U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Fiscal Year ended March 31, 1998.
Commission File number: 811-0969
The First Connecticut Capital Corporation
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(Exact name of Registrant as Specified in its Charter)
Connecticut 06-0759497
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(State of Incorporation) (IRS Employer
Identification No.)
1000 Bridgeport Avenue, Shelton, Connecticut 06484
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(Address of principal executive offices) Zip Code
Registrant's telephone number (203) 944-5400
Securities registered under Section 12(b) of the Exchange Act: NONE
Name of each exchange on
which registered:
NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Class
COMMON
Check whether the registrant (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 [X ] No [
]
Check if there is no 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. [ ]
Registrant's revenues for its most recent fiscal year: $660,000
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 3, 1998 based on the closing sales price of such stock on
such date was approximately $804,000
<PAGE>
Check whether the registrant has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
The number of shares outstanding of the registrant's common stock as of June 3,
1998 was 1,173,382.
DOCUMENTS INCORPORATED BY REFERENCE:
The following documents are hereby incorporated by reference into the following
Parts of this Form 10-KSB: (1) financial statements and Independent Auditors'
Report for the fiscal years ended March 31, 1998 and 1997 is incorporated by
reference into Part II Item 7.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
The First Connecticut Capital Corporation (the "Corporation") is
engaged in the mortgage banking business, which involves the origination,
purchase, sale and servicing of mortgage loans secured by residential or
commercial real estate. The Corporation's revenues consist of loan servicing
fees, loan origination fees, interest on mortgage loans held prior to sale and
gains from the sale of loans and mortgage servicing rights. Mortgage loans which
are originated or purchased by the Corporation may be resold.
The Corporation also engages in mortgage servicing, of its own
Portfolio Loan Program, which includes the processing and administration of
mortgage loan payments and remitting principal and interest to purchasers. The
Corporation also monitors delinquencies, collects late fees, manages
foreclosures, processes prepayments and loan assumption fees, provides
purchasers with required reports, and answers borrowers' inquiries. Although the
Corporation plans, from time to time, to sell a portion of its mortgage
servicing rights, it intends to build the size of its mortgage servicing
portfolio by retaining the servicing rights from a large share of its mortgage
loan originations. As of June 1, 1998, the Corporation services a total
portfolio of approximately $12,302,000, consisting, in part, of mortgage loans
which were sold by the Corporation to GF Mortgage Corporation, a subsidiary of
Gruntal Financial Corporation, a subsidiary of The Home Insurance Corporation,
on December 15, 1993 as described below. On April 19, 1996, GF Mortgage
Corporation was sold to Walsh Acquisition Company, also known as Walsh
Securities. In October 27, 1997 the balance of that portfolio was sold to
Greenwich Capital Financial Corporation. First Connecticut continues to service
the remaining balance which is $4,955,000 as of June 1, 1998, under a new
service agreement. At June 1, 1998 the Company also services its Portfolio Loan
Program, which has an outstanding balance of $5,444,000, representing an
increase of 37% from the prior period. In addition the Corporation as General
partner also services loans for First Connecticut Capital Mortgage Fund A,
Limited Partnership, which has a mortgage loan balance of $1,903,000 at June 1,
1998.
History
The Corporation (formerly The First Connecticut Small Business
Investment Company) was incorporated on May 6, 1960 as a federally licensed
small business investment company under the Small Business Investment Act of
1958 and was registered as an investment company under the Investment Company
Act of 1940. The Corporation's business consisted of providing long-term loans
to finance the growth, expansion and development of small business concerns.
On August 15, 1990, the Corporation filed a petition for relief under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court.
On October 18, 1991, the Corporation filed a plan of reorganization (the "Plan")
with the United States Bankruptcy Court. The Plan was confirmed as of January 9,
1992. Under the Plan, the Corporation was required to surrender its license to
operate as a small business investment company.
On June 29, 1993, the Corporation's application for deregistration
under the Investment Company Act of 1940 was approved by the Securities and
Exchange Commission.
<PAGE>
On December 15, 1993, the Corporation sold substantially all of its
outstanding investment portfolio to GF Mortgage Corporation for an amount
sufficient to settle substantially all of the Company's liabilities under the
Plan. As part of this transaction, restrictions under the Plan regarding the
Corporation's lending activities were waived.
The Corporation was granted a license by the State of Connecticut
Department of Banking to engage in business as a First Mortgage
Loan-Lender-Broker on April 8, 1994. The Corporation is also licensed by the
State of Connecticut as a Second Mortgage Lender/Broker.
On December 28, 1994 the United States Bankruptcy Court issued a final
decree closing the Chapter 11 case of the Company.
On August 3, 1995 the Corporation was granted a license by the State of
Massachusetts, Department of Banking, to engage in business as a Mortgage
Lender.
Seasonality
The Corporation's business and the mortgage banking industry as a whole
is generally subject to seasonal trends which reflect a pattern of home sales
and resales. Loan originations typically peak during the spring and summer
seasons and decline from mid-November through January. Prior to January 1996 the
Corporation focused its efforts on refinances of mortgages on residential
properties which was generally the case throughout the industry. Since January
1996, the Corporation has expanded its Portfolio Loan Program to include
short-term mortgages for construction, remodeling and additions. These loans are
predominately secured by first mortgage liens on residential properties and are
sold to qualified investors with fees retained for servicing.
Competition
The Corporation competes with other mortgage bankers, mortgage brokers,
state and national banks, thrift institutions and insurance companies for loan
originations and purchases. Many of its competitors have substantially greater
financial resources than the Corporation. The Corporation competes for loan
originations, in part, based on price, through print and electronic media
advertising campaigns, by telemarketing to potential borrowers, and by
maintaining close relationships with mortgage brokers, real estate brokers and
builder-developers.
Regulation
The Corporation is not presently an approved seller/servicer for the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC"),
nor is the Corporation an approved issuer and servicer under GNMA, FNMA or FHLMC
mortgage-backed securities programs. The Corporation is not qualified to
originate mortgage loans insured by the Federal Housing Administration (the
"FHA") or partially guaranteed by the Veterans Administration (the "VA"). The
Corporation does not presently intend to apply for such approvals or
qualifications. Accordingly, the Corporation is not currently subject to the
rules and regulations of these agencies with respect to originating, processing,
<PAGE>
selling and servicing mortgage loans, but may become subject to such rules and
regulations should the Corporation become an approved issuer, seller or servicer
for any of these agencies. Such rules and regulations would, among other things,
prohibit discrimination and establish underwriting guidelines which include
provisions for inspections and appraisals and require credit reports on
prospective borrowers, and with respect to VA loans, fix maximum interest rates.
The Corporation's mortgage loan origination activities are subject to
the Equal Credit Opportunity Act, the Federal Truth-In-Lending Act, the Real
Estate Settlement Procedures Act and the regulations promulgated thereunder
which prohibit discrimination and require the disclosure of certain information
to borrowers concerning credit and settlement costs. Additionally, the sale of
mortgage loans by the Corporation to purchasers may be subject to applicable
federal and state securities laws.
There are various state laws affecting the Corporation's mortgage
banking operations, including licensing requirements and substantive limitations
on the interest and fees that may be charged. The Corporation is in possession
of all required licenses in those states in which it does business that require
such licenses, except where the absence of such licenses are not material to the
business and operations as a whole. States have the right to conduct financial
and regulatory audits of the loans under their jurisdiction.
Personnel
As of June 1, 1998, the Corporation had 5 employees, all of whom were
employed at the Corporation's headquarters in Shelton, Connecticut. The
Corporation believes that its relations with its employees are good.
Investment Policies
(i) Investments in real estate - The Corporation does not invest
in real estate or interests in real estate but may acquire
real estate by foreclosure of mortgage loans owned by the
Corporation or by deed in lieu of foreclosure. Primarily such
properties would consist of 1-4 family dwellings or
undeveloped acreage. The Corporation does not intend to own or
operate properties for an extended period of time but rather
its policy is to sell such properties at fair market value as
soon as possible.
(ii) Investments in real estate mortgages - The Corporation intends
to originate first or second real estate mortgages and sell
certain of these mortgages immediately to interested
purchasers, retaining the application fees and servicing
rights. Maturities of mortgages not sold will range from one
to five years.
(iii) The Corporation currently does not intend to invest in the
securities of, or interests in, persons or entities which are
primarily engaged in real estate activities.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
During the prior year the Corporation relocated to 1000 Bridgeport
Avenue, Shelton, Connecticut. The office contains 1,772 square feet of space
which the Corporation currently leases from an unaffiliated party pursuant to a
5 year lease expiring December 31, 2002.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Corporation's common stock is traded over the counter, and the high
(bid) and low (asked) prices of the Corporation's stock are quoted in the "pink
sheets" published by the National Quotation Bureau, Inc.
Following are the high and low bid prices for the Corporation's common
stock during the fiscal years ended March 31, 1998 and 1997 according to the
"pink sheets" published by the National Quotation Bureau, Inc.
High Low
---- ---
1997
----
First Quarter $.5625 $.5000
Second Quarter .5625 .4375
Third Quarter .4375 .3125
Fourth Quarter .3125 .2500
1998
----
First Quarter $.2500 $.20000
Second Quarter .4375 .15000
Third Quarter .3200 .21875
Fourth Quarter .2600 .22000
The approximate number of stockholders of record on June 3, 1998 was
1,244 and the Corporation estimates that it has approximately 1,650
shareholders. The closing bid quotation of the Corporation's Common Stock on
that date was approximately 78 cents. The Corporation has not paid any dividends
on its Common Stock since April 27, 1990. The Corporation currently intends to
retain earnings, for use in its business and does not anticipate paying cash
dividends in the foreseeable future.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
Results of Operations
The Corporation had net income of $288,000 for the year ended March 31,
1998 compared to a net loss of $230,000 for the year ended March 31, 1997. The
increase of $518,000 is due primarily to a non-recurring recovery of a note
payable of $268,000. Included in net income is a loss of $52,000 resulting from
the assignment of the loan portfolio serviced by First Connecticut under the
Asset Management Loan Servicing Agreement Dated December 15, 1993 (the
"Agreement") from Walsh Securities to Greenwich Capital Financial Products, Inc.
The Corporation exchanged the unamortized balance of mortgage servicing rights
for the Walsh Portfolio and related receivable for certain collection costs for
a $560,000 non interest bearing note (the "Note"). The Note was discounted
approximately $78,000 to reflect a market rate of interest.
Total interest income for 1998 was $107,000 as compared to total
interest income for 1997 of $103,000 an increase of $4,000 or 4%. This increase
was a result of unaccrued interest collected on non performing loans.
Other operating expenses for 1998 was $468,000 as compared to $814,000
in 1997, a decrease of 346,000 or 43%. This decrease was primarily due to the
decrease in officer and other salaries and employee and general insurance. In
addition, in 1997 there was a non-recurring collection expense of $150,000
representing taxes on sold loans. During 1998, the Corporation has continued to
reduce overall operating expenses.
The amortization of servicing rights has stopped in 1998 due to the
aforementioned assignment of the Walsh loan portfolio to Greenwich Capital
Financial Products. The Corporation continues to service the portfolio for
Greenwich Capital under a new agreement. Professional services increased $16,000
or 50% from $16,000 in 1997 to $32,000 in 1998 primarily as a result of an
increase in accounting and legal costs.
Total loan origination fees for 1998 were $163,000 as compared to
$198,000 in 1997, a decrease of $35,000 or 18%. Loan origination fees for 1998
reflect a decrease of $120,000 for origination fees on loans funded by outside
parties and are partially offset by an increase of $85,000 in origination fees
on loans funded by the Corporation.
Recorded in other fees for the year ended 1997 was a non-recurring management
fee of $150,000. After considering this one time fee, other fee income increased
by $14,000 due to interest earned on idle funds and loan inspection fees.
During the year ended 1997 the Corporation recorded a provision for investment
losses of $215,000 to adjust the allowance for investment losses to adequately
absorb decreases in investment values based on re-appraisals and evaluations. No
such valuation adjustment were required in 1998. In 1998, the Corporation
recorded a recovery of $49,000 attributable to the liquidation of an impaired
loan which was over-reserved.
Plan of Operation
The Corporation is engaged in the mortgage banking business, which
involves the origination, purchase, sale and servicing of mortgage loans secured
by residential or commercial real estate.
<PAGE>
Liquidity and Capital Resources
At March 31, 1998 and 1997, the Corporation had cash and cash
equivalents of $214,000 and $211,000, respectively.
The Corporation currently anticipates that during the year ending March
31, 1999, its principal financing needs will consist of funding its mortgage
loans held for sale (see Note 10 of Financial Statements) and the ongoing net
cost of mortgage loan originations. Future cash flow requirements will depend
primarily on the level of the Corporation's activities in originating and
selling mortgage loans, as well as cash flow required by its operations.
Although the Corporation anticipates increased activities in originating
mortgage loans, the difficulties experienced within the relevant economic
markets still exist and there are no assurances that increased activity will
occur. Consequently, as a means to provide further cash flow, the Corporation
has expressed a willingness to liquidate certain current assets in its portfolio
and believes that a market exists for those assets.
The Corporation continues to investigate and pursue alternative and
supplementary methods to financing its operations and to support the growth of
the Corporation.
The Corporation believes that cash on hand and internally generated
funds will be sufficient to meet its corporate, general and administrative
working capital and other cash requirements during the year ending March 31,
1999. The Corporation took certain steps during the year ended March 31, 1997 to
decrease its cash flow requirements for the years ended March 31, 1998 and 1997.
Those steps included a management salary reduction and a restatement and
termination of the pension plan. The Corporation also continues to decrease its
cash flow requirements, by monitoring all expenses. As a result of the Note with
Walsh Securities the Corporation's cash flow will increase by $120,000 a year.
Management also believes additional steps can be taken if necessary.
The Corporation did not have any material capital commitments at March
31, 1998.
Inflation
Inflation will affect the Corporation most significantly in the area of
loan originations. Interest rates normally increase during periods of high
inflation and decrease during periods of low inflation.
Accounting Pronouncements
New Accounting Pronouncements - In 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
130, Reporting Comprehensive Income, which establishes standards for reporting
and displaying comprehensive income and its components and SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes standards for the way public companies report information about
operating segments in both interim and annual financial statements and related
disclosures. The adoption of these standards is not expected to have a material
impact on the Corporation's financial statements. The standards will be
effective for the Corporation's financial statements in fiscal year 1999.
<PAGE>
Partnership - The Corporation has formed a Limited Partnership known as First
Connecticut Capital Mortgage Fund A, Limited Partnership as to which the
Corporation is the General Partner. The intent of this new entity is to sell
units in the Limited Partnership to investors in a private placement, up to a
maximum of $5 million in $50,000 units, for the purpose of funding a short-term
Portfolio Loan Program for the Limited Partnership. The limited partners will be
limited to investors who qualify as "Accredited Investors" as defined in
Regulation D, promulgated under the Securities Act of 1933. This program would
generate income to the Corporation in the form of loan origination fees and
servicing fees in excess of a guaranteed income return to the limited partners
in connection with mortgage loans that would be purchased by the Limited
Partnership from the funds invested by the limited partner. As of June 1, 1998
the Corporation has sold 33 units. A copy of the offering memo is available upon
request.
ITEM 7. FINANCIAL STATEMENTS
The following report and financial statements of the Corporation are
contained on the pages indicated.
Independent Auditors' Report - Page 1
Balance Sheets as of March 31, 1998 and 1997 - Page 2
Statements of Operations for the years ended March 31, 1998 and 1997 -
Page 3
Statements of Changes in Stockholders' Equity for the years ended March
31, 1998 and 1997 - Page 4
Statements of Cash Flows for the years ended March 31, 1998 and 1997 -
Page 5
Notes to Financial Statements - Page 6
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Corporation has not changed accountants in the twenty-four month
period prior to March 31, 1998. No disagreements on accounting or financial
disclosure practices occurred during the fiscal year ended March 31, 1998.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers of the Registrant
The directors and executive officers of the Corporation as of May 1,
1998 are as follows:
Names Age Present Position
----- --- ----------------
James M. Breiner 79 Chairman of the Board of Directors
and Treasurer
David Engelson 77 President and Director
Louis I. Cohen 77 Director
Edward Ardolino 77 Director
Mario D'Addario 78 Director
Edward M. Freda 74 Director
Allan J. Rosen 62 Director
Lawrence R. Yurdin 58 Vice President and Director
Priscilla E. Ottowell 51 Secretary and Controller
James M. Breiner, Director of the Corporation since 1960. Chairman of
the Board and Treasurer of the Corporation; Director of State Street Mortgage
Company.
David Engelson, Director of the Corporation since 1960. President of
the Corporation; Director of State Street Mortgage Company.
Louis I. Cohen, Director of the Corporation since 1968. Director of
State Street Mortgage Company.
Edward Ardolino, Director of the Corporation since 1960. President and
CEO of Aerospace Coating Systems, Inc.
Mario D'Addario, Director of the Corporation since 1976. President of
Mario D'Addario Buick, Inc.
Edward M. Freda, Director of the Corporation since 1979. Retired
Executive Vice President of People's Bank, Bridgeport, Connecticut.
Allan J. Rosen, elected to the Board of Directors on September 16,
1997. Shareholder, Kleban & Samor, P.C., act as legal counsel to the
Corporation.
<PAGE>
Lawrence R. Yurdin, Director of the Corporation since 1986.
Vice-President of the Corporation; employed by the Corporation in various
capacities since 1970; Director of State Street Mortgage Company.
Priscilla E. Ottowell, elected Secretary of the Corporation on April
12, 1995. Employed by the Corporation as Controller since 1985.
Each of the directors holds office for a term of one year, and until a
successor has been chosen and qualified. Directors, except Messrs. J. Breiner,
D. Engelson and L. Yurdin, receive a fee of $300 per Board meeting.
Mr. Lawrence R. Yurdin is the son-in-law of Mr. David Engelson,
President and a Director of the Corporation.
ITEM 10. EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain information
regarding the annual and long-term compensation of James M. Breiner and David
Engelson, who together perform the function of Chief Executive Officer, for each
of the last three fiscal years. No officers of the Corporation received salary
and bonus in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------------------- --------------------------------
Other Awards Payouts
Annual Restricted All Other
Name and Compen- Stock Options LTIP Compen-
Principal Year Salary Bonus sation Awards SARs Payouts sation
Position Ended ($) ($) ($) ($) (#) ($) ($)
-------- -------- ------- ----- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
James M. Breiner 03/31/98 $12,000 0 0 None 0 None 0
Chairman of the 03/31/97 $38,493 0 0 None 0 None 0
Board & Treasurer 03/31/96 $39,233 0 0 None 0 None 0
David Engelson 03/31/98 $12,000 0 0 None 0 None 0
President 03/31/97 $38,493 0 0 None 0 None 0
03/31/96 $39,233 0 0 None 0 None 0
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following tables list the beneficial owners of more than five
percent of the Corporation's Common Stock and the shares beneficially owned by
all directors and executive officers of the Corporation as of March 31, 1998.
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Owner Percent
- - - - - - - - - - - - - - ---------------- ---------------- -------
Robert E. Humphreys 114,900 9.792
64 Alcott Street
Acton, MA 01720
<PAGE>
Security Ownership of Management
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Owner Percent
- - - - - - - - - - - - - - ---------------- ---------------- -------
James M. Breiner 53,172(i) 4.530
David Engelson 43,605 3.716
Louis I. Cohen 8,351 .712
Edward Ardolino 3,741 .319
Mario D'Addario 3,860 .329
Edward M. Freda 131 -
Alan J. Rosen 4,000 .341
Lawrence R. Yurdin 21,707 1.850
Priscilla E. Ottowell 4,389 .374
All directors and executive officers
as a group (nine persons) 142,956 12.183
(i) Includes 2,272 shares owned by the Estate of William Breiner, of which Mr.
Breiner is the administrator. Mr. Breiner has sole voting and investment
power with respect to these shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
Five (5) directors and officers of the Corporation are also directors
and officers of State Street Mortgage Company, which makes first and second
mortgage loans to commercial and residential borrowers. State Street Mortgage
Company is in the process of liquidation and does not compete with the
Corporation.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10.2) Asset Management and Loan Servicing Agreement with GF
Mortgage Corp. now known as Walsh Securities
(incorporated by reference to Exhibit 7(c)(l) to the
Current Report on Form 8-K filed by the Corporation
with the Securities and Exchange Commission on
December 29, 1993).
(99) Independent Auditors' Report and Financial Statements
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE FIRST CONNECTICUT CAPITAL
CORPORATION
Date: June 29, 1998 By: /s/ David Engelson
------------------
David Engelson
President
Date: June 29, 1998 By: /s/ Priscilla E. Ottowell
-------------------------
Priscilla E. Ottowell
Secretary and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: June 29, 1998 /s/ James M. Breiner
---------------------
James M. Breiner
Chairman and Treasurer
Date: June 29, 1998 /s/ David Engelson
-------------------
David Engelson
President and Director
Date: June 29, 1998 /s/ Louis I. Cohen
-------------------
Louis I. Cohen
Director
Date: June 29, 1998 /s/ Edward Ardolino
--------------------
Edward Ardolino
Director
Date: June 29, 1998 /s/ Mario D'Addario
-------------------
Mario D'Addario
Director
Date: June 29, 1998 /s/ Edward M. Freda
-------------------
Edward M. Freda
Director
<PAGE>
Date: June 29, 1998 /s/ Allan J. Rosen
------------------
Allan J. Rosen
Director
Date: June 29, 1998 /s/ Lawrence R. Yurdin
----------------------
Lawrence R. Yurdin
Vice-President and Director
Date: June 29, 1998 /s/ Priscilla E. Ottowell
-------------------------
Priscilla E. Ottowell
Secretary and Controller
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
Financial Statements for the Years Ended March 31, 1998 and 1997 and
Independent Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of The First Connecticut Capital Corporation:
We have audited the accompanying balance sheets of The First Connecticut Capital
Corporation (the "Corporation") as of March 31, 1998 and 1997 and the related
statements of operations, changes in stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Corporation'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, such financial statements present fairly, in all material
respects, the financial position of the Corporation at March 31, 1998 and 1997
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
June 12, 1998
-1-
<PAGE>
<TABLE>
<CAPTION>
THE FIRST CONNECTICUT CAPITAL CORPORATION
BALANCE SHEETS, MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and
per share data)
NOTES 1998 1997
----- ---- ----
<S> <C> <C> <C>
ASSETS
Investments:
Loans - net of allowance for investment losses 6 $ 466 $ 481
of $300 in 1998 and $695 in 1997
Cash and cash equivalents 214 211
Restricted cash 3 49 45
Loans held for sale 94 380
Partnership loans 91 0
Accrued interest 21 41
Note receivable 450 0
Servicing rights 3 14 347
Fixed assets 7 37 47
Other assets 35 245
------ ------
TOTAL ASSETS $1,471 $1,797
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Warehouse line of credit 10 $ - $ 317
Accounts payable and other accrued expenses 142 439
------ ------
TOTAL LIABILITIES 142 756
------ ------
Commitments and contingencies 12
STOCKHOLDERS' EQUITY:
Common stock, no par value, stated value $.50
per share, authorized 3,000,000 shares,
issued and outstanding 1,173,382 shares 587 587
Paid-in surplus 9,253 9,253
Accumulated deficit (8,511) (8,799)
------ ------
TOTAL STOCKHOLDERS' EQUITY 1,329 1,041
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,471 $1,797
====== ======
</TABLE>
See notes to financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
THE FIRST CONNECTICUT CAPITAL CORPORATION
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share data)
Year Ended Year Ended
NOTES 1998 1997
----- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 107 $103
INTEREST EXPENSE:
Interest expense 4 9
---------- -----------
NET INTEREST INCOME 103 94
---------- -----------
RECOVERY OF (PROVISION FOR) INVESTMENT LOSSES 49 (215)
---------- -----------
NET INTEREST INCOME (EXPENSE) AFTER RECOVERY OF
(PROVISION FOR) INVESTMENT LOSSES 152 (121)
---------- -----------
OTHER OPERATING INCOME:
Servicing fees 4 132 166
Loan Origination fees 163 198
Other fees 32 164
Recovery on note payable 12 268 -
Recovery on legal settlement - 24
Gain on sale of loans 3 14 22
Other income - 136
---------- -----------
Total Other Operating Income 609 710
---------- -----------
TOTAL INCOME 761 589
---------- -----------
OTHER OPERATING EXPENSES:
Amortization of servicing rights 3 27 17
Collection expenses - 151
Officers' salaries 138 224
Other salaries 37 81
Directors' fees 9 18
Professional services 32 16
Miscellaneous taxes 21 36
Employee and general insurance 38 88
Loss on note receivable 5 52 -
Rent 31 33
Communications 11 19
Advertising and promotions 5 4
Stock record and other financial expenses 5 5
Depreciation expense 10 15
Other 52 107
---------- -----------
Total Other Operating Expenses 468 814
---------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE FIRST CONNECTICUT CAPITAL CORPORATION
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share data) (continued)
Year Ended Year Ended
NOTES 1998 1997
----- ---- ----
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES 293 (225)
INCOME TAX EXPENSE 5 5
---------- -----------
NET INCOME (LOSS) $ 288 ($230)
========== ===========
INCOME (LOSS) PER COMMON SHARE (BASIC AND DILUTED) 3 $ 0.25 ($0.20)
========== ===========
Weighted average number of
common shares outstanding (Basic and Diluted) 1,173,382 1,173,382
========== ===========
</TABLE>
See notes to financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
THE FIRST CONNECTICUT CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share data)
Common Stock
--------------------- Total
Number Of Paid-In Accumulated Stockholders'
Shares Amount Surplus Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31,1996 1,173,382 $587 $9,253 ($8,569) $1,271
Net Loss (230) (230)
--------- ---- ------ ------- ------
BALANCE, MARCH 31,1997 1,173,382 $587 $9,253 ($8,799) $1,041
Net Income 288 288
--------- ---- ------ ------- ------
BALANCE, MARCH 31,1998 1,173,382 $587 $9,253 ($8,511) $1,329
========= ==== ====== ======= ======
</TABLE>
See notes to financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
THE FIRST CONNECTICUT CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands)
1998 1997
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .......................................... $ 288 ($ 230)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on disposal of furniture and equipment ............ -- 15
Net Gain on sale of loans held for sale ................ (14) (22)
(Recovery of) provision for investment losses .......... (49) 215
Loss on note receivable ................................ 52 --
Principal collected on note receivable ................. 40 --
Recovery on note payable ............................... (268) --
Depreciation ........................................... 10 15
Amortization of servicing rights ....................... 27 17
Origination of loans held for sale ..................... (7,033) (3,256)
Proceeds from sales of loans held for sale ............. 7,333 2,876
Increase in Partnership loans .......................... (91) --
Decrease (Increase) in accrued interest receivable ..... 20 (6)
Decrease in other assets ............................... (4) 20
Decrease in accounts payable and other accrued expenses (29) (130)
Decrease in deferred income taxes ...................... -- (76)
Increase in restricted cash ............................ (4) --
------- -------
Net cash provided by (used in) operating activities 278 (562)
------- -------
INVESTING ACTIVITIES
Proceeds from sales of investments ...................... -- 250
Principal collected on investments ...................... 42 2
------- -------
Net cash provided by investing activities ......... 42 252
------- -------
FINANCING ACTIVITIES
(Decrease) increase in warehouse line of credit .......... (317) 91
------- -------
Net cash (used in) provided by financing activities (317) 91
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............. 3 (219)
CASH AND CASH EQUIVALENTS, BEGINNING .......................... 211 430
------- -------
CASH AND CASH EQUIVALENTS, ENDING ............................. $ 214 $ 211
======= =======
</TABLE>
See notes to financial statements.
-5-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
1. MANAGEMENT'S PLAN
On August 15, 1990, the Corporation, formerly The First Connecticut
Small Business Investment Company, filed a petition for relief under Chapter 11
of the federal bankruptcy laws in the United States Bankruptcy Court.
On October 18, 1991, the Corporation filed a plan of reorganization
(the "Plan") with the United States Bankruptcy Court. The Plan was confirmed as
of January 9, 1992, and generally provided for payment in full of all creditors
except the U.S. Small Business Administration (the "SBA").
The Corporation filed an application to close the Chapter 11 bankruptcy
proceedings. That application was approved and the Corporation emerged from
bankruptcy on December 24, 1994.
During 1998, the Corporation generated net income of $288. The
Corporation currently anticipates that during the year ending March 31, 1999,
its principal financing needs will consist of funding its mortgage loans held
for sale (see Note 10 - Warehouse Line of Credit) and the ongoing net cost of
mortgage loan originations. Future cash flow requirements will depend primarily
on the level of the Corporation's activities in originating and selling mortgage
loans, as well as cash flow required by its operations. Although the Corporation
anticipates increased activities in originating mortgage loans, the difficulties
experienced within the relevant economic markets still exist and there are no
assurances that increased activity will occur. Consequently, as a means to
provide further cash flow, the Corporation has expressed a willingness to
liquidate certain current assets in its portfolio and that a market exists for
those assets.
The Corporation continues to investigate and pursue alternative and
supplementary methods of financing its operations and to support the growth of
the Corporation.
The Corporation believes that cash on hand and internally generated
funds will be sufficient to meet its corporate, general and administrative
working capital and other cash requirements during the year ending March 31,
1999. The Corporation took certain action steps during the year ended March 31,
1997 to decrease its cash flow requirements for the years ended March 31, 1998
and 1997. Those steps included an overall salary reduction and a restatement and
termination of the pension plan. As a result of the note receivable from Walsh
Securities (see Note 4 ) the Corporation's cash flow will increase by $120 a
year. Management also believes additional steps can be taken if necessary.
-6-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
2. PARTNERSHIP
The Corporation has formed a Limited Partnership (the "Partnership")
known as First Connecticut Capital Mortgage Fund A, Limited Partnership as to
which the Corporation is the General Partner. The intent of this new entity is
to sell units in the Limited Partnership to investors in a private placement, up
to a maximum of $5 million in $50 units, for the purpose of funding a short-term
Portfolio Loan Program for the Limited Partnership. The limited partners will be
limited to investors who qualify as "Accredited Investors" as defined in
regulation D, promulgated under the Securities act of 1933. This program would
generate income to the Corporation in the form of loan origination fees and
service fees in excess of a guaranteed income return to the limited partners in
connection with, mortgage loans that would be purchased by the Limited
Partnership from the funds invested by the limited partner. As of June 1, 1998
the Corporation has sold 33 units.
As of March 31, 1998, the Corporation had a one percent interest in the
Partnership with a recorded balance of $13 which is accounted for on the equity
method of accounting. The following presents summarized financial information
for the Partnership as of and for the year ended December 31, 1997, the
Partnership's fiscal year end:
Total Assets (principally consisting of mortgages receivable) $1,279
Total Liabilities 11
Total Partnership Capital 1,269
Total Revenues 40
Net loss $ 1
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Loans - Loans are generally recorded at the principal amount
outstanding. Interest rates on loans are fixed at the time of issuance and are
based upon current market rates at the time. As of March 31, 1998, outstanding
loans are payable in a variety of methods over a term of less than five years,
all are collateralized by liens on real properties; a few of such properties are
subject to prior liens. Interest income on loans is recognized based on rates
applied to principal amounts outstanding. In connection with most loans, the
borrower also pays a nonrefundable fee to the Corporation. Loans are generally
placed on nonaccrual status when they become 180 days past due or earlier, if
the loan is considered impaired. Any unpaid amounts previously accrued on these
loans are reversed from income. Subsequent cash receipts are applied to the
outstanding principal balance or to interest income if, in the judgment of
management, collection of the outstanding principal is not in question. Loans
are removed from non-accrual status when they become current as to both
principal and interest and when subsequent performance reduces the concern as to
the collectibility of principal and interest.
Loans held for sale - Mortgage loans originated and intended for sale
in the secondary market are carried at the lower of cost or fair value in the
aggregate. Net unrealized losses are recognized through a valuation allowance
charged to income.
-7-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
Allowance for Investment Losses - The allowance for investment losses
is determined by management on an investment by investment basis. The allowance
is an amount that management believes will be adequate to absorb losses on
existing investments that may become uncollectible, based on evaluations of the
collectibility of the investments. The evaluations take into consideration such
factors as geographic location, assessment of collateral quality, appraisals of
significant collateral and other conditions that may affect the borrower's
ability to repay.
Certain impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent.
Concentration of Credit Risks - The nature of the Corporation's
business is to fund and service mortgages to qualified borrowers within the
northeastern United States , and more localized in the state of Connecticut
where management has the most experience. The mortgage loans are predominately
collateralized with residential properties, however, there are a few smaller
commercial properties as well as some vacant land. The Corporation maintains a
strict real estate appraisal policy as well as underwriting guidelines.
Pension Plan - The Corporation had a non-contributory defined benefit
pension plan covering all employees meeting certain eligibility requirements.
The Corporation's policy was to fund accrued pension cost.
This plan was terminated on March 31, 1997 (See Note 14).
Cash and Cash Equivalents - For the purpose of the statements of cash
flows, the Corporation has defined cash as including cash on hand and cash in
interest bearing and noninterest bearing operating bank accounts. Highly liquid
investments such as time deposits with an original maturity of three months or
less are considered to be cash equivalents.
Restricted Cash - Restricted cash is composed of a certificate of
deposit which is being maintained as collateral for the Corporation's standby
letter of credit.
Income Taxes - The Corporation follows the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Servicing Rights - In connection with the sale of substantially all of
the Corporation's investments as discussed in Note 4, the Corporation stopped
the amortization of certain servicing rights due to the assignment of the loan
portfolio serviced by the Corporation under the Asset Management Loan Servicing
agreement dated December 15,1993 (the "Agreement") to Greenwich Capital
Financial Products, Inc.(Note 5). Servicing rights amortized using the interest
method were $27 and $17 during the years ended March 31, 1998 and 1997,
respectively.
-8-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
Fixed Assets - Fixed assets are carried at original cost. Depreciation
is provided for primarily by using accelerated depreciation methods over the
estimated service lives as follows:
Improvements 31 years
Furniture and fixtures 3-5 years
Equipment 3-5 years
Automobiles 3 years
Loan Servicing - As of April 1, 1996, the Corporation adopted Statement
of Financial Accounting Standard (SFAS) No. 122, "Accounting for Mortgage
Servicing Rights." This Statement required allocation of the total cost of
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. Effective
January 1, 1997, SFAS No. 122 was superseded by SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
the effective provisions of which were adopted by the Corporation as of the
above mentioned effective date. This statement specifies accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities and for distinguishing whether a transfer of a
financial asset in exchange for cash or other consideration should be accounted
for as a sale or as a pledge of collateral in a secured borrowing. The
Corporation recorded an asset of $14 and $27, related to servicing of loans as
of March 31, 1998 and 1997, respectively. This asset is affected by the
predominant risk characteristics of the underlying financial assets and,
accordingly, the Corporation periodically assesses the asset for impairment.
Since the underlying financial assets primarily represent loans collateralized
by first mortgages, the servicing rights asset encompasses risks commonly
associated with mortgage loans. Estimation of a valuation allowance to reduce
the servicing rights asset to fair value involves evaluating the characteristics
of the underling assets including interest rates, estimated remaining lives,
dates of origination, terms, and geographic location. No valuation allowance was
recorded at March 31, 1998 and 1997, based on the characteristics of the
underlying financial assets.
Income (Loss) Per Common Share - As of March 31, 1998, the Corporation
adopted Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings per Share," which establishes new standards for the computation and
disclosure of earning per share ("EPS"). The new statement requires dual
presentation of "basic" EPS and "diluted" EPS. Basic EPS is based on the
weighted average number of common shares outstanding for the period, excluding
the effects of any potentially dilutive securities. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted. Net income (loss) per share is
calculated by dividing net income (loss) by the weighted average number of
common shares outstanding during the period. The Corporation's outstanding
options are excluded from the computation due to their antidilutive effect.
-9-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
Stock Options - During 1997, the Corporation adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement encourages, but does
not require, employers to adopt a fair value method of accounting for employee
stock-based compensation. The Corporation continues to account for stock-based
compensation using the intrinsic value under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Regardless of the method
used for employee stock-based arrangements, SFAS No. 123 requires increased
disclosures of stock-based compensation arrangements with employees. The
Corporation has adopted SFAS No. 123 through a separate disclosure to the
financial statements.
Use of 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 revenue and expenses during
the reporting periods. Actual results could differ from those estimates.
New Accounting Standards - In 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, which establishes standards for reporting and
displaying comprehensive income and its components and SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, which establishes
standards for the way public companies report information about operating
segments in both interim and annual financial statements and related
disclosures. The adoption of these standards is not expected to have a material
impact on the Corporation's financial statements. The standards will be
effective for the Corporation's financial statements in fiscal year 1999.
4. SALE OF INVESTMENTS
On December 15, 1993, the Corporation sold outstanding investments
including accrued interest with a net book value of $30,025 pursuant to a Loan
and Real Property Purchase Agreement (the "Purchase Agreement") dated as of June
29, 1993 (and as amended on October 29, 1993). The portfolio was sold to GF
Mortgage Corporation, an unrelated purchaser which is a subsidiary of Gruntal
Financial Corporation, a subsidiary of The Home Insurance Company, in exchange
for satisfaction of outstanding liabilities to the Participants' Trust and the
SBA with carrying values at December 15, 1993 of $17,359 and $5,275,
respectively, and options to purchase 60,000 shares of the Corporation's common
stock (see Note 15). The Corporation recognized a loss of $6,412 in connection
with the sale. The Corporation also received a participation under certain
conditions in the recovery of non-accrued interest or principal in excess of the
book value of the loans and entered into an Asset Management and Loan Servicing
-10-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
Agreement (the "Agreement") dated December 15, 1993 with GF Mortgage Corporation
whereby the Corporation continued to service the portfolio for an amount equal
to 1/12th of one percent of the principal balance outstanding each month and
received 2.5% of the principal outstanding or the sales price as defined in the
Agreement upon subsequent sale of these investments to an outside party. During
the years ended March 31, 1998 and 1997, the Corporation realized $41 and $126,
respectively, in accordance with this Agreement. See Note 5 for a discussion of
the termination of the Agreement.
5. TERMINATION OF SERVICING RIGHTS
On October 27, 1997, Walsh Securities assigned the balance of the loan
portfolio serviced by the Corporation under the Agreement to Greenwich Capital
Financial Products, Inc. ("Greenwich Capital") As a result of this transaction,
the Agreement was terminated. Walsh Securities issued a promissory note (the
"Note") dated November 12, 1997 in the amount of $560 to fulfill their
obligation to the Corporation under the Agreement. Since the Note is not
interest bearing, interest has been imputed at 8.5% resulting in an original
issue discount ("OID") of $78. This OID will be amortized to interest income
over the life of the Note.
The discounted value of the Note of $482 was exchanged for the
unamortized balance of the servicing rights of $320 and a receivable of $214 for
certain reimbursable fees and expenses resulting in a $52 loss on the
transaction.
The Note requires monthly payments of $10 beginning December 1, 1997
through December 1, 2000 with a lump sum payment of $200 on December 31, 2000.
The Corporation will continue to service the remaining loan portfolio
for Greenwich Capital under a new servicing agreement.
6. INVESTMENTS AND ALLOWANCE FOR INVESTMENT LOSSES
Investments by type at March 31, are as follows:
1998 1997
----- ------
Loans ......................... $ 766 $1,176
Allowance for investment losses (300) (695)
----- -----
Total ......................... $ 466 $ 481
===== =====
-11-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
Changes in the allowance for investment losses are summarized as
follows for the years ended March 31:
1998 1997
-------- --------
Beginning balance $ 695 $ 636
(Recovery of) Provision for losses (49) 215
Investment write-offs (346) (156)
-------- --------
Ending balance $ 300 $ 695
======== ========
At March 31, 1998, the Corporation has a recorded investment in
impaired loans of $735 and a related allowance for investment losses of $300, as
compared to $1,176 of impaired loans and a related allowance for investment
losses of $695 at March 31, 1997. The average recorded investment in impaired
loans for the year ended March 31, 1998 and 1997 was $1,042 and $1,120,
respectively, and the income recorded on these loans identified as impaired
totaled $107 and $103, respectively.
Loans on which the accrual of interest has been discontinued amounted
to approximately $94 and $491 at March 31, 1998 and 1997, respectively. If those
loans had been current throughout their terms, interest income would have
increased $12 and $95 for the years ended March 31, 1998 and 1997, respectively.
7. FIXED ASSETS
At March 31, 1998 and 1997, the costs and related accumulated
depreciation of the Corporation's fixed assets were as follows:
1998 1997
----- ------
Improvements ............................ $ 7 $ 7
Equipment ............................... 234 237
----- -----
Fixed assets at cost .................... 241 244
Less accumulated depreciation............ (204) (197)
----- -----
Fixed assets-net ........................ $ 37 $ 47
===== =====
8. PARI PASU LOAN PARTICIPATIONS
Certain participation agreements provide for the participant and the
Corporation to share, pari pasu in the rights and risks of payment in certain
loan accounts. Investments are shown net of the pari pasu participation amount.
The outstanding participant balance under these agreements is $44 and $253 as of
March 31, 1998 and 1997, respectively.
-12-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
9. INCOME TAXES
The income tax provision consisted solely of current state income taxes
for the years ended March 31, 1998 and 1997.
A reconciliation of the income tax provision (benefit) computed by
applying the Federal statutory rate to income before income taxes to the actual
provisions for income taxes for the years ended March 31, 1998 and 1997 is as
follows:
1998 1997
----- -----
Income tax provision (benefit)
at statutory rate ...................... $ 103 $ (79)
Primarily loss for which no benefit
can be realized ........................ 0 84
Benefit of net operating loss carryforward
for which no asset was previously
recognized ............................. (98) 0
----- -----
Total .................................... $ 5 $ 5
===== =====
The components of the net deferred tax asset are as follows:
1998 1997
------- -------
Deferred tax asset:
Net operating loss carryforward $ 3,295 $ 3,746
Valuation allowance ........... (3,295) (3,746)
------- -------
Net deferred tax asset .......... $ 0 $ 0
======= =======
The Corporation has elected, for income tax purposes, to report certain
capital gains on an installment basis, whereas the total amount of such gains is
reported for financial statement purposes as of the transaction date. Deferred
income taxes are provided for the difference between the gains reported for book
and tax purposes, and becomes currently payable as the gains are realized for
tax purposes. There was no deferred tax liability at March 31, 1998 or 1997.
In addition, deferred tax assets result from net operating loss
carryforwards (NOLS). Due to the uncertainty of realizing the benefits of these
NOLS a valuation allowance has been established. The valuation allowance was
reduced by $451 and increased by $22 for the years ending March 31, 1998 and
1997, respectively.
-13-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
At March 31, 1998, the Corporation had available federal and state net
operating loss carryforwards of $9,293 and $5,344, respectively, for income tax
purposes which expire as follows:
Federal State
------- -----
1999 - $4,087
2000 - 678
2001 - 483
2002 - 69
2003 - 27
2008 $3,914 -
2009 4,087 -
2010 679 -
2011 497 -
2012 81 -
2013 35 -
------ ------
$9,293 $5,344
====== ======
10. WAREHOUSE LINE OF CREDIT
The Corporation had a $1 million warehouse line of credit with Walsh
Securities to fund mortgages before they were sold. This line of credit was
collateralized by mortgage loans originated with the proceeds. This line of
credit expired on December 31, 1997 and, accordingly, there were no outstanding
advances at March 31, 1998. At March 31, 1997 there was $317 of outstanding
advances under the line of credit.
11. TRANSACTIONS WITH AFFILIATES
Affiliates include directors and officers of the Corporation and
members of their immediate families and companies which have a 5% or more
ownership in the Corporation.
Legal services, including representation of the Corporation on the closing of
all new loans, foreclosure proceedings on delinquent loans and general corporate
and security matters, are provided by a firm in which a director is a principal.
Fees for these services were $17 and $31 for the years ended March 31, 1998 and
1997, respectively, of which $15 of legal expenses accrued at March 31, 1996 had
been negotiated and forgiven by the law firm in the year ended March 31, 1997.
-14-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
Certain officers and directors of the Corporation are principals of a
mortgage company. The Corporation extended second mortgages to borrowers secured
by collateral which had also been pledged to the mortgage company on first
mortgages. The mortgage company is in the process of liquidation and does not
compete with the Corporation.
12. COMMITMENTS AND CONTINGENCIES
The Corporation had made certain guarantees with a contractual balance
of $368 at March 31, 1997. The guarantees were for small business concerns from
whom collateralized loans were outstanding and were previously sold (see Note
4). During the year ended March 31, 1995, $368 of these guarantees had been
called by the bank. The Corporation had fully accrued for the guaranteed amounts
called at March 31, 1997. On March 31, 1998 this guarantee had been negotiated,
forgiven and released for a cash payment of $100, resulting in income of $268
included in the recovery of notes payable in the statement of operations for
1998.
Additionally, the Corporation has made no payments on prior mortgages
to other financial institutions in order to secure the Corporation's position
during the years ended March 31, 1998 or 1997.
As of March 31, 1998 and 1997, the Corporation had outstanding loan
commitments of $2,447 and $1,132, respectively.
13. LETTER OF CREDIT
The Corporation has a $40 letter of credit outstanding as of March 31,
1998 at a stated interest rate of 2.00% per annum related to obtaining its
license as a First Mortgage Loan-Lender Broker. The letter of credit expires
February 9, 2000. At March 31, 1998, restricted cash includes a $49 certificate
of deposit which is being maintained as collateral for the letter of credit.
14. EMPLOYEE BENEFITS
The Corporation had a non-contributory defined benefit pension plan
covering substantially all of its employees. The benefits were based on years of
service and the average of the highest consecutive five years compensation. Plan
assets consisted primarily of cash equivalents and debt securities.
The Plan, as restated on March 31, 1995, froze benefits for the "Highly
Compensated Employees" at the March 31, 1989 level and provided the "Non-Highly
Compensated Employees" with pre-1986 level of benefits. Furthermore, an
amendment adopted March 31, 1995 ceased benefits accruals for all participants
effective April 14, 1995. Finally on March 31, 1997, the Plan was terminated.
Accordingly, the projected benefit obligation became fully vested and Plan
assets of $293 were distributed to participants on November 24, 1997.
-15-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
Net periodic pension cost for the year ended March 31, 1997 included
the following components:
Service cost-benefits earned
during the year $ 11
Interest cost on projected
benefit obligation 20
Actual return on assets 0
Net amortization of transition obligation (21)
-----
Net periodic pension cost $ 10
=====
The following table sets forth the benefit obligations and net assets
of the plan at March 31, 1997:
Vested benefit obligation $293
Accumulated benefit obligation 293
Projected benefit obligation 293
Plan assets at fair value 293
----
Excess of plan asset
over projected benefit obligation 0
Unrecognized net gain 0
-----
Accrued pension costs included in
accrued expenses $ 0
=====
The following are rates and assumptions used in determining the actuarial
present value of the projected benefit obligations for fiscal 1997:
Weighted average discount rate 7.25%
Expected long-term rate of
return on assets 7.50%
-16-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
15. STOCK OPTIONS
The Corporation has a compensatory stock option plan which enables the
granting of options to officers to purchase shares of the Corporation's common
stock at prices equal to fair market value at the date of grant. As the grant
date coincides with the measurement date, and the option price is equal to the
quoted market price at the measurement date, there is no related compensation
expense. At March 31, 1998, no options were outstanding under this plan and
options for 40,000 shares were available for future grants. Options generally
become exerciseable two years after grant and expire within five years of grant.
In connection with the Purchase Agreement (see Note 4) and pursuant to
a stock option agreement dated December 15, 1993, the Corporation granted GF
Mortgage Corporation the right and option to purchase 60,000 shares of the
Corporation's common stock expiring on December 15, 1998 at an exercise price of
$1.50 per share which was less than market value at the date of grant. The
difference between the quoted market value of the shares at the date of grant
and the option price for the grant was charged to the loss on sale of
investments at the date of grant. As of March 31, 1998, 60,000 options are
excercisable and no such options have been exercised.
16. DIVIDEND REINVESTMENT PLAN
Previously, the Corporation had established a Dividend Reinvestment
Plan whereby holders of the Corporation's common stock may automatically invest
cash dividend payments in additional shares of common stock at a price equal to
90% of the then market value, as defined, without payment of any brokerage
commissions or service charge. No shares of common stock were issued under this
plan during 1998 or 1997.
17. LEASES
The Corporation leases office space and equipment for use in
operations. The leases generally provide that the Corporation pay taxes,
insurance and maintenance expenses. Some leases contain renewal options, and
rent payments change in accordance with changes in the Consumer Price Index.
Rental expense relating to cancelable and noncancelable operating leases
amounted to $31 and $33 for the years ended March 31, 1998 and 1997,
respectively.
-17-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
As of March 31, 1998, future minimum rental payments required under
noncancelable operating leases were as follows:
Year Ending Minimum
March 31, Rental Payments
--------- ---------------
1999 $ 36
2000 35
2001 32
2002 23
TOTAL $ 126
-----
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Methods and assumptions for estimating the fair value of the Company's
financial instruments are set forth below. Fair values are calculated based on
the value without regard to any premium or discount that may result from
concentrations of ownership of a financial instrument, possible tax
ramifications or estimated transaction costs.
Loans - As substantially all of the Corporation's loans fall within the
scope of SFAS No. 114, the estimated fair value for such loans is based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or on recent external appraisals or other available market
information if the loan is collateral dependent. Assumptions regarding credit
risk, cash flow, and discount rates are judgmentally determined using available
market information and specific borrower information.
Servicing Rights - The Corporation estimates fair value for its
servicing rights by discounting expected net cash flows through maturity from
servicing activities at market discount rates that reflect the credit and
interest rate risk inherent in the servicing rights.
Note Receivable - The fair value of the note receivable is estimated by
discounting future cash flows at a current market rate of interest.
Other On-Balance Sheet Financial Instruments - Other on-balance sheet
financial instruments include cash and cash equivalents, restricted cash,
accrued interest and a warehouse line of credit. The carrying value of each of
these financial instruments is a reasonable estimation of fair value.
Loans held for sale - For loans held for sale fair value is estimated
by discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources adjusted to reflect differences
in servicing and credit costs.
-18-
<PAGE>
THE FIRST CONNECTICUT CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS - continued
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands, except share and per share amounts)
The carrying values were equal to the estimated fair values of cash and
cash equivalents, restricted cash, net investments, loans held for resale, note
receivable, accrued interest, warehouse line of credit and net servicing rights
as of March 31, 1998 and 1997.
Limitations - Fair value estimates are made at a specific point in
time, based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
* * * * *
-19-
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