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, 1998
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: None
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 $4,987,838.
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 26, 1999, 108,232 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.
1,567,259 shares $1.00 value common stock are outstanding as of February
26, 1999.
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, 1998. 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
2 and 14 (Pages 12 and 19, respectively) of the Notes to Consolidated
Financial Statements in Exhibit 13, the Annual Report to Shareholders for the
year ended December 31, 1998 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 18) of the Notes to Consolidated Financial Statements in Exhibit 13,
the Annual Report to Shareholders for the year ended December 31, 1998, 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 10 - Commitments, of the Notes to
Consolidated Financial Statements on Page 17 of Exhibit 13, the Annual Report
to Shareholders for the year ended December 31, 1998 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
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
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 20, Pages 1 and 2 and Pages 3 to 19,
respectively, of Exhibit 13, the Annual Report to Shareholders for the year
ended December 31, 1998, 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 1999 annual meeting of
shareholders or until their successors are elected and qualify.
NAME, AGE, AND YEAR ELECTED DIRECTOR POSITION
R. Bruce Robson, 57, 1994 Director
G. Robert Crotty, Jr., 71, 1995 Director
S. M. McCann, 35, 1994 Director,
President
R. Bruce Robson is a director and secretary-treasurer of Medical Information
Processing Systems, Inc.
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 in Great Falls, Montana.
S. M. McCann is an attorney at law, business owner 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 1998, 1997 and 1996. No officer or director of the
Company or the Company's consolidated subsidaries received total cash
compensation in excess of $100,000 for 1998, 1997 or 1996.
Summary Compensation Table
Name and Calender Total Cash
Principal Position Year Compensation
S. M. McCann 1998 $ 0
President, Director 1997 $ 0
1996 $ 0
The Company does not have any compensatory stock appreciation rights plans
or compensatory stock option plans. The Company has not adopted a formal
plan for the compensation of directors. During 1998 the Company and its
consolidated subsidiaries paid a total of $1,300 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 26, 1999.
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 44.7%
Value Common 110 Second Street South
Stock Great Falls, MT 59403
$1.00 Par Jefferson Management Co. 696,632 44.4%
Value Common 110 Second Street South
Stock Great Falls, MT 59403
$1.00 Par Anne Marie and Paul J. 1,459,027 (1) 93.1%
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, 59,924 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, 696,632 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 2,130 shares owned outright by members of the Anne Marie and Paul
J. McCann family. S.M. McCann is the record owner of 600 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 personally own any shares
of stock of the Company.
(b) Security Ownership of Management
The following table sets forth as of February 26, 1999, 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 600 (1) --
All Directors and Officers
as a Group 610 (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 12 (Page 17) of the Notes to
Consolidated Financial Statements in Exhibit 13, the Annual Report to
Shareholders for the year ended December 31, 1998 which description is
incorporated herein by reference.
The total compensation paid to members of Anne Marie and Paul J. McCann's
family was $0 for the year 1998 and $94,395 for the year 1997.
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, 1998.
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, 1998.
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 26, 1999 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 26,
1999.
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
1998
<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 owns rental properties through its
majority-owned subsidiaries. The 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 13 (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 14 (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 $611,165 (36.0%) in 1998
as compared with 1997 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 $80,669 (12.0%) in 1998 as compared with 1997
due primarily to an increase in interest-bearing deposits.
1
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Rent revenues increased $8,564 (1.5%) in 1998 as compared with 1997. The
increase in rent revenues in 1998 as compared with 1997 was due primarily
to an increase in rental rates.
Other income decreased $4,798,025 (78.3%) in 1998 as compared with 1997.
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.
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. No such gains were realized during
1998. The gain recognized on the merger transaction was the primary reason
for the decrease in other income in 1998 as compared with 1997 and is also
the primary reason for the decrease in net income in 1998 as compared with
1997.
Salaries and other personnel costs increased $91,528 (9.8%) in 1998 as
compared with 1997 due primarily to an increase in salary rates and an
increase in the number of personnel employed in the Company's title
insurance operations.
Other general and administrative expenses increased $268,063 (21.9%) in 1998
as compared with 1997. During 1998 consolidated subsidiaries of the Company
made contributions of appreciated assets to a private foundation in the
total fair value amount of approximately $751,417. The contributions resulted
in an income tax benefit to the Company in the amount of approximately
$271,000.
Income tax expense decreased $1,695,000 (73.5%) in 1998 as compared with
1997 due primarily to the decrease 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, 1998
CONTENTS
PAGE
AUDITOR'S REPORT 4
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1998 and 1997 5-6
Statements of Income and Comprehensive Income
for the Years Ended
December 31, 1998 and 1997 7
Statements of Stockholders' Equity
for the Years Ended
December 31, 1998 and 1997 8
Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997 9-10
Notes to Consolidated Financial Statements 11-19
OTHER INFORMATION 20
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, 1998 and 1997 and the related
consolidated statements of income and comprehensive income, stockholders'
equity 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, 1998
and 1997 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 19, 1999
Great Falls, Montana
4
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
DECEMBER 31, 1998 and 1997
ASSETS 1998 1997
Current Assets
Cash (Note 3) $17,931,372 $15,186,576
Investment Securities (Note 4) 1,699,672 2,032,576
Trade Accounts Receivable, Less
Allowance for Doubtful Accounts of
$8,000 in 1998 and 1997 77,155 3,521
Current Portion of Long-Term
Receivable (Note 8) - 2,026
Prepaid Expenses 28,300 26,900
Income Tax Prepayments - 9,309
Total Current Assets 19,736,499 17,260,908
Other Assets
Noncurrent Investments (Note 4) 105,000 105,000
Other Investments (Note 4) 5,478,054 8,417,116
Note Receivable, Excluding
Current Portion (Note 8) - 9,440
Total Other Assets 5,583,054 8,531,556
Investments In Property, Plant and
Equipment, at Cost (Notes 1 and 13)
Buildings 2,131,096 2,145,001
Furniture, Fixtures and Equipment 538,595 475,194
2,669,691 2,620,195
Less Accumulated Depreciation (1,985,682) (1,877,462)
684,009 742,733
Title Plants 201,113 201,113
Land 84,527 84,527
Net Property, Plant and Equipment 969,649 1,028,373
$26,289,202 $26,820,837
See Notes to Consolidated Financial Statements.
5
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
DECEMBER 31, 1998 and 1997
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 169,735 $ 115,633
Accrued Liabilities (Note 5) 136,194 131,470
Dividends Payable 423,118 289,414
Income Taxes Payable 43,858 -
Deferred Income Taxes (Notes 1 and 7) 167,000 280,200
Total Current Liabilities 939,905 816,717
Provision for Estimated Title and
Escrow Losses (Note 9) 970,494 1,005,612
Minority Interests in Consolidated
Subsidiaries 2,264,242 2,292,081
Deferred Income Taxes (Notes 1 and 7) 654,800 1,847,400
Excess of Fair Value of Net Assets Acquired
Over Cost (Note 1) 48,635 56,855
3,938,171 5,201,948
Commitments (Note 10)
Stockholders' Equity (Notes 1,4 and 11)
Common Stock, $1.00 Par Value,
5,000,000 shares authorized, 3,750,905
shares issued in 1998 and 3,252,004
shares issued in 1997 3,750,905 3,262,004
Capital Surplus 16,267,463 15,778,562
Retained Earnings (Note 11) 2,329,646 1,185,494
Accumulated Other
Comprehensive Income (Note 4) 1,429,456 2,942,456
Less: Cost of Common Shares in Treasury
2,183,646 Shares in 1998 and 1997 (2,366,344) (2,366,344)
Total Stockholders' Equity 21,411,126 20,802,172
$26,289,202 $26,820,837
See Notes to Consolidated Financial Statements.
6
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
1998 1997
Revenue
Title Insurance Premiums and Related Fees $ 2,309,024 $ 1,697,859
Interest 754,510 673,841
Rent 591,056 582,492
Other (Note 6) 1,333,248 6,131,273
4,987,838 9,085,465
Operating Expenses
Salaries and Other Personnel Costs 1,029,842 938,314
Depreciation 108,219 123,202
Rent 42,490 35,284
Title and Escrow Losses 30,544 15,049
Interest 34 -
Other General and Administrative Expenses 1,489,776 1,221,713
2,700,905 2,333,562
Operating Income 2,286,933 6,751,903
Minority Share of Consolidated Subsidiaries
Net (Income) (140,463) (373,696)
Income Before Income Taxes 2,146,470 6,378,207
Income Taxes (Note 7) (610,000) (2,305,000)
Net Income 1,536,470 4,073,207
Other Comprehensive Income (Loss),
Net of Income Taxes:
Unrealized Holding Gains (Losses):
Gain (Loss) Arising During Year (1,011,664) 1,567,637
Reclassification Adjustment (501,336) (2,912,453)
Other Comprehensive Income (Loss) (1,513,000) (1,344,816)
Comprehensive Income $ 23,470 $ 2,728,391
See Notes to Consolidated Financial Statements.
7
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
<TABLE>
Accumulated
Other
Common Capital Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997 $3,051,004 $ 9,934,562 $2,382,380 $4,287,272 $(2,366,344) $17,288,874
Recapitalization 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 Shares 211,000 844,000 1,055,000
Change in Net Unrealized
Holding Gains (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
Net Income 1,536,470 1,536,470
Dividends Paid (392,318) (392,318)
Issuance of Common Stock
488,901 Shares 488,901 488,901 977,802
Change in Net Unrealized
Holding Gains (1,513,000) (1,513,000)
Balances, December
31, 1998 $3,750,905 $16,267,463 $2,329,646 $1,429,456 $(2,366,344) $21,411,126
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
INCREASE (DECREASE) IN CASH
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash Received From Customers $ 2,850,658 $ 2,352,199
Cash Paid to Suppliers and Employees (1,816,449) (1,771,166)
Interest and Dividends Received in Cash 1,025,055 951,942
Cash Proceeds From Sales of Noncurrent Assets 13,905 6,994
Interest Paid in Cash (34) -
Income Taxes Paid in Cash (716,833) (2,287,950)
Net Cash Provided (Used) By Operating Activities 1,356,302 (747,981)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Received on Principal of Notes Receivable 11,466 1,852
Cash Purchases of Minority Interests (15,536) (6,335)
Capital Expenditures Paid in Cash (63,401) (31,785)
Cash Received on Dispositions of
Current Investments 342,656 68,213
Cash Received on Dispositions of
Noncurrent Investments 527,582 5,351,471
Cash Purchases of Current Investments (133,460) (109,666)
Net Cash Provided By Investing Activities 669,307 5,273,750
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends Paid in Cash (258,615) (11,278)
Issuance Of Common Stock For Cash 977,802 1,055,000
Net Cash Provided By Financing Activities 719,187 1,043,722
NET INCREASE IN CASH 2,744,796 5,569,491
CASH - BEGINNING OF YEAR 15,186,576 9,617,085
CASH - END OF YEAR $17,931,372 $15,186,576
(Continued)
9
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS - Continued
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
1998 1997
Net Income $ 1,536,470 $ 4,073,207
Adjustments to Reconcile Net Income
to Net Cash Provided (Used)
By Operating Activities:
Depreciation 108,219 123,202
Provision for Doubtful Account Receivable - (3,825)
Minority Share of Consolidated Subsidiaries
Net Income 140,463 373,696
Amortization of Deferred Credit (8,220) (8,220)
Net Book Value of Assets Sold 13,905 6,994
Contribution in Kind 163,182 116,875
Realized (Gains) on Dispositions
of Investments (439,559) (5,395,369)
Changes in Operating Assets and Liabilities
(Increase) Decrease in Accounts Receivable (73,634) 28,197
(Increase) Decrease in Prepaid Expenses (1,400) (26,900)
(Increase) Decrease in Income Tax Prepayments 9,309 17,050
Increase (Decrease) in Payables and
Accrued Liabilities 23,709 (52,888)
(Increase) in Deferred Income Taxe (160,000) -
Increase (Decrease) in Income Taxes Payable 43,858 -
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $1,356,302 $ (747,981)
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.
(g) 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.
(h) Retirement Plans
The Company adopted an employees' savings plan under Section 401(k) of the
Internal Revenue Code (the "Code") during 1998. The Company allows eligible
employees to contribute the maximum percentage of their compensation allowed
by the Code. The Company matches employee contributions in an amount
equal to fifty percent of the first six percent of the employee's
compensation up to a maximum of $1,080. Participants are at all times fully
vested in their contributions and are gradually vested in the Company's
contributions. The Company's 401(k) contributions and administrative costs
were $8,423 for 1998.
(i)Reclassifications
Certain reclassifications have been made to the prior year amounts to make
them comparable to the 1998 presentation. These changes had no impact on
previously reported results of operations or shareholders' equity.
2. 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.
As the Company's operations are conducted almost exclusively within the
State of Montana, items and/or events affecting the economy within the
State of Montana could adversely affect the Company and the Company's
operations.
12
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
3.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, 1998, cash balances totaling
$14,956,222 were uninsured by either the SIPC or the FDIC.
4. 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:
1998 1997
Current Assets
Cost $ 1,152,704 $ 1,374,728
Gross Unrealized Holding Gains 551,638 673,389
Gross Unrealized Holding Losses (4,670) (15,541)
Fair Value $ 1,699,672 $ 2,032,576
Other (Noncurrent) Assets
Cost $ 3,385,128 $ 3,623,505
Gross Unrealized Holding Gains 2,092,926 4,793,611
Fair Value $ 5,478,054 $ 8,417,116
Realized gains and losses are determined on the basis of specific
identification. During 1998 and 1997, sales proceeds and gross realized gains
and losses were as follows:
1998 1997
Sales Proceeds $ 870,238 $ 5,419,622
Gross Realized Losses $ 17,159 $ -
Gross Realized Gains $ 456,718 $ 5,395,368
13
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
4. INVESTMENT SECURITIES AND OTHER INVESTMENTS - Continued
Stockholders' equity at December 31, 1998 has been increased by $1,429,456,
the difference between the total net unrealized gain at December 31, 1998
and deferred income taxes and minority interests in the net unrealized gain.
Other noncurrent investments totaling $105,000 at December 31, 1998
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.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31,:
1998 1997
Property Taxes $ 48,627 $ 50,635
Compensation 61,884 36,638
Payroll Taxes - 16,037
Other 25,683 28,160
$ 136,194 $ 131,470
6. OTHER INCOME
Other income consists of the following:
1998 1997
Dividends $ 270,545 $ 278,101
Gain on Sales of Securities 439,559 5,395,368
Amortization of Deferred Credit 8,220 8,220
Gain on Contribution in Kind 588,235 408,125
Other 26,689 41,459
$ 1,333,248 $ 6,131,273
7. INCOME TAXES
Income tax expense consists of the following:
1998 1997
Federal and State Income Taxes
Currently Payable $ 770,000 $ 2,305,000
Deferred (160,000) -
$ 610,000 $ 2,305,000
14
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
7. INCOME TAXES - Continued
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:
1998 1997
Computed "Expected" Tax Expense $ 729,800 $ 2,168,600
Purchase Accounting Adjustments (2,800) (4,600)
Tax Exempt Income - (2,300)
Special Dividends Received Deduction (64,400) (65,000)
Minority Share of Consolidated
Subsidiaries Income 47,800 127,100
Contribution At Fair Value (200,000) (138,800)
State Income Taxes 70,300 187,900
Other 29,300 32,100
$ 610,000 $ 2,305,000
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:
1998 1997
Installment sales recognized for
financial reporting purposes
but not income tax purposes $ - $ (2,100)
Allowance for doubtful accounts 2,700 2,700
Excess of income tax depreciation
over financial reporting
depreciation (13,000) (13,500)
Contribution Deduction Carryover 157,400 -
Unrealized Gains on Investments (1,075,800) (2,221,600)
Excess of financial reporting
reserves for title and escrow
losses over income tax reporting
for title and escrow losses 106,900 106,900
$ (821,800) $(2,127,600)
15
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
7. INCOME TAXES - Continued
The amounts of deferred tax assets and liabilities as of December 31,
are as follows:
1998 1997
Deferred tax asset, net of
valuation allowance of $0 in
1998 and 1997 $ - $ -
Deferred tax liabilty $ 821,800 $ 2,127,600
8. NOTE RECEIVABLE
Note receivable has resulted from the sale of certain assets and is
summarized as follows as of December 31, 1997:
9% Contract For Deed, due in monthly
installments of $248 including interest
until September, 2002 $ 11,466
Less Current Portion of Long-Term Receivables 2,026
Long-Term Notes Receivable $ 9,440
9. 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.
16
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
10. 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, 1998 and 1997, was $39,204 and
$32,030, respectively. Annual rental commitments for the ensuing calendar
years are as follows:
1999 2000 2001 2002
$38,400 $35,400 $32,400 $32,400
11. 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, 1998, substantially all retained earnings
were subject to such restrictions. At December 31, 1998, FMTIC's statutory
capital and surplus as regars policyholders amounted to $8,761,566.
12. RELATED PARTY TRANSACTIONS
During 1998, consolidated subsidiaries of the Company contributed assets in
kind with a fair market value and a cost basis of $751,417 and $163,182,
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 $271,000.
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. 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
majority holders of the Company.
13. INVESTMENTS IN REAL ESTATE
The Company is the lessor of property under operating leases expiring in
various years through 1999. Minimum future rentals to be received on
non-cancelable leases as of December 31, 1998, for the 1999 calendar year
was $128,100. 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.
17
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
<TABLE>
<CAPTION>
13. INVESTMENTS IN REAL ESTATE - Continued
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, 1998
Commercial Building
Helena, Montana 1966 $ 23,037 $ 320,294 $ 343,331 $ 311,314 $ --
Apartment Complex
Polson, Montana 1983 23,037 275,850 298,887 275,850 $ --
Apartment Complex
Great Falls, Montana 1974 10,252 217,243 227,495 217,243 $ --
Other Rental Units Var. 1,093 1,169,909 1,171,002 527,650 $ --
Buildings Occupied
By the Company and
Miscellaneous
Properties Var. 27,108 147,800 174,908 147,436 $ --
$ 84,527 $2,131,096 $2,215,623 $1,479,493 $ --
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 $ --
Other Rental Units Var. 1,093 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 $ --
</TABLE>
18
<PAGE>
M CORP
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -Continued
<TABLE>
<CAPTION>
14. INFORMATION ON SEGMENTS OF BUSINESS
The Company's operations are classified into three reportable segments that
provide different products or services. The Company's reportable segments,
the title insurance business, ownership and rental of properties and
financial holding company are managed separately because of their differing
operations, customers and requirements. The Company's accounting policies for
segments are the same as those described in the summary of significant
accounting policies. Management evaluates segment performance based on
segment profit or loss before income taxes. Substantially all of the
Company's business is conducted within the state of Montana.
Sales to Segment Total Net Expenditures
Outside Interest Operating Segment Depreciation For Segment
Concerns Revenues Profit Assets Expense Assets
<S> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1998
Financial Holding
Company $ 650,639 $ 387,754 $ 472,943 $ 12,148,486 $ 841 $ 632
Title Insurance
Operations 2,991,633 366,756 1,572,935 13,369,296 39,727 62,769
Rental Properties 591,056 - 241,055 771,420 67,651 -
Consolidated $ 4,233,328 $ 754,510 $ 2,286,933 $ 26,289,202 $ 108,219 63,401
Year Ended
December 31, 1997
Financial Holding
Company $ 4,013,651 $ 330,624 $ 3,716,728 $ 11,914,807 $ 1,833 $ -
Title Insurance
Operations 3,805,481 353,217 2,638,113 14,109,761 36,970 31,785
Rental Properties 582,492 - 397,062 796,269 84,399 -
Consolidated $ 8,401,624 $ 683,841 $ 6,751,903 $ 26,820,837 $ 123,202 31,785
19
<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 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.
A dividend of $.25 per share was declared on December 30, 1998, payable
to shareholder's of record on December 31, 1998, to be paid on or before
March 15, 1999. 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.
There are approximately 750 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
20
<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 92.2
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)
Merritt Properties, Inc. Montana (5)
Miramar, Inc. Montana (2)
Consulting Associates, Inc. Montana (4)
(1) Owned 87.2% 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 17931372
<SECURITIES> 1699672
<RECEIVABLES> 77155
<ALLOWANCES> 8000
<INVENTORY> 0
<CURRENT-ASSETS> 19736499
<PP&E> 2955331
<DEPRECIATION> 1985682
<TOTAL-ASSETS> 26289202
<CURRENT-LIABILITIES> 939905
<BONDS> 0
0
0
<COMMON> 3750905
<OTHER-SE> 17662855
<TOTAL-LIABILITY-AND-EQUITY> 26289202
<SALES> 0
<TOTAL-REVENUES> 4987838
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2700905
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2146470
<INCOME-TAX> 610000
<INCOME-CONTINUING> 1536470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1536470
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
