORP
Date: February 27, 1998 By: s/S. M. McCann
S. M. McCann, President
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the
Registrant and in the capacities indicated on February 27,
1998.
Chairman of the Board,
President,
Principal Executive
and Financial Officer s/S. M. McCann
S. M. McCann
Director s/R. Bruce Robson
R. Bruce Robson
Principal Accountant s/Jerry K. Mohland
Jerry K. Mohland
IV-2
8.
<PAGE>
M CORP
ANNUAL REPORT
1997
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
ANNUAL REPORT
DESCRIPTION AND LINES OF BUSINESS
M Corp (sometimes referred to herein as the "Company") was incorporated in
1958 and operates as a financial holding company. The Company, through its
wholly or majority-owned subsidiaries is engaged in the title insurance
business and the ownership and rental of real properties.
Title Insurance - First Montana Title Insurance Company (FMTIC, a wholly-
owned subsidiary of TSI, Inc., a ninety-two percent owned subsidiary of the
Company) was organized in 1958. FMTIC issues title insurance policies through
its subsidiaries within the State of Montana only.
Real Estate Investments - The Company, through its wholly or majority-owned
subsidiaries owns rental properties. The Company's rental properties include
one commercial building, two apartment complexes with a total of thirty-two
units and several one to four unit residential properties. The Company's
investments in real estate are set forth in Note 14 (Investments In Real
Estate) of the Notes to Consolidated Financial Statements.
The Company operates in a competitive business environment and the Company is
not dependent upon one or a few major customers. Information concerning the
Company's industry segments is set forth in Note 15 (Information on Segments
of Business) of the Notes to Consolidated Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Title insurance premiums and related fees increased $74,691 (4.6%) in 1997
as compared with 1996 due primarily to an increase in the real estate
economies within which the Company operates. The Company believes that the
increase in the real estate economies within which the Company operates was
due in part to decreased mortgage interest rates.
Interest revenues increased $224,846 (50.1%) in 1997 as compared with 1996 due
primarily to an increase in interest-bearing deposits.
Rent revenues increased $16,085 (2.8%) in 1997 as compared with 1996.
The increase in rent revenues in 1997 as compared with 1996 was due
primarily to a decrease in vacancies.
1
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
During 1997 the Company recognized a gain on the merger of Security Bancorp
with and into WesterFed Financial Corporation in the amount of $5,351,471, a
non-recurring event, which was the primary reason other income increased
$5,495,072 (863.7%) in 1997 as compared with 1996. Pursuant to the terms of
the merger the Company received cash in the amount of the gain recognized
and approximately 275,000 shares of WesterFed Financial Corporation common
stock. The gain recognized on the merger transaction was the primary reason
for the increase in other income in 1997 as compared with 1996 and is also
the primary reason for the increase in net income in 1997 as compared with
1996.
Salaries and other personnel costs increased $8,240 (.9%) in 1997 as compared
with 1996 due primarily to an increase in salary rates and an increase in the
number of personnel employed in the Company's title insurance operations.
The provision for depreciation increased $6,078 (5.2%) in 1997 as compared
with 1996 due primarily to the acquisition of additional furniture and
equipment during 1997. Other general and administrative expenses increased
$345,367 (39.4%) in 1997 as compared with 1996. During 1997 the Company made
contributions of appreciated assets to a private foundation in the total fair
value amount of approximately $525,000. The contributions resulted in an
income tax benefit to the Company in the amount of approximately $203,000.
Income tax expense increased $1,940,450 (532.2%) in 1997 as compared with
1996 due primarily to the increase in pre-tax income.
The Company is considering acquisitions which would deplete the Company's
available cash and thus affect the liquidity of the Company.
2
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
FINANCIAL REPORT
DECEMBER 31, 1997
CONTENTS
PAGE
AUDITOR'S REPORT 4
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1997 and 1996 5-6
Statements of Income
for the Years Ended
December 31, 1997 and 1996 7
Statements of Stockholders' Equity
for the Years Ended
December 31, 1997 and 1996 8
Statements of Cash Flows for the Years
Ended December 31, 1997 and 1996 9-10
Notes to Consolidated Financial Statements 11-20
OTHER INFORMATION 21
3
<PAGE>
Report of Independent Auditors
To The Board of Directors
M Corp
Great Falls, MT 59405
We have audited the accompanying consolidated balance sheets of M Corp
and consolidated subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements income and retained earnings and cash flows
for the years then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of M Corp and consolidated subsidiaries as of December 31, 1996 and 1995 and
the consolidated results of their operations and their consolidated cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
DWYER & KEITH, CPA's, P.C.
March 20, 1998
Great Falls, Montana
4
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
DECEMBER 31, 1997 and 1996
ASSETS 1997 1996
Current Assets
Cash (Note 2) $15,186,576 $ 9,617,085
Investment Securities (Note 3) 2,032,576 2,690,620
Trade Accounts Receivable, Less
Allowance for Doubtful Accounts of
$8,000 in 1997 and $12,500 in 1996 3,521 27,892
Current Portion of Long-Term
Receivable (Note 7) 2,026 1,854
Prepaid Expenses 26,900 -
Income Tax Prepayments 9,309 26,359
Total Current Assets 17,260,908 12,363,810
Other Assets
Noncurrent Investments (Note 3) 105,000 105,000
Other Investments (Note 3) 8,417,116 10,337,419
Note Receivable, Excluding
Current Portion (Note 7) 9,440 11,464
Total Other Assets 8,531,556 10,453,883
Investments In Property, Plant and
Equipment, at Cost (Notes 1 and 14)
Buildings 2,145,001 2,266,306
Furniture, Fixtures and Equipment 475,194 443,410
2,620,195 2,709,716
Less Accumulated Depreciation (1,877,462) (1,754,261)
742,733 955,455
Title Plants 201,113 216,715
Land 84,527 94,714
Net Property, Plant and Equipment 1,028,373 1,266,884
$26,820,837 $24,084,577
See Notes to Consolidated Financial Statements.
5
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
DECEMBER 31, 1997 and 1996
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 115,633 $ 112,062
Accrued Liabilities (Note 4) 131,470 123,773
Dividends Payable 289,414 30,599
Deferred Income Taxes (Notes 1 and 6) 280,200 405,000
Total Current Liabilities 816,717 671,434
Provision for Estimated Title and
Escrow Losses (Note 8) 1,005,612 1,069,768
Minority Interests in Consolidated
Subsidiaries 2,292,081 2,229,026
Deferred Income Taxes (Notes 1 and 6) 1,847,400 2,760,400
Excess of Fair Value of Net Assets Acquired
Over Cost (Note 1) 56,855 65,075
5,201,948 6,124,269
Commitments (Note 9)
Stockholders' Equity (Notes 1 and 13)
Common Stock, $1.00 Par Value,
5,000,000 shares authorized,
3,252,004 shares issued in 1997 and
3,051,004 shares issued in 1996, at Par 3,262,004 3,051,004
Capital Surplus 15,778,562 9,934,562
Retained Earnings (Note 10) 1,185,494 2,382,380
Add: Unrealized Gains on Investments (Note 3) 2,942,456 4,287,272
Less: Cost of Common Shares in Treasury
2,183,646 Shares in 1997 and 1996 (2,366,344) (2,366,344)
Total Stockholders' Equity 20,802,172 17,288,874
$26,820,837 $24,084,577
See Notes to Consolidated Financial Statements.
6
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
1997 1996
Revenue
Title Insurance Premiums and Related Fees $ 1,697,859 $ 1,623,168
Interest 673,841 448,995
Rent 582,492 566,407
Other (Note 5) 6,131,273 636,201
9,085,465 3,274,771
Operating Expenses
Salaries and Other Personnel Costs 938,314 930,074
Depreciation 123,202 117,124
Rent 35,284 37,210
Title and Escrow Losses 15,049 13,966
Interest - 1,823
Other General and Administrative Expenses 1,221,713 876,346
2,333,562 1,976,543
Operating Income 6,751,903 1,298,228
Minority Share of Consolidated Subsidiaries
Net (Income) (373,696) (95,854)
Income Before Income Taxes 6,378,207 1,202,374
Income Taxes (Note 6) (2,305,000) (364,550)
Net Income $4,073,207 $ 837,824
See Notes to Consolidated Financial Statements.
7
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
<TABLE>
Net
Unrealized
Common Capital Retained Gains On Treasury
Stock Surplus Earnings Investments Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 $3,051,004 $ 9,934,562 $1,555,833 $2,610,860 $(2,366,344) $14,785,915
Net Income 837,824 837,824
Dividends Paid (11,277) (11,277)
Change in Net Unrealized
Gains On Investments 1,676,412 1,676,412
Balances, December 31,
1996 3,051,004 9,934,562 2,382,380 4,287,272 (2,366,344) 17,288,874
Recapitalization (Note 14) 5,000,000 (5,000,000) -
Net Income 4,073,207 4,073,207
Dividends Paid (270,093) (270,093)
Exercise of Stock Options 211,000 844,000 1,055,000
Change in Net Unrealized
Gains On Investments (1,344,816) (1,344,816)
Balances, December 31,
1997 $3,262,004 $15,778,562 $1,185,494 $2,942,456 $(2,366,344) $20,802,172
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
INCREASE (DECREASE) IN CASH
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash Received From Customers $ 2,352,199 $ 2,193,209
Cash Paid to Suppliers and Employees (1,771,166) (1,706,698)
Interest and Dividends Received in Cash 951,942 813,138
Cash Proceeds From Sales of Noncurrent Assets 6,994 10,522
Interest Paid in Cash - (1,823)
Income Taxes Paid in Cash (2,287,950) (398,842)
Net Cash Provided (Used) By Operating Activities (747,981) 909,506
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Received on Principal of Notes Receivable 1,852 107,825
Cash Purchases of Minority Interests (6,335) (2,425)
Capital Expenditures Paid in Cash (31,785) (18,254)
Cash Received on Dispositions of
Current Investments 68,213 389,242
Cash Received on Dispositions of
Noncurrent Investments 5,351,471 -
Cash Purchases of Current Investments (109,666) (208,204)
Net Cash Provided By Investing Activities 5,273,750 268,184
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Received From Affiliates - 306,878
Dividends Paid in Cash (11,278) -
Issuance Of Common Stock For Cash 1,055,000 -
Net Cash Provided By Financing Activities 1,043,722 306,878
NET INCREASE IN CASH 5,569,491 1,484,568
CASH - BEGINNING OF YEAR 9,617,085 8,132,517
CASH - END OF YEAR $15,186,576 $ 9,617,085
(Continued)
9
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS - Continued
FOR THE YEARS ENDED DECEMBER 31, 1997 and 1996
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
1997 1996
Net Income $ 4,073,207 $ 837,824
Adjustments to Reconcile Net Income
to Net Cash Provided By Operating Activities:
Depreciation 123,202 117,124
Provision for Doubtful Account Receivable (3,825) (4,926)
Minority Share of Consolidated Subsidiaries
Net Income 373,696 95,854
Amortization of Deferred Credit (8,220) (8,220)
Net Book Value of Assets Sold 6,994 10,522
Contribution in Kind 116,875 27,877
Realized (Gains) on Dispositions
of Investments (5,395,369) (152,251)
Unrealized (Gain) on Current Assets - (244)
Changes in Operating Assets and Liabilities
(Increase) Decrease in Accounts Receivable 28,197 (12,077)
(Increase) Decrease in Prepaid Expenses (26,900) 33,700
(Increase) Decrease in Income Tax Prepayments 17,050 43,216
(Decrease) in Payables and Accrued
Liabilities (52,888) (1,385)
(Increase) in Deferred Income Taxes - (17,000)
(Decrease) in Income Taxes Payable - (60,508)
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (747,981) $ 909,506
See Notes to Consolidated Financial Statements.
10
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly and majority owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
(b) Title Insurance Income and Related Fees
The Company follows the practice of recording title insurance premiums as
income upon the issuance of the title insurance policy or the collection of
payment for the title insurance preliminary commitment, whichever occurs
first. All other fees and charges are recognized as income upon the rendering
of services.
(c) Excess of Fair Value of Net Assets of Acquired Subsidiaries Over
Cost
The excess of fair value of the net assets of acquired subsidiaries over cost
is amortized over a twenty year period using the straight-line method.
(d) Depreciation and Amortization
Property, plant and equipment is comprised of furniture and fixtures,
buildings, title plants and land. Furniture and fixtures are carried at cost.
Depreciation is computed over recovery periods of three to ten years using
declining balance methods with a mid-quarter convention.
Buildings and building improvements are carried at cost. Depreciation is
computed over recovery periods of ten to twenty-seven and one-half years
using the straight line method with a mid-month convention.
Title plants and land are carried at cost and are not depreciated.
(e) Income Taxes
The Company follows the practice of recording deferred income taxes resulting
from timing differences between financial reporting and income tax reporting.
The Company does not provide for deferred income taxes resulting from the
undistributed earnings of subsidiary companies included in the consolidated
statements of income because the companies file consolidated federal income
tax returns and therefore any dividends paid to the Company are nontaxable.
Investment tax credits are recorded as a reduction of the provision for
federal income taxes in the year utilized.
11
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
(f) Fiduciary Assets and Liabilities
The assets and liabilities of the escrows administered by the Company are not
included in the consolidated balance sheet.
(h) Policy of Cash Equivalents
For purposes of the statements of cash flows, cash equivalents include time
deposits, certificates of deposit and money market accounts, all with
original maturities of three months or less.
(i) Reclassifications
Certain reclassifications have been made to the prior year amounts to make
them comparable to the 1997 presentation. These changes had no impact on
previously reported results of operations or shareholders' equity.
2. CASH BALANCES
The Company maintains accounts with various financial institutions and stock
brokerage firms. Cash balances are insured up to $100,000 by either the
Securities Investor Protection Corporation ("SIPC") or the Federal Deposit
Insurance Corporation ("FDIC"). At December 31, 1997, cash balances totaling
$12,407,136 were uninsured by either the SIPC or the FDIC.
3. INVESTMENT SECURITIES AND OTHER INVESTMENTS
The Company adopted Statement of Financial Accounting Standards No. 115
("SFAS No. 115"), "Accounting For Investments in Certain Debt and Equity
Securities" effective January 1, 1994. In accordance with SFAS No. 115, the
Company has classified all of its current and other investments as available
for sale. On the following page is a summary of the Company's investments,
all of which consist of equity securities:
1997 1996
Current Assets
Cost $ 1,374,728 $ 1,724,198
Gross Unrealized Holding Gains 673,389 984,375
Gross Unrealized Holding Losses (15,541) (17,953)
Fair Value $ 2,032,576 $ 2,690,620
12
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
3.INVESTMENT SECURITIES AND OTHER INVESTMENTS - Continued
1997 1996
Other (Noncurrent) Assets
Cost $ 3,623,505 $ 3,305,560
Gross Unrealized Holding Gains 4,793,611 7,031,859
Fair Value $ 8,417,116 $10,337,419
Realized gains and losses are determined on the basis of specific
identification. During 1997 and 1996, sales proceeds and gross realized gains
and losses were as follows:
1997 1996
Sales Proceeds $ 5,419,622 $ 389,242
Gross Realized Losses $ - $ 228
Gross Realized Gains $ 5,395,368 $ 152,480
An unrealized gain in the amount of $243 is included in the Company's
statement of income for 1996.
Stockholders' equity at December 31, 1997 has been increased by $2,942,456
which is the difference between the total net unrealized gain at December 31,
1997 and deferred income taxes and minority interests in the net unrealized
gain. Other noncurrent investments totaling $105,000 at December 31, 1997
consist of certificates of deposit which are on deposit with the State of
Montana Commissioner of Insurance and are restricted as to use by law.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31,:
1997 1996
Property Taxes $ 50,635 $ 49,389
Compensation 36,638 41,328
Payroll Taxes 16,037 7,089
Other 26,160 25,967
$ 131,470 $ 123,773
13
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
5. OTHER INCOME
Other income consists of the following:
1997 1996
Dividends $ 278,101 $ 364,144
Gain on Sales of Securities 5,395,368 152,252
Amortization of Deferred Credit 8,220 8,220
Gain on Contribution in Kind 408,125 97,498
Other 41,459 14,087
$ 6,131,273 $ 636,201
6. INCOME TAXES
Income tax expense consists of the following:
1997 1996
Federal and State Income Taxes
Currently Payable $ 2,305,000 $ 381,550
Deferred - (17,000)
$ 2,305,000 $ 364,550
The income tax expense reflected in the financial statements differs from the
amounts that would normally be expected by applying the U.S. Federal income
tax rates to income before income taxes. The reasons for the differences are
as follows:
1997 1996
Computed "Expected" Tax Expense $ 2,168,600 $ 408,800
Purchase Accounting Adjustments (4,600) (4,600)
Tax Exempt Income (2,300) (400)
Special Dividends Received Deduction (65,000) (95,100)
Minority Share of Consolidated
Subsidiaries Income 127,100 29,500
Contribution At Fair Value (138,800) (33,100)
State Income Taxes 187,900 39,600
Other 32,100 19,850
$ 2,305,000 $ 364,500
14
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
6. INCOME TAXES - Continued
Deferred income taxes result from timing differences in the recognition of
income and expense for tax and financial reporting purposes. The sources and
tax effects of these timing differences are as follows:
1997 1996
Installment sales recognized for
financial reporting purposes
but not income tax purposes $ (2,100) $ (2,600)
Allowance for doubtful accounts 2,700 4,100
Excess of income tax depreciation
over financial reporting
depreciation (13,500) (14,400)
Unrealized Gains on Investments (2,221,600) (3,259,400)
Excess of financial reporting
reserves for title and escrow
losses over income tax reporting
for title and escrow losses 106,900 106,900
$(2,127,600) $(3,165,400)
The amounts of deferred tax assets and liabilities as of December 31, are
as follows:
1997 1996
Deferred tax asset, net of
valuation allowance of $0 in
1997 and 1996 $ - $ -
Deferred tax liabilty $ 2,127,600 $ 3,165,400
15
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
7. NOTE RECEIVABLE
Note receivable has resulted from the sale of certain assets and are
summarized as follows as of December 31:
1997 1996
9% Contract For Deed, due in monthly
installments of $248 including interest
until September, 2002 $ 11,466 $ 13,318
Less Current Portion of Long-Term Receivables 2,026 1,854
Long-Term Notes Receivable $ 9,440 $ 11,464
The above receivable is secured by property, the sale of which resulted in
the receivable. In the event the receivables becomes uncollectible and the
underlying collateral is completely worthless, the Company would incur a loss
in the total amount of $11,466.
8. PROVISION FOR ESTIMATED TITLE AND ESCROW LOSSES
The Company's subsidiary, First Montana Title Insurance Company (FMTIC,wholly-
owned by TSI, Inc.) issues title insurance policies in the State of Montana.
The terms of policies issued are indefinite and premiums are not refundable.
FMTIC is a party to various lawsuits wherein, among other things, plaintiffs
generally claim defects in insured titles, unreported liens or improper
practices. FMTIC is also required under many of its policies issued to
provide defense for its insureds in litigation founded upon alleged defects
or other matters insured against by the policy. Such litigation and claims
are normal occurrences within the title insurance industry. In accordance
with generally accepted accounting practices, FMTIC has established a
provision for estimated title and escrow losses which appears on the
consolidated balance sheets under the same title. FMTIC has established the
provision for estimated losses on (1) claims known to FMTIC and (2) claims
unknown to FMTIC but incurred upon issuance of policies as well as for
estimated external settlement expenses to be incurred. The provision has been
reduced for estimated recoveries.
9. COMMITMENTS
The Company and its subsidiaries are obligated under various lease agreements
for office space expiring at various dates through 2002. Rental expense for
office space for the years ended December 31, 1997 and 1996, was $32,030 and
$30,840, respectively. Annual rental commitments for the ensuing calendar
years are as follows:
1998 1999 2000 2001 2002
$37,200 $38,400 $35,400 $32,400 $32,400
16
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
10. DIVIDEND RESTRICTIONS
M Corp, the parent company, depends in part upon cash dividends from its
subsidiaries for the funding of its cash requirements. Dividends paid by
First Montana Title Insurance Company (FMTIC), the parent company's lower
tier subsidiary, are restricted by statutes of the State of Montana. FMTIC
is required to obtain regulatory approval before making any dividend
distributions. At December 31, 1997, substantially all retained earnings
were subject to such restrictions. At December 31, 1997, FMTIC's statutory
capital and surplus as regars policyholders amounted to $9,621,572.
11. RELATED PARTY TRANSACTIONS
During 1996, a company affiliated with the Company through common
stockholders repaid the Company $108,834 which had been advanced to the
affiliated company. During 1996, the Company's parent company, GNI, Inc.,
repaid the Company $198,044 which had been advanced to it. No affiliated
unconsolidated companies are indebted to the Company at December 31, 1997.
During 1997, consolidated subsidiaries of the Company contributed assets
in kind with a fair market value and a cost basis of $525,000 and $116,875,
respectively, to a charitable foundation established by a controlling
shareholder of the Company. The contribution in kind resulted in an income tax
benefit to the Company in the approximate amount of $203,000. During 1996,
consolidated subsidiaries of the Company contributed assets in kind
with a fair market value and a cost basis of $125,375 and $27,877,
respectively, to a charitable foundation established by a controlling
shareholder of the Company. The contribution in kind resulted in an income
tax benefit to the Company in the approximate amount of $51,000. Outstanding
options to purchase 211,000 shares of the Company's common stock at the
exercise price of five dollars per share were exercised during 1997 by a
company controlled by the majority holders of the Company.
12. NATURE OF OPERATIONS, RISKS AND UNCERTAINTIES
The Company is engaged in the title insurance business within the state of
Montana, in the title insurance agency business in Yellowstone, Rosebud and
Cascade Counties, Montana and in the ownership and rental of properties
located primarily in Montana. The Company's primary business, based on
revenues, is title insurance.
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the reported amounts of certain types of assets, liabilities,
revenues and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Actual
results could differ from those estimates.
13. RECAPITALIZATION
During 1997, the Company adopted a plan whereby portion of retained earnings
was capitalized as capital surplus. Adoption of the plan had no effect on
total stockholders' equity.
17
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
14. INVESTMENTS IN REAL ESTATE
The Company is the lessor of property under operating leases expiring in
various years through 2001. Minimum future rentals to be received on non-
cancelable leases as of December 31, 1997, for the ensuing calendar years
are as follows:
1998 1999
$ 73,920 $ 77,280
The consolidated statements of income do not contain any contingent rental
income. The Company's investments in real estate are shown in detail on the
following page.
18
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
<TABLE>
<CAPTION>
14. INVESTMENTS IN REAL ESTATE
GROSS AMOUNT CARRIED
DATE ON BALANCE SHEET ACCUMULATED AMOUNT OF
DESCRIPTION ACQUIRED LAND BUILDINGS TOTAL DEPRECIATION ENCUMBRANCE
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Commercial Building
Helena, Montana 1966 $ 23,037 $ 320,294 $ 343,331 $ 305,338 $ --
Apartment Complex
Polson, Montana 1983 23,037 275,850 298,887 274,180 $ --
Apartment Complex
Great Falls, Montana 1974 10,252 217,243 227,495 217,243 $ --
Rental Units Var. 1,500 1,183,814 1,184,907 467,845 $ --
Buildings Occupied
By the Company and
Miscellaneous
Properties Var. 27,108 147,800 174,908 146,119 $ --
$ 84,527 $2,145,001 $2,229,528 $1,410,725 $ --
December 31, 1996:
Commercial Building
Helena, Montana 1966 $ 25,000 $ 321,568 $ 346,568 $ 296,868 $ --
Apartment Complex
Polson, Montana 1983 25,000 275,992 300,992 252,490 $ --
Apartment Complex
Great Falls, Montana 1974 11,125 217,243 228,368 217,243 $ --
Rental Units Var. 1,500 1,303,559 1,305,059 414,426 $ --
Buildings Occupied
By the Company and
Miscellaneous
Properties Var. 32,089 147,944 180,033 135,803 $ --
$ 94,714 $2,266,306 $2,361,020 $1,316,830 $ --
</TABLE>
19
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -Continued
<TABLE>
<CAPTION>
15. INFORMATION ON SEGMENTS OF BUSINESS
The Company is engaged primarily in the title insurance business and the
ownership and rental of properties. Through its subsidiaries, the Company
owns title plants in three Montana counties and issues title insurance
policies, through its subsidiaries, within the State of Montana. The Company
(through wholly and majority owned subsidiaries) owns property in Helena,
Butte, Billings, Polson, and Great Falls, Montana, and in Clearwater, Florida.
Sales to Operating Total Depreciation Capital
Outside Concerns Profit (Loss) Assets (Net) Expense Expenditures
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1997
Financial Holding
Company $ 4,344,275 $ 3,716,728 $11,914,807 $ 1,833 $ -
Title Insurance
Operations 4,158,698 2,638,113 14,109,761 36,970 31,785
Rental Properties 582,492 397,062 796,269 84,399 -
Consolidated $ 9,085,465 $ 6,751,903 $26,820,837 $ 123,202 31,785
Year Ended
December 31, 1996
Financial Holding
Company $ 618,449 $ 437,334 $10,192,799 $ 4,974 $ -
Title Insurance
Operations 2,089,915 658,242 12,878,312 32,879 18,254
Rental Properties 566,407 202,652 1,013,466 79,271 -
Consolidated $ 3,274,771 $ 1,289,228 $24,084,577 $ 117,124 $ 18,254
20
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
DIRECTORS AND OFFICERS
NAME OCCUPATION
S. M. McCann Attorney at Law, Business Owner,
Director and Investor
President San Luis Obispo, California
R. Bruce Robson Data Processing Manager,
Director Sletten Construction Co.
Great Falls, Montana
G. Robert Crotty, Jr. Attorney at Law,
Director Graybill, Ostrem & Crotty
Great Falls, Montana
MARKET INFORMATION
The Company's common stock is not traded on any securities exchange, nor
are there records kept of any quotations by securities dealers or the
National Quotation Bureau, Inc. To the best knowledge of the Company, bid
and asked quotations for the Company's common stock are not reported in any
newspapers.
Dividends of $.10 per share were paid in 1996 to all shareholders except
those shareholders affiliated with the control group. A dividend of $.25
per share was declared on December 31, 1997, payable to shareholder's of
record on December 31, 1997, to be paid on or before March 15, 1998. M Corp
itself, without including the accounts of subsidiary companies, had only
$36,446 cash available at December 31, 1997 with which to pay dividends.
There are approximately 775 holders of record of the Company's common
stock.
A copy of the Form 10-KSB Annual Report may be obtained upon written
request to the Company.
M Corp
P.O. Box 2249
110 Second Street South
Great Falls, MT 59403-2249
21
<PAGE>
</TABLE>
M CORP
EXHIBIT #22
SUBSIDIARIES
Percentage
Voting
Securities
State of Owned By
Name Of Company Organization Registrant
Century Title Insurance Company
(Inactive) Montana 100.0
Diversified Realty, Inc. Montana 94.4
TSI, Inc. Montana 92.0
UAC, Inc. Delaware (1)
TSI Business Systems, Inc. Montana (2)
TSI Leasing, Inc. Montana (2)
First Mortgage Investors, Inc.
(Inactive) North Dakota (3)
First Montana Title Company of
Great Falls Montana (4)
First Montana Title Insurance
Company Montana (2)
First Montana Title Company of
Billings Montana (5)
First Montana Title Company of
Forsyth Montana (5)
Consulting Associates, Inc. Montana (4)
(1) Owned 87% by TSI, Inc.
(2) Owned 100% by TSI, Inc.
(3) Owned 70% by UAC, Inc.
(4) Owned 100% by UAC, Inc.
(5) Owned 100% by First Montana Title Insurance Company
TSI, Inc. and Diversified Realty, Inc., are each registered under the
Exchange Act and each files its own Form 10-KSB pursuant to that act.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 15186576
<SECURITIES> 2032576
<RECEIVABLES> 5547
<ALLOWANCES> 8000
<INVENTORY> 0
<CURRENT-ASSETS> 17260908
<PP&E> 2905835
<DEPRECIATION> 1877462
<TOTAL-ASSETS> 26820837
<CURRENT-LIABILITIES> 816717
<BONDS> 0
0
0
<COMMON> 3262004
<OTHER-SE> 17540168
<TOTAL-LIABILITY-AND-EQUITY> 26820837
<SALES> 0
<TOTAL-REVENUES> 9085465
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2333562
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6378207
<INCOME-TAX> 2305000
<INCOME-CONTINUING> 4073207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4073207
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
