SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from July 1, 1996 to December 31, 1996
Commission file number 0-20806
FIRSTMARK CORP.
(Name of Small Business Issuer in its Charter)
Maine 01-0389195
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
222 Kennedy Memorial Drive, 04901
Waterville, Maine (Zip Code)
(Address of Principal Executive Offices)
(207) 873-6362
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.20 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 past 90 days.
Yes __X__ No _____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B 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. __X__
The issuer's revenues for the fiscal year ended June 30, 1996 were
$3,398,900. The issuer's revenues for the transition period from July 1, 1996 to
December 31, 1996 were $6,242,047.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of April 30, 1997 was $3,771,149.
The number of shares outstanding of Common Stock, as of December 31,
1996 was 2,080,634.
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TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business..............................................3
Item 2. Description of Property..............................................9
Item 3. Legal Proceedings...................................................10
Item 4. Submission of Matters to a Vote of Security Holders.................11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters............12
Item 6. Management's Discussion and Analysis or Plan of Operation...........12
Item 7. Financial Statements................................................17
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..............................17
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...................18
Item 10. Executive Compensation..............................................20
Item 11. Security Ownership of Certain Beneficial Owners and Management......22
Item 12. Certain Relationships and Related Transactions......................24
Item 13. Exhibits, List and Reports on Form 8-K..............................24
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PART I
Item 1. Description of Business
General
Firstmark Corp. (the "Company") was incorporated in Maine in January
1982. Through a subsidiary, Southern Title Insurance Corporation ("STIC"), the
Company is principally engaged in the business of issuing title insurance. The
Company also makes venture capital and real estate investments either in the
form of pure equity investments or in the form of loans with an equity
participation feature and makes control investments in situations where the
Company's management actually operates the business. Currently, the Company has
numerous minority interest investments and one control investment in title
insurance. Until January 24, 1997, the Company also actively traded public
stocks and bonds and provided financial consulting services to a select number
of individuals and institutions. See "-- Recent Developments."
In June 1996, Southern Capital Corp. ("SCC") was merged with and into
Southern Capital Acquisition Corp. ("SCAC"), a subsidiary of the Company. As
part of the merger, the shareholders of SCC received 40,000 shares of the
Company's Series B, cumulative, non-voting preferred stock, par value $.20 per
share (the "Series B Preferred Stock"). The Series B Preferred Stock is not
convertible by the holders, but may be converted by the Company, subject to
approval by the Federal Communications Commission ("FCC"), into not less than
2,000,000 shares of the Company's common stock, par value $.20 per share (the
"Common Stock"), subject to adjustment if the market price of the Common Stock
is less than $4.00 per share at the time of conversion. The Series B Preferred
Stock began accruing dividends on January 1, 1997 and, if not converted by the
Company sooner, would have been redeemable at the option of the holders at a
price of $200 per share after June 30, 1998. See "-- Recent Developments" for
information on the conversion by the Board of Directors.
SCC, through its subsidiary, STIC, is principally engaged in the
business of issuing title insurance. SCC also reviews investment opportunities
for its own account. Currently, SCC is an investor in Champion Broadcasting
Corp., a small market radio acquisition company that acquires multiple stations
in single markets ranked below the top 150 markets by Arbitron.
The title insurance industry is highly sensitive to the volume of real
estate transactions and to interest rate levels. The Company is not subject to
environmental litigation.
Recent Developments
Board Review of Company Operations. Over the last several months of the
transition period from July 1, 1996 to December 31, 1996, the Company reviewed
several of its operations, which were unprofitable. First, Firstmark Prime
Securities, located in Portland, Maine was closed in December 1996. Robert A.
Rice, who had supervised the Portland operations, resigned as an officer and
director of the Company. The Board of Directors also concluded that it was
unlikely that the Company could profitably conduct certain operations located in
Waterville, Maine. Those operations included financial planning, investment
management, estate and tax planning, insurance planning and securities
brokerage. Generally, it was determined that the revenue stream from those
businesses was too uncertain and uneven to justify the related operating
expenses.
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In addition to reducing operating expenses, the Board of Directors also
determined that it was important to improve the Company's liquidity by
converting non-cash assets to cash and, if possible, extending the maturity of
some or all of the Company's convertible notes, which, if not extended, were due
on April 21, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Based on these conclusions, the Company devised a plan intended to help
it achieve its short-term goals of reducing expenses and improving liquidity,
consistent with its clients' interests and its contractual obligations to
officers and others.
Sale of Subsidiaries and Resignation of Officers. Effective January
24, 1997, the Company transferred the stock of three subsidiaries, Firstmark
Capital Corp., Firm Investment Corp. and Firstmark Properties, Inc. to Ivy L.
Gilbert. These subsidiaries conducted the operations that the Company
decided to discontinue. At the time of the transfers, Firstmark Capital
Corp. had total assets of approximately $202,000 and net assets of
approximately $102,000; Firm Investment Corp. had total assets of
approximately $47,000 and net assets of approximately $47,000; and Firstmark
Properties, Inc. had total assets of approximately $1,000 and net assets of
approximately $1,000. When the stock of the subsidiaries was transferred
to Ms. Gilbert, she resigned as an officer and employee of the Company. Ms.
Gilbert has agreed to serve the Company as a consultant until July 1997. In
addition to the transfer of the subsidiaries, Ms. Gilbert will receive
$30,000, payable over six months, for her services as a consultant and would
be compensated if holders of $500,000 or more of the Company's convertible notes
agree to extend the maturity of such notes.
On January 24, 1997, James F. Vigue resigned as President and Chief
Executive Officer of the Company. Mr. Vigue continues as the Chairman of the
Board of Directors and a consultant to the Company. For his services as a
consultant, Mr. Vigue will receive $90,000, payable over 12 months.
As a result of these developments, the Company was released from
several obligations. First, in connection with the transfer of the stock of the
subsidiaries to Ms. Gilbert, Firstmark Capital Corp. has assumed the Company's
obligations under the lease, dated January 1, 1993, between the Company, as
tenant, and Pinnacle Investment Group ("Pinnacle"), as landlord, for
approximately 4,000 square feet of commercial space at the Company's principal
office in Waterville, Maine. Currently, the rent under the lease, which
terminates on December 31, 2003, is approximately $43,980 per year. The Company
owned the parcel of land on which its administrative office was located. On
January 27, 1997, Pinnacle purchased the land for $55,000.
In addition, in connection with their respective resignations, both Mr.
Vigue and Ms. Gilbert, as officers of the Company, canceled employment
agreements with the Company. Both agreements were for three-year terms that
commenced on May 17, 1996, with renewals by mutual consent of the parties for
successive terms of one year each. Under the agreements, Mr. Vigue and Ms.
Gilbert were each entitled to base compensation of $120,000 per year and
additional compensation based on any fees or commissions that he or she
generated as employees of the Company and its subsidiaries.
Both Mr. Vigue and Ms. Gilbert continue to serve as directors of the
Company. Donald V. Cruickshanks, President of STIC, was appointed President
and Chief Executive Officer of the Company on January 24, 1997. Lewis M.
Brubaker, Jr., chief financial officer of SCC at that time, was appointed
Chief Financial Officer of the Company on the same date. Mr. Brubaker
resigned on April 25, 1997 to take advantage of a new employment
opportunity.
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Conversion of Series B Preferred Stock. On February 25, 1997, in a
special meeting of the Company's shareholders, the Company presented two
proposals that would allow for the conversion of the Series B Preferred Stock.
These two proposals were:
(1) an amendment to the Company's Articles of Incorporation to
increase the amount of authorized Common Stock from 5,000,000 to
30,000,000 shares.
(2) an amendment to the Company's Articles of Incorporation
to opt out of Section 910 of the Maine Business Corporation Act.
The shareholders approved both proposals, which are described in
further detail in the Company's definitive Proxy Statement for a Special Meeting
of Stockholders, which was filed with the Securities and Exchange Commission on
February 5, 1997.
On March 12, 1997, the Company approved the conversion of the shares of
Series B Preferred Stock into shares of Common Stock, effective in April 1997,
subject to the approval of the FCC. Each outstanding share of Series B Preferred
Stock was converted into 80.7571 shares of Common Stock, which figure was
calculated based on the average bid and asked stock prices of the Common Stock
during a 20-day period prior to the date of conversion.
The Series B Preferred Stock entitled the holders to dividends
beginning January 1, 1997, and, with the approval of the conversion, dividends
no longer accrued after March 12, 1997. The preferred stock dividend accrued to
that date ($3.16 per share) will be paid on or before June 30, 1997, but no
earlier than April 30, 1997. Additionally, the approval of the conversion of the
Series B Preferred Stock will eliminate the obligation to establish a sinking
fund beginning April 1, 1997, for the redemption of such stock.
Extension of Notes. In March 1997, holders of $585,000 of the Company's
8% convertible notes due April 21, 1997, have agreed to extend the maturity date
of the indebtedness evidenced by these notes to March 1, 1999. This amount
represents approximately 57% of the $1,035,000 of such notes outstanding. The
holders of the remaining $450,000 of notes will have the opportunity to extend
the maturity date of the indebtedness evidenced by their notes at any time prior
to April 21, 1997. Any notes that are not exchanged for new notes with a
maturity of March 1, 1999, will be repaid with cash the Company currently has
available or expects to be available upon maturity of such notes.
Related Industry Segments
The following description is a summary of the Company's historical
operations by industry segment.
Title Insurance
The title insurance related subsidiaries derive their revenues from
policy premiums and other related fees for title abstracts, binder preparations
and escrow closings. Title insurance policies are issued to buyers of real
property and secured real property lenders. These policies customarily insure
against title defects, liens and encumbrances that are not specifically exempted
in the policy. Title insurance differs from other types of insurance because it
is related to past events which affect title to the property at the time of
closing and not to unforeseen future events. Revenues are generated from 10
directly owned and operated offices as well as an agency network of over 100
agents. The majority of these revenues are generated in the Commonwealth of
Virginia. The sales and marketing efforts of STIC are generally targeted at the
residential housing market and commercial real estate.
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Venture Capital and Real Estate
The venture capital segment derives its revenue from interest earned on
loans to companies in venture capital situations and from equity returns.
Investment real estate transactions are also considered a source of revenues for
this segment.
Financial Services
The financial services subsidiaries derive their revenue from
commissions and fees generated from consulting, investment banking, the creation
of proprietary investment products and the marketing of investment and insurance
products of other companies. In addition, the Company invests its own capital in
marketable securities and other investments and makes various business and other
loans.
There is no geographical limitation of the financial services and
investment segment. Through proper licensing with each state, these services may
be provided nationwide.
Subsidiaries
The following lists the Company's subsidiaries after the January 24,
1997 transfer of three subsidiaries to Ivy Gilbert (see "-- Recent
Developments") and the services that they provide:
QFAN Marketing Services, Inc. Founded: 1984
This subsidiary holds certain real estate holdings of the
Company.
Southern Capital Acquisition Corp. Founded: 1996
This subsidiary was established to serve as the corporation
used to acquire the stock of SCC and SCC's subsidiaries. See
"Description of Business -- General." In addition, this subsidiary
holds certain securities holdings of the Company.
Investors Southern Corporation Acquired: 1996
Investors Southern Corporation serves as the holding company
for the title insurance and related operations.
Subsidiaries of Investors Southern Corporation:
Southern Title Insurance Corporation Acquired: 1996
(Founded in 1925)
This subsidiary is a title insurance underwriter. It
operates through a combination of 10 direct offices and over
100 agents.
Southern Title Agency Corporation Acquired: 1996
This subsidiary is a title insurance agency for two
of the national title insurance underwriters.
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Southern Abstractors Corporation Acquired: 1996
This subsidiary performs all title examinations and
abstracts for all of the title insurance operations. Title
examinations and abstracts involve the researching of court
and other land records to find the status of title to that
particular property.
Glasgow Enterprises Corp. Acquired: 1996
This subsidiary is involved in title agency joint
ventures with various partners. These joint ventures and the
percentage of ownership are as follows:
Southern Title of Ohio, Inc. 75%
Southern Title of Ohio, Limited 75%
Southern Title of the Peninsula, LLC 70%
Southern Title of Chesapeake, Inc. 70%
Southern Title of North Carolina, LLC 70%
Virginia First Title and Escrow LLC 70%
Southern Agency, LC 70%
Southern Title of Roanoke, LLC 33%
TBD Settlement LLC 50%
Southern Title Services, Inc. Acquired: 1996
This company is a subsidiary of STIC and currently provides
special title insurance and real estate transaction accommodation
functions, such as exchanger in like kind exchanges and mechanics' lien
agent for construction loans in Virginia.
Firstmark and all of its subsidiaries are collectively referred to
herein as the "Company."
The following lists three of the Company's former subsidiaries, which
were transferred to Ms. Gilbert, effective January 24, 1997, and the services
that they provide:
Firstmark Capital Corp. Acquired: June 1982
Firstmark Capital Corp. was the Company's financial planning
subsidiary and offered investment management services to affiliated
partnerships by serving as general partner. The subsidiary also offered
investment management, financial planning, estate and tax planning, and
insurance planning. The subsidiary's revenues were derived from
charging fees and receiving commissions on various products. The
subsidiary had been in business since 1972 and was a Federally
Registered Investment Advisory firm, with two certified financial
planners and five financial advisors.
Firm Investment Corp. (formerly Firstmark Investment Corp.)
Acquired: January 1986
This subsidiary also served as the Company's investment
banking and consulting subsidiary. Firm Investment Corp. marketed the
Company's proprietary investment products to other firms and served as
advisor and manager in some cases to the Company's equity
funds.
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Firstmark Properties Inc. Founded: 1985
This subsidiary offered commercial and investment real estate
brokerage services primarily to the Company's own holdings. The
subsidiary also advised its former parent company on real estate
related acquisitions and projects. This subsidiary had five State of
Maine Real Estate Agent licensed professionals affiliated with it.
Employees
The Company and its subsidiaries have 120 total employees, of which 15
are part-time, as of December 31, 1996. The Company believes that its relations
with its employees are good.
Significant Customers
The Company does not receive more than 10% of its business or revenues
from any single customer.
Company Operations -- Title Insurance
Competition. The title insurance business is very competitive.
Competition is based primarily on price, service, and expertise. Competition
within the title insurance industry has increased as new local and regional
title insurance operations as well as national companies are vying for market
share. Title insurance underwriters also compete for agents on the basis of
service and commission levels.
Insured Risk and Loss Reserves. The insured risk or "face amount" of
insurance under a title insurance policy is generally equal to either the
purchase price of the property or the amount of the loan secured by the
property. The insurer is also responsible for the cost of defending claims
against the insured title. The insurer's actual exposure at any time is
significantly less than the total face amount of policies in force because the
risk on an owner's policy is often reduced over time as a result of subsequent
transfers of the property and the reissuance of title insurance by other title
insurance underwriters, and the coverage of the lender's policy is reduced and
eventually terminated as a result of payment of the mortgage loan. Because of
these factors, there is no practical way to ascertain the total contingent
liability of a title underwriter on outstanding policies.
In the ordinary course of business, STIC represents and defends the
interests of their insureds and provides on its books for estimated losses and
loss adjustment expenses. In recent years, the cost of defending policy claims
has increased. Title insurers are also sometimes subject to claims arising
outside the insurance contract, such as for alleged negligence in search,
examination or closing, alleged improper claims handling and alleged bad faith.
The damages alleged in such claims may often exceed the stated liability limits
of the policies involved.
Liabilities for estimated losses and loss adjustment expenses are
accrued when premium revenues are recognized and are based upon historical and
anticipated loss experience. The resulting liability reflects estimates of net
costs to settle all reported claims and claims incurred but not yet reported to
the company. Loss reserve calculations are based on annual reviews of the actual
paid claims experience. Reserves for losses incurred but not reported (IBNR) are
estimated based on the use of actuarial methods.
Regulation. The title insurance businesses, in common with those of
other insurance companies, are subject to comprehensive, detailed regulation in
the jurisdictions in which they do business. Such regulation is primarily for
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the protection of policyholders rather than for the benefit of investors.
Although their scope varies from place to place, insurance laws in general grant
broad powers to supervisory agencies or officials to examine companies and to
enforce rules or exercise discretion touching almost every significant aspect of
the conduct of the insurance business. These powers include the licensing of
companies and agents to transact business, the imposition of monetary penalties
for rules violations, varying degrees of control over premium rates, the forms
of policies offered to customers, financial statements, periodic reporting,
permissible investments and adherence to financial standards relating to
surplus, dividends and other criteria of solvency intended to assure the
satisfaction of obligations to policyholders.
State holding company acts also regulate changes of control in
insurance holding companies and transactions and dividends between an insurance
company and its parent or affiliates. Although the specific provisions vary, the
holding company acts generally prohibit a person from acquiring a controlling
interest in an insurer incorporated in the state promulgating the act or in any
other controlling person of such insurer unless the insurance authority has
approved the proposed acquisition in accordance with the applicable regulations.
In many states, including Virginia, where STIC is domiciled, "control" is
presumed to exist if 10% or more of the voting securities of the insurer are
owned or controlled by a party, although the insurance authority may find that
such control in fact does or does not exist where a person owns or controls
either a lesser or a greater amount of securities. The holding company acts also
impose standards on certain transactions with related companies, which generally
include, among other requirements, that all transactions be fair and reasonable
and that certain types of transactions receive prior regulatory approval either
in all instances or when certain regulatory thresholds have been exceeded.
The Insurance Law of Virginia limits the maximum amount of dividends
which may be paid without approval by the Virginia Bureau of Insurance.
Reinsurance. STIC reinsures portions of title insurance risks with
unaffiliated insurance companies under traditional indemnity reinsurance
agreements. In such reinsurance agreements, the reinsurer accepts that part of
the risk which STIC, as the primary insurer, decides not to retain, in
consideration for a portion of the premium. Generally, STIC enters into
traditional reinsurance arrangements to diversify its risk and to limit loss
exposure on risks that exceed STIC's policy retention limits. These limits are
considered prudent by STIC's management and are well below the $3.4 million
limit allowed by statute, as of December 31, 1996. STIC, however, remains liable
to the insureds for the total risk, whether or not the reinsurer meets its
obligations.
At December 31, 1996, STIC ceded all of its reinsurance liability to
one carrier, Fidelity National Title Insurance Company ("Fidelity"), with which
STIC has had a treaty reinsurance agreement since October 1, 1992. Under this
agreement, STIC has reinsured all single policy risk in excess of $250,000 from
October 1, 1992 to August 1, 1996 and all single policy risk in excess of
$300,000 since August 1, 1996. For the years ended December 31, 1996, 1995 and
1994, STIC ceded to Fidelity $291 million, $336 million and $293 million,
respectively.
Item 2. Description of Property
Corporate Real Estate
Prior to January 24, 1997, the Company leased its executive and
administrative offices, consisting of approximately 4,000 square feet of
commercial space, from the Pinnacle Investment Group ("Pinnacle"), a group
consisting of four individuals, one of whom was an officer of the Company. This
facility was leased from Pinnacle under a fifteen year lease terminating on
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December 31, 2003. The lease was renewable and negotiable after five years.
Effective January 24, 1997, Firstmark Capital Corp. assumed the lease
obligation. The Company owned the parcel of land on which its administrative
offices were located. On January 27, 1997, Pinnacle purchased the land for
$55,000. See "Description of Business -- Recent Developments."
The Company owns 5,716 square feet of land and a two-story office
building containing 3,842 square feet that contains the Charlottesville,
Virginia office of STIC. The building is not encumbered and is in good operating
condition. The brick structure was built in 1920 and renovated in 1985.
Investment Real Estate
Investments in real estate are made for possible development of the
property or immediate re-sale. Most real estate held by the Company consists of
lakefront property, but non-lakefront property is also owned. The majority of
the real estate owned by the Company is either developed or undeveloped raw
land. In January 1997, the Company sold a single-family housing unit that was
acquired in connection with the moving of an employee.
The Company's real estate properties are reviewed for impairment
whenever events or circumstances indicate that the carrying value of such
properties may not be recoverable.
Item 3. Legal Proceedings
The Company is involved in litigation from time to time in the ordinary
course of business. Except as noted below, as of December 31, 1996, the Company
was not involved in any litigation outside the ordinary course of business.
On November 18, 1996, C.J. Jones filed a Complaint against Champion
Broadcasting Corporation ("Champion"), the Company and SCC, both of which are
shareholders of Champion, and H. William Coogan, Jr., a director of all three
entities, in the United States District Court for the Eastern District of
Virginia, Richmond Division. The Complaint alleges counts of breach of contract,
fraud and negligent misrepresentation against Champion, SCC and Mr. Coogan and a
count of misappropriation against SCC and Mr. Coogan in connection with Mr.
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Jones's employment as Chairman and Chief Executive Officer of Champion and his
subsequent termination in August 1996. For these counts, the Complaint seeks
both compensatory damages in the amount of approximately $3,277,000 and punitive
damages in the amount of $10,000,000, plus interest. Mr. Jones further alleges a
count of conspiracy against SCC, Mr. Coogan and the Company. For this count, the
Complaint seeks punitive damages in the amount of $12,000,000, which have been
trebled by statute to the amount of $36,000,000. The Company believes that the
Complaint is without any merit whatsoever and is defending this action
aggressively. Currently, the Company, as only an investor in Champion, is
seeking immediate dismissal as a defendant in this action.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the transition period covered by
this report.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Common Stock of the Company is traded on the Nasdaq SmallCap Market
under the symbol of "FIRM".
The following table sets forth the high and low bid information for the
Common Stock on the Nasdaq SmallCap Market for each quarter within the two
fiscal years ended June 30, 1996 and the two quarters of the transition period
from July 1, 1996 to December 31, 1996.
Fiscal Year Ended June 30, Bid Information
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High Low
1995 ---- ---
1st quarter.............................. 5.00 4.50
2nd quarter.............................. 4.81 4.50
3rd quarter.............................. 5.00 4.63
4th quarter.............................. 4.88 4.63
1996
1st quarter.............................. 4.75 3.38
2nd quarter.............................. 4.50 4.00
3rd quarter.............................. 4.75 4.25
4th quarter.............................. 4.88 3.88
Transition Period from July 1 to December 31,
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1996
July 1, 1996 to September 30, 1996....... 4.63 4.25
October 1, 1996 to December 31, 1996..... 4.63 3.25
As of December 31, 1996, there were approximately 647 shareholders of
the Common Stock.
The Company has never declared any cash dividends on the Common Stock,
and any future payment of dividends is solely in the discretion of the Board of
Directors and is dependent upon the earnings and financial condition of the
Company and such other factors as the Board of Directors from time to time may
deem relevant.
Item 6. Management's Discussion and Analysis or Plan of Operation
Change in Fiscal Year-end
On February 4, 1997, the Company changed its fiscal year end from June
30 to December 31. As a result, the accompanying financial statements and
following discussion include results for the six-month transition period from
July 1, 1996 to December 31, 1996. References in the following discussion to
fiscal 1996 or any earlier fiscal year are references to the fiscal years ended
June 30, 1996 or earlier.
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Results of Operations
Six Months Ended December 31, 1996 vs. Six Months Ended December 31, 1995
The six months ended December 31, 1996 proved to be a difficult
period for the Company, as management continued to evaluate each of its business
operations and investments to determine if they were to continue as a viable
source of profits for the Company. As a result of this process, additional
write-offs and losses from the closing of non-profitable operations were
recorded during the period. These include the closing of the securities
brokerage office in Portland, Maine and the write-off or write-down of
additional loans and investments deemed uncollectible or permanently impaired.
As a result, the Company incurred a net loss of approximately $841,000 for the
six months ended December 31, 1996 as compared to a $440,000 net profit for the
six months ended December 31, 1995.
During the period, revenues decreased by $677,000 or 10% over the same
period in 1995 to $6.24 million. This decrease was a result of a $1.17 million
or 153% decrease in investment gains and a $494,000 or 51% decrease in
commissions and fees offset by an increase in title insurance revenues of
$974,000 or 20%. The decrease in investment gains was a result of two factors.
The first factor was the fact that the 1995 amounts included a gain of $649,000
on the Intercel stock (see page 15 of the December 31, 1996 audited financial
statements for a more detailed explanation of the Intercel transaction). The
second factor was the $229,000 write-down of the Company's investment in
Industrial Technologies, Inc. ("Intech"). The Company's investment in Intech was
viewed by management to have a permanent diminution in value. The commission fee
income decreased because of management's decision to change the focus of the
Company's investment direction from venture capital investments, which generated
much of the fee income in 1995, and the closing of the securities brokerage
office in Portland, Maine in October 1996. The Company also showed declines in
financial services revenue during the period. As a result of management's review
of this operation, the Company decided in January 1997 to transfer the operation
to the former Chief Financial Officer. See "Description of Business -- Recent
Developments" for more details on this transaction. The increase in title
insurance premiums can be attributed primarily to the joint ventures started
during the last six months of 1995 and 1996 fully contributing to the revenues
for the last six months of 1996. Also an increase in title insurance revenues
from non-affiliated agencies was generated in the second half of 1996.
Total expenses increased for the six months ended December 31, 1996 by
$1.1 million or 17% to $7.49 million as compared to the same period of 1995.
This increase was mainly a result of employee compensation and benefits
increasing $718,000 or 17% to $5.0 million and general and administrative
expenses increasing by $214,000 or 11% to $2.1 million for the six months ended
December 31, 1996 versus the same period in 1995. The increase in both of these
categories can be attributed to two factors. First, the increase in agency
revenues as noted above resulted in an increase in agency commissions for the
period of approximately $292,000 more than the comparable period of 1995.
Second, the new title insurance operations started during the last six months of
1995 are escrow closing operations, which are very labor intensive, resulting in
increases in salaries and benefits as well as general and administrative costs.
Write-offs of loans and investments increased $37,000 or 24% to $187,000 as a
result of management's continued review of the investments held by the Company.
The loss on retirement of fixed assets of $45,000 and the write-down of the
excess of cost over fair value of $81,000 are a result of the closing of the
brokerage operations in Portland, Maine.
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Results of Operations
Fiscal Year Ended June 30, 1996 vs. Fiscal Year Ended June 30, 1995
The fiscal year ended June 30, 1996 was one of significant change for
the Company. On June 7, 1996, the Company completed the acquisition of SCC, and
as a result the Company's assets increased $11.4 million or 164%. As more fully
explained in Note 2 to the Consolidated Financial Statements, the assets of SCC
were merged into a wholly owned subsidiary of the Company in exchange for 40,000
shares of the Company's Preferred Series B, cumulative, non-voting preferred
stock. It is anticipated that shares of the Preferred Stock will be converted
into at least 2,000,000 shares of the Common Stock. This larger balance sheet
will allow the Company a broader base on which to build.
The increase in assets was offset in part by $1.2 million of write-offs
and reserves for venture capital investments in and loans to several startup
companies. Due to the uncertainty of these investments and loans, the Company's
Board of Directors decided that it was prudent to make such adjustments. The
progress of these investments and the repayment of these loans will be actively
managed for improvements which may allow the Company to recover certain of these
write-offs and reserves.
The statement of earnings for the year ended June 30, 1996 as shown in
the Consolidated Financial Statements only includes the consolidated results of
operations for SCC for the period from June 7, 1996 to June 30, 1996. It is
anticipated that in the future the title insurance revenues will become the
Company's major source of revenues.
Earnings (losses) before income taxes decreased $1.5 million or
200% from 1995 largely as a result of the write-offs and reserves noted above.
Revenues increased $.3 million or 11% from 1995 mainly as a result of
$.8 million in title insurance revenues which were not present in 1995. This
increase was offset by a decrease in real estate and timber revenues of $.7
million or nearly 100%. There were no timber revenues in 1996 as all timber had
been harvested. The real estate market continues to be sluggish. The Company
continues to believe that its properties, located largely on Maine lakes, will
prove to be profitable investments over the longer term. As a result of
management's review of the real estate holdings, the Company added an additional
$20,000 to the reserve against real estate holdings. Investment gains increased
$.2 million or 50% from 1995 mainly as a result of the Intercel stock
distribution. See Note 3 to the Consolidated Financial Statements for additional
information on this investment.
Expenses before write-offs of loans and investments increased $.6
million or 27% from 1995. This increase was mainly from increased employee
compensation and benefits costs of $.7 million or 59% from 1995. This increase
is attributed largely to SCC's insurance operations as the title insurance
operations are highly labor intensive.
During the fiscal year ended June 30, 1996 the Company had to make some
hard decisions concerning its venture capital investments. The Investment
Committee of the Board of Directors, which was established subsequent to the
acquisition of SCC, examined the Company's venture capital investment portfolio.
After its review, the Investment Committee concluded that several such
investments and one loan had experienced significant value diminution, which,
together with the overall risk and uncertainties inherent in the venture capital
business, prompted the Investment Committee to recommend to the Board of
Directors certain adjustments in the carrying values of such investments and the
creation of certain reserves against these investments. Such adjustments were
made to bring the carrying values of these investments in line with management's
best estimate of realizable value at June 30, 1996.
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<PAGE>
Prior to the fiscal year ended June 30, 1996, venture capital
investments were a relatively minor business for the Company, in both number of
transactions and dollars invested. At June 30, 1995, such venture capital
investments and loans totaled $1,574,789. At June 30, 1996, such investments
totaled $3,275,523 before adjustments and $2,026,176 after adjustments. These
investments were made by the Company's management prior to the acquisition of
SCC.
With these decisions behind the Company and with the addition of the
Southern Capital Corp. companies, management is implementing strategies to
reduce operating expenses and improve liquidity. The Company conducted a review
of all of its businesses. Businesses that could not produce acceptable profits,
in management's opinion, have been transferred or shut down. Similarly,
management is examining all assets of the Company to determine those assets that
should be sold, with the proceeds to be redeployed into more profitable
businesses.
See "Description of Business -- Recent Developments."
Along with the reduction of expenses, management is concentrating on
returning the Company to profitability. The title insurance industry has
experienced consolidation in recent years. The Company believes that this trend
will continue and, through another subsidiary, STIC, is looking at opportunities
for growth and expansion in this industry. The Company is interested primarily
in growing through joint ventures, expanded agency operations and possible
acquisition of small title insurance companies. The Company's geographical focus
in the title insurance industry centers on areas with prospects for growth,
including markets in Virginia where STIC does not currently have a presence and
in other states. If the Company is able to return to an acceptable level of
liquidity, it will then consider other investment opportunities.
Results of Operations
Fiscal Year Ended June 30, 1995 vs. Fiscal Year Ended June 30, 1994
Pre-tax earnings in 1995 increased 185% to $771,895 over the $271,003
level of 1994. Total expenses, 91% of revenues in 1994, only amounted to 75% of
revenues in 1995. Total 1995 revenues of $3,054,453 were slightly lower than the
prior year's $3,176,950.
Real estate and timber revenues were higher in 1995 than in 1994 due to
increased harvesting from the timber tract purchased in August 1993. This tract
was completely harvested by June 30, 1995. The real estate market continues to
be sluggish. However, in March 1994 the Company provided an additional write
down of $296,000 related to its real estate holdings. The Company continues to
believe its properties, located largely on Maine lakes, will prove to be
profitable investments over the longer term.
Commissions and fees went from $1,562,684 in 1994 to $1,665,078 in
1995. The 6.55% increase resulted both from increased consulting fees as well as
additional revenues generated at the Firstmark Prime Securities division of
Firstmark Investment Corp. in Portland, Maine. The property and equipment of
Prime Securities were acquired and its employees were hired in April 1994;
therefore, the fiscal year ended June 30, 1995 was the first year which included
a full year of Prime Securities' revenues.
Gains on securities, $443,134, were significantly higher than in the
prior fiscal year. Over $200,000 of these gains were due to the implementation
of a trading program at Firstmark Prime Securities. In addition, the parent
company changed its method of accounting for investments in equity securities
and accordingly reported an unrealized gain of approximately $176,000 on trading
securities.
Interest and dividend income was up over 10% from the prior fiscal year
due to improved interest rates earned on cash investments. The increase was
partially offset by less interest earned on lower balances of loans receivable
outstanding during that period.
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<PAGE>
Commissions and fees expense decreased to $916,227 in 1995 from
$1,072,464 in 1994, despite an increase in related revenues. The decrease
resulted primarily because some commissioned representatives became employees in
January 1994 and received lower commission percentages. In addition, certain fee
income was generated for which no commissions were paid.
The cost of real estate and timber revenues was 47% lower than in the
prior fiscal year. One reason for the decrease was the $296,000 write down,
discussed above, that occurred in the prior fiscal year. There was no comparable
write down in 1995. In addition, there were fewer real estate sales in 1995 than
in 1994.
General and administrative expenses increased slightly to $763,160 from
$718,901. Depreciation and amortization were $26,000 higher than in the prior
fiscal year. These increases were largely due to the cost associated with the
new trading office in Portland and the acquisition of a client list from a
former financial advisor.
Interest expense, $87,476 in 1995, was almost 40% lower than in the
prior fiscal year. The decrease resulted because $675,000 of short term
borrowing obtained to finance the timberland purchase, outstanding for most of
fiscal year 1994, were paid off. In addition, the Company's long term debt had
been reduced from $1,147,500 at June 30, 1994 to $1,035,000 at June 30, 1995.
Overall, Firstmark increased its profitability over 1994 because both
financial services and real estate operations improved. The financial services
improvement resulted from gains on trading securities and increased net
commissions and fees offset by the one time gain on Unity Telephone in 1994. The
real estate operations improvement resulted from higher profitability on its
timber cutting operation and the one time write down of real estate in 1994.
Liquidity and Capital Resources
The Company's cash and cash equivalents were approximately $1,700,000
at June 30, 1996, and $1,833,000 at December 31, 1996. However, a significant
portion of the cash and cash equivalents (approximately $655,000 at June 30,
1996 and $1,136,000 at December 31, 1996) was held by STIC and cannot be used by
the Company to meet obligations other than STIC's without obtaining regulatory
permission. In addition to liquidity needed for operations, the Company redeemed
$450,000 of convertible notes which were due April 21, 1997. Holders of $585,000
of the $1,035,000 of such notes agreed to extend the maturity date of their
indebtedness evidenced by these notes until March 1, 1999.
The Company intends to satisfy its obligations through cash on hand,
income tax refunds, sales of marketable securities and other assets and payments
received on loans receivable. Management believes that its available and
expected sources of cash and the other actions taken will be sufficient to
enable the Company to satisfy its obligations as they come due. However, the
Company will continue to attempt to secure other sources of credit in the event
cash from other sources is not sufficient for that purpose. At this time, no
other sources of credit have been obtained.
Reference is made to "Description of Business - Regulation" concerning
payments of dividends from the title insurance companies.
Due to the nature of its operations, the Company does not expect to
incur significant environmental costs. Its capital resources are not expected to
be affected significantly by the current accounting pronouncements regarding
accounting for impairment of loans and accounting for investments in debt and
equity securities and derivatives.
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<PAGE>
Item 7. Financial Statements
The following list is the index to Consolidated Financial Statements,
attached hereto as Exhibit 99a:
Page
Independent Auditors' Report..................................................1
Financial Statements
Consolidated Balance Sheets, December 31, 1996 and June 30, 1996 and 1995..2
Consolidated Statements of Operations, Six Months Ended December 31, 1996
and Years Ended June 30, 1996 and 1995.....................................3
Consolidated Statements of Stockholders' Equity, Six Months Ended
December 31, 1996 and Years Ended June 30, 1996 and 1995...................4
Consolidated Statements of Cash Flows, Six Months Ended
December 31, 1996 and Years Ended June 30, 1996 and 1995...................5
Notes to Consolidated Financial Statements.................................7
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
No changes in the Company's independent accountants or disagreements on
accounting and financial disclosure required to be reported hereunder have taken
place.
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<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors. The business experience of the Directors of the
Company for the past five years is summarized below.
JAMES F. VIGUE, 47, is Chairman of the Board of Directors and founder
of the Company. Mr. Vigue served as President, Chairman of the Board of
Directors and Chief Executive Officer of the Company from the Company's
inception in March 1981 to January 24, 1997. Mr. Vigue is also President
and a Director of Firstmark Capital Corp., Firm Investment Corp. and
Firstmark Properties Inc., all of which were formerly subsidiaries of the
Company, and, prior to his resignation from the Company, was President and a
Director of QFAN Marketing Services, Inc. and Southern Capital Acquisition
Corp., both of which are subsidiaries of the Company. Mr. Vigue is a 1972
graduate of Colby College and was the first practicing Certified Financial
Planner in the State of Maine. Mr. Vigue is the author of WEALTH POWER: How to
Work With Your Financial Advisors to Maximize, Protect and Control Your
Assets.
IVY L. GILBERT, 35, has been a Director since June 1993. Ms. Gilbert
served as Corporate Secretary and Chief Financial Officer of the Company from
June 1986 to January 24, 1997 and Treasurer from June 1992 to January 24, 1997.
Ms. Gilbert is Corporate Secretary and Treasurer of Firstmark Capital Corp.,
Firm Investment Corp. and Firstmark Properties Inc., all of which were formerly
subsidiaries of the Company, and, prior to her resignation from the Company,
was Corporate Secretary and Treasurer of QFAN Marketing Services, Inc. and
Southern Capital Acquisition Corp., both of which are subsidiaries of the
Company. Ms. Gilbert is a 1981 graduate of Thomas College and is also Chief
Executive Officer of The Hamilton Foundation, a non-profit organization.
Ms. Gilbert is the founder of Women & Investing and the author of Women's
Financial Wisdom: How to Become a Woman of Wealth.
DONALD V. CRUICKSHANKS, 39, has been President and Chief Executive
Officer of the Company since January 24, 1997 and has been a Director since
June 1996. He served as President of Southern Capital Corp. from 1992
through 1996, and has served as President and Chief Executive Officer of
Southern Title Insurance Corporation since 1984. Mr. Cruickshanks is also
Chairman of Southern Title Insurance Corporation. Mr. Cruickshanks is also
President of Southern Abstractors Corporation, Southern Title Agency
Corporation, Glasgow Enterprises Corp. and Southern Title Services, Inc., all
of which are subsidiaries of Southern Title Insurance Corporation. He is a
1979 graduate of Randolph Macon College.
H. WILLIAM COOGAN, JR., 43, has been a Director of the Company since
June 1996. He has served as Chairman and Chief Executive Officer of Southern
Capital Corp. since April 1995 and is currently a Director and Chief Investment
Officer of its subsidiary, Southern Title Insurance Corporation, and Chairman of
Champion Broadcasting Corporation. From June 1992 to April 1995, he was Managing
Director of Libra Investments, Inc., a high-yield debt and special situation
investment firm based in Los Angeles. From May 1991 to May 1992, he was a
private investor. From August 1990 to April 1991, he was a Managing Director and
Head of Corporate Finance at Wheat First Butcher Singer and, from September 1982
to July 1990, was an investment banking partner of CS First Boston in New York,
San Francisco and Los Angeles. Mr. Coogan received his undergraduate degree from
the University of Vermont and his MBA degree from the University of Virginia. He
is also a director of Wireless Financial, Inc.
SUSAN C. COOGAN, 42, has been a Director of the Company since June
1996. From 1992 to 1996, she was a Director of Southern Capital Corp. From 1994
to 1995, she was a member and Executive Vice President of CKC Advisors and
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<PAGE>
Chesapeake Capital Lending Fund, L.P., a SBIC applicant. From 1987 to 1990, she
served as Executive Vice President and Chief Operating Officer of Country Wide
Mortgage Investments, a real estate management trust. In 1987, Ms. Coogan joined
Countrywide Credit Industries, Inc., a mortgage banking firm headquartered in
Pasadena, CA. She was Senior Vice President responsible for all capital raising
activities. Ms. Coogan received her undergraduate degree from Hollins College
and a MBA from the Colgate Darden Graduate Business School of the University of
Virginia. Ms. Coogan is currently on the Board of Directors of Regency
Bancshares, a Richmond, Virginia bank holding company.
R. BRIAN BALL, 45, was a Director of the Company from June 1996 to
April 1997. Mr. Ball is a partner and a director of Williams, Mullen,
Christian & Dobbins, P.C., a law firm in Richmond, Virginia.
ROBERT A. RICE, 41, was a Director of the Company from June 1994 to
December 1996, at which time he resigned as an officer of the Company. Mr.
Rice had joined the Company in January 1994 and was head of the Company's
brokerage and trading operations. Mr. Rice had also been Vice President of
Firm Investment Corp. and Firstmark Capital Corp. since 1994. Mr. Rice
holds a degree in Business Administration from the University of Southern
Maine and has done graduate work in business at New Hampshire College. In
1983, Mr. Rice founded Prime Discount Securities, Inc., an investment
broker/dealer registered with the National Association of Securities Dealers,
Inc., and presently serves as its President and Chairman. In 1991, he founded
Prime Securities Corp., which acts as a management company for various
investments, including its wholly owned subsidiary, Prime Discount Securities,
Inc. Mr. Rice is a general partner of B.R. Partners, a partnership
which owns and operates commercial and residential real estate holdings in
Maine. He is also a director of Sunrise Preschools, Inc.
Executive Officers. The business experience of James F. Vigue,
Robert A. Rice, and Ivy L. Gilbert, executive officers of the Company as of
December 31, 1996, for the past five years is summarized above. The
business experience of Donald V. Cruickshanks, the current President and Chief
Executive Officer, for the past five years is summarized above. The
business experience of Lewis M. Brubaker, Jr. for the past five years is
summarized below:
LEWIS M. BRUBAKER, JR., 38, was Chief Financial Officer of the
Company from January 24, 1997 to April 1997. He served as Vice President of
Southern Capital Corp. from 1992 to April 1997. He was Vice President and
Controller of Southern Title Insurance Corporation from 1987 to April
1997 and Senior Vice President and Treasurer from 1996 to April 1997. Mr.
Brubaker is a 1980 graduate of Virginia Polytechnic Institute.
Family Relationships. James F. Vigue and Ivy L. Gilbert are husband
and wife, and H. William Coogan, Jr., and Susan C. Coogan are husband and
wife.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
any persons who own more than 10% of the Company's Common Stock, to file with
the Securities and Exchange Commission ("SEC") reports of ownership and changes
in ownership of the Company's Common Stock. Officers and directors are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
that they file. Based solely on review of the copies of such reports furnished
to the Company or written representation that no other reports were required,
the Company believes that, during fiscal year 1996, all filing requirements
applicable to its officers and directors were complied with.
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<PAGE>
Item 10. Executive Compensation
The following table summarizes the compensation paid or accrued to the
Chief Executive Officer of the Company and its other most highly paid executive
officers for the last fiscal year in all capacities in which they served the
Company and its subsidiaries.
Summary Compensation Table
<TABLE>
<CAPTION>
Years Ended June 30 Long Term
- ------------------- Compensation
Awards
Annual Compensation ------------
------------------- Securities
Name and Other Annual Underlying
Principal Position Year Salary Bonus Compensation(1) Options(2)
- ------------------ ---- ------ ----- --------------- ----------
<S> <C>
James F. Vigue, Chairman of the 1996 $ 0 $ 0 $205,351 5,000
Board (formerly President and Chief 1995 0 0 177,241 5,000
Executive Officer) 1994 0 0 130,663 5,000
Ivy L. Gilbert (formerly Chief 1996 0 0 101,571 5,000
Financial Officer, Corporate 1995 0 0 108,392 5,000
Secretary and Treasurer)
Robert A. Rice (formerly Vice 1996 64,500 28,722 (3) 5,000
President of Trading) 1995 42,016 72,193 (3) 80,000
H. William Coogan, Jr., Chairman 1996 126,975 0 (3) -
and Chief Executive Officer of SCC 1995 124,375 6,250 (3) -
(4) 1994 119,375 0 (3) -
Donald V. Cruickshanks, President 1996 126,975 0 (3) -
of SCC (4) 1995 124,375 7,979 (3) -
1994 119,375 69,869 (3) -
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Six Months Ended December 31
- ---------------------------- Long Term
Compensation
Awards
Annual Compensation ------------
------------------- Securities
Other Annual Underlying
Name Year Salary Bonus Compensation(1) Options(2)
- ---- ---- ------ ----- --------------- ----------
<S> <C>
James F. Vigue 1996 $ 0 $ 0 $60,000 5,000
Ivy L. Gilbert 1996 0 0 60,000 5,000
Robert A. Rice 1996 20,769 17,724 (3) 5,000
H. William Coogan, Jr. 1996 68,282 1,540 9,187 (5) -
Donald V. Cruickshanks 1996 68,282 0 (3) -
</TABLE>
(1) As of March 28, 1996, per contract, the Chairman of the Board and the
former Chief Financial Officer were entitled to receive a base
compensation of $120,000 per year. These employment agreements were
terminated on January 24, 1997. See "Description of Business -- Recent
Developments."
(2) The options listed in the table were not approved by the Company's
stockholders and were terminated in connection with the respective
resignations of Mr. Vigue, Ms. Gilbert and Mr. Rice as employees
and officers of the Company.
(3) The value of perquisites and other personal benefits did not exceed
the lesser of $50,000 or 10% of the total annual salary and bonus shown
in the table.
(4) SCC merged with and into a subsidiary of the Company on June 7, 1996.
See "Description of Business -- General."
(5) Amount represents consulting fees earned.
The executive officers of the Company participate in other benefit
plans provided to all full-time employees of the Company who meet eligibility
requirements, including group life insurance, hospitalization and major medical
insurance.
Key Man and Officers' Insurance. James F. Vigue, Ivy L. Gilbert and
Robert A. Rice were formerly key officers of the Company, and their
contributions to the Company had been significant factors in the Company's plans
and operations. Prior to their respective resignations from the Company, the
Company maintained key-man life insurance policies on Mr. Vigue, Ms. Gilbert and
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<PAGE>
Mr. Rice with aggregate face values of approximately $3,000,000, $500,000 and
$1,000,000, respectively. In addition, the Company presently maintains a key-man
life insurance policy on H. William Coogan, Jr., a Director of the Company and
an officer of SCC, with an aggregate face value of approximately $3,000,000.
Compensation of Directors. For the fiscal year ended June 30, 1996 and
the six months ended December 31, 1996, the Company provided no compensation to
its Directors for attending meetings of the Board of Directors.
Employment Agreements. The Company and James F. Vigue, former Chief
Executive Officer and President, were parties to an employment agreement for a
three-year term commencing May 17, 1996, with renewals by mutual consent of the
parties for successive terms of one year each, which agreement provided for his
employment with the Company. Under the agreement, Mr. Vigue was entitled to base
compensation of $120,000 per year. If, during the term of the agreement, the
Company terminated the agreement, Mr. Vigue would have been entitled to
compensation for the remainder of the contract. Mr. Vigue terminated this
employment agreement when he resigned from the Company on January 24, 1997. See
"Description of Business -- Recent Developments."
The Company and Ivy L. Gilbert, former Chief Financial Officer,
Secretary and Treasurer, were parties to an employment agreement for a
three-year term commencing May 17, 1996, with renewals by mutual consent of the
parties for successive terms of one year each, which agreement provided for her
employment with the Company. Under the agreement, Ms. Gilbert was entitled to
base compensation of $120,000 per year. If, during the term of the agreement,
the Company terminated the agreement, Ms. Gilbert would have been entitled to
compensation for the remainder of the contract. Ms. Gilbert terminated this
employment agreement when she resigned from the Company on January 24, 1997. See
"Description of Business -- Recent Developments."
STIC and H. William Coogan, Jr., a Director of the Company, are parties
to an employment agreement for a term commencing August 15, 1992, and
terminating August 15, 1997. The agreement provides for his employment as
Chairman of the Board of Directors and Chief Investment Officer of STIC. Under
the agreement, Mr. Coogan is entitled to base compensation of $115,000 per year,
with an increase in compensation of $5,000 per year. Mr. Coogan may terminate
his employment at any time by giving STIC 30 days' notice of such termination.
STIC and Donald V. Cruickshanks, the current President and Chief
Executive Officer and a Director of the Company, are parties to an employment
agreement for a term commencing August 15, 1992, and terminating August 15,
1997. The agreement provides for his employment as President and Chief Executive
Officer of STIC. Under the agreement, Mr. Cruickshanks is entitled to base
compensation of $115,000 per year, with an increase in compensation of $5,000
per year. Mr. Cruickshanks may terminate his employment at any time by giving
STIC 30 days' notice of such termination.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of December 31, 1996 by (i) each person
who is known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, and (iii)
all of the directors and executive officers of the Company as a group. For the
purposes of the following table, beneficial ownership has been determined in
accordance with the provisions of Rule 13d-3 under the Exchange Act, under
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<PAGE>
which, in general, a person is deemed to be a beneficial owner of a security if
he or she has or shares the power to vote or direct the voting of the security
or the power to dispose or direct disposition of the security, or if he or she
has the right to acquire beneficial ownership of the security within 60 days.
Except as otherwise indicated (i) each stockholder identified in the table
possesses sole voting and investment power with respect to his shares, and (ii)
the mailing address of each individual is Firstmark Corp., One Financial Place,
222 Kennedy Memorial Drive, Waterville, Maine 04901.
Name Common Stock Percent
- ---- ------------ -------
Donald V. Cruickshanks -- --
James F. Vigue 110,9861 5.4%
Ivy L. Gilbert 161,5112 7.8%
H. William Coogan, Jr. -- --
Susan C. Coogan -- --
R. Brian Ball -- --
All Directors and executive officers as a
group (6 persons) 161,511 7.8%
On June 7, 1996, SCC was merged with and into SCAC pursuant to an
Agreement and Plan of Reorganization, dated as of April 30, 1996, between SCC,
SCAC and the Company (the "Reorganization"). As part of the Reorganization, each
share of SCC common stock was converted into and exchanged for 400 shares of
Series B Preferred Stock. Accordingly, the three shareholders of SCC, H. William
Coogan, Jr., Donald V. Cruickshanks and the H. William Coogan Irrevocable Trust,
Susan C. Coogan, Trustee, received in the aggregate 40,000 shares of Series B
Preferred Stock. Pursuant to its terms, the shares of Series B Preferred Stock
were not convertible by its holders, but were convertible by the Company into
not less than 2,000,000 shares of Common Stock, subject to adjustment if the
market price of Common Stock was less than $4.00 per share at the time of
conversion. A more complete description of the Reorganization is contained in
the Company's definitive Proxy Statement for a Special Meeting of Stockholders
held on February 25, 1997, which was filed with the Securities and Exchange
Commission on February 5, 1997. The shareholders of SCC acquired shares of
Series B Preferred Stock in the Reorganization as follows:
H. William Coogan, Jr. 12,400 shares
The H. William Coogan Irrevocable Trust 14,400 shares
(Susan C. Coogan, Trustee)
Donald V. Cruickshanks 13,200 shares
-------------
40,000 shares
On March 12, 1997, the Company declared the conversion, subject to
approval by the FCC, of all outstanding shares of Series B Preferred Stock into
shares of Common Stock, effective April 1997. Because the market price of Common
Stock was less than $4.00 per share at the time of conversion, the Company
adjusted the number of shares of Common Stock into which the shares of Series B
1 Includes 4,324 shares held by his spouse, Ivy L. Gilbert.
2 Includes 50,525 shares held as custodian for her minor children and
106,662 shares held by her spouse, James F. Vigue.
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<PAGE>
Preferred Stock were convertible. Accordingly, under the terms of the Series B
Preferred Stock, each outstanding share of Series B Preferred Stock was
convertible into 80.7571 shares of Common Stock. As a result of this conversion,
the following individuals and trust acquired beneficial ownership of shares of
Common Stock as follows:
H. William Coogan, Jr. 1,001,389 shares
The H. William Coogan Irrevocable Trust 1,162,903 shares
(Susan C. Coogan, Trustee 1,162,903 shares)
Donald V. Cruickshanks 1,065,994 shares
----------------
3,230,286 shares
Item 12. Certain Relationships and Related Transactions
The Company obtains certain related party receivables and payables in
the normal course of business and through advances for accommodation. In
addition, the Company has certain loans receivable from related parties at terms
consistent with those provided to other customers. The loans are substantially
secured by real estate mortgages. Balances at December 31, 1996 are as follows:
Advances to Related Parties $ 59,187
Loans to Related Parties $151,226
Prior to January 24, 1997, the Company leased its executive and
administrative offices, consisting of approximately 4,000 square feet of
commercial space, from the Pinnacle Investment Group ("Pinnacle"), a group
consisting of four individuals, one of whom was an officer of the Company. This
facility was leased from Pinnacle under a fifteen year lease terminating on
December 31, 2003. The lease was renewable and negotiable after five years.
Effective January 24, 1997, Firstmark Capital Corp. assumed the lease
obligation. The Company owned the parcel of land on which its administrative
offices were located. On January 27, 1997, Pinnacle purchased the land for
$55,000. See "Description of Business -- Recent Developments."
On April 10, 1996, H. William Coogan, Jr. loaned $100,000 to Glasgow
Enterprises Corp. ("Glasgow") to be used for its general corporate purposes.
Glasgow paid off the loan in December 1996.
Williams, Mullen, Christian & Dobbins, P.C., in which a Director of the
Company is a partner, provides legal services to the Company and its
subsidiaries from time to time.
For related party information, see Note 8 to the Consolidated Financial
Statements.
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits.
3a Articles of Incorporation, as amended, incorporated by
reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1994.
3b Bylaws, as amended, incorporated by reference to the Company's
Annual Report on Form 10-KSB for the fiscal year ended June
30, 1994.
4a Stock Certificate, incorporated by reference to the Company's
Annual Report on Form 10-KSB for the fiscal year ended June
30, 1994.
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<PAGE>
4b Convertible notes, incorporated by reference to the Company's
Annual Report on Form 10-KSB for the fiscal year ended June
30, 1994.
4c Preferred "A" stock certificate, incorporated by reference to
the Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1994.
4d Preferred "A" stock warrant, incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1994.
4e Preferred "B" stock certificate, incorporated by reference to
the Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1996.
11a Lease, incorporated by reference to the Company's Annual
Report on Form 10-KSB for the fiscal year ended June 30, 1994.
(b) Reports on Form 8-K.
A second amendment to a current report on Form 8-K/A was filed on
October 1, 1996 and reported an amended Item 7 to include pro forma financial
information relating to the merger of Southern Capital Corp., a Virginia
corporation, into Southern Capital Acquisition Corp., a Virginia corporation and
wholly-owned subsidiary of the Company (the "Merger"). The Form 8-K/A amended a
current report on Form 8-K, dated June 7, 1996, and an amendment to the current
report on Form 8-K/A, filed August 22, 1996, both of which announced the Merger.
-25-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRSTMARK CORP.
Date: May 5, 1997 By: /s/ DONALD V. CRUICKSHANKS
_______________________________________
Donald V. Cruickshanks
President and Chief Executive Officer
In accordance with Section 13 or 15(d) of the Exchange Act, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
/s/ DONALD V. CRUICKSHANKS President and Chief Executive May 5, 1997
- ------------------------------------------- Officer and Director
Donald V. Cruickshanks (Principal Executive Officer)
May __, 1997
- ------------------------------------------- (Principal Financial and Principal
Accounting Officer)
/s/ JAMES F. VIGUE
- ------------------------------------------- Chairman of the Board May 5, 1997
James F. Vigue
/s/ IVY L. GILBERT
- ------------------------------------------- Director May 5, 1997
Ivy L. Gilbert
- ------------------------------------------- Director May __, 1997
H. William Coogan, Jr.
- ------------------------------------------- Director May __, 1997
Susan C. Coogan
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
Consolidated Financial Statements for the
Six Month Period Ended December 31, 1996
and the Years Ended June 30, 1996 and 1995
and Independent Auditors' Report
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 1996 AND THE
YEARS ENDED JUNE 30, 1996 AND 1995:
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-29
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Firstmark Corp.
We have audited the consolidated balance sheet of Firstmark Corp. and
subsidiaries as of December 31, 1996 and June 30, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the six month period ended December 31, 1996 and for the year ended June 30,
1996. 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. The financial statements of the Company for the
year ended June 30, 1995 were audited by other auditors whose report, dated
September 11, 1995, expressed an unqualified opinion on those statements and
included an explanatory paragraph that described the issues involving the
valuation of certain investments, as discussed in Note 3 to the financial
statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 present fairly, in all
material respects, the financial position of the Company and subsidiaries at
December 31, 1996 and June 30, 1996, and the results of their operations and
their cash flows for the six month period ended December 31, 1996 and for the
year ended June 30, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 28, 1997
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996, JUNE 30, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, June 30,
------------ ---------------------
ASSETS 1996 1996 1995
<S> <C>
Cash and cash equivalents $ 1,832,681 $ 1,707,327 $1,622,016
Receivables:
Receivables - trade, net 884,497 1,065,469 190,986
Receivables - related parties 59,187 53,116 424,169
-------------- -------------- -------------
Total receivables 943,684 1,118,585 615,155
-------------- -------------- -------------
Notes receivables:
Notes receivables, net 179,429 219,743 268,134
Notes receivables - related parties 151,226 209,935 310,338
-------------- -------------- -------------
Total notes receivables 330,655 429,678 578,472
-------------- -------------- -------------
Income taxes receivables 330,372 436,910 -
Investments:
Marketable securities 2,893,759 3,742,382 1,242,101
Venture capital investments, net 1,836,540 2,026,176 1,574,789
Real estate and other investments 1,624,121 1,611,455 1,226,585
-------------- -------------- -------------
Total investments 6,354,420 7,380,013 4,043,475
-------------- -------------- -------------
Other Assets:
Title plants 3,544,243 3,544,243 -
Property, plant and equipment, net 1,005,806 1,130,572 156,561
Excess of cost over fair value 1,013,696 1,111,777 114,384
Deferred tax asset 1,468,518 829,591 80,000
Other assets 246,320 263,361 118,050
-------------- -------------- -------------
Total other assets 7,278,583 6,879,544 468,995
-------------- -------------- -------------
TOTAL ASSETS $17,070,395 $17,952,057 $7,328,113
============== ============== =============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, June 30,
------------ ---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1996 1995
<S> <C>
LIABILITIES:
Accounts payable and other liabilities $ 571,383 $ 422,120 $ 237,830
Borrowed funds 1,749,435 1,885,561 1,035,000
Reserve for title policy claims 972,703 944,754 -
Deferred tax liability 1,127,659 931,817 -
Income taxes payable - - 89,594
--------- --------- ----------
Total liabilities 4,421,180 4,184,252 1,362,424
-------------- -------------- --------------
MANDATORILY REDEEMABLE PREFERRED STOCK - Series B, $0.20 par
value - authorized 188,000 shares; issued 40,000 shares
(liquidation
preference $8,000,000) 8,750,000 8,750,000 -
-------------- ------------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock, Series A, $0.20 par value authorized
250,000 shares; issued 57,000, 57,000 and 60,000
shares, respectively,
(liquidation preference $2,280,000) 11,400 11,400 12,000
Common stock, $0.20 par value - authorized
5,000,000 shares; issued 2,271,144,
2,271,044 and 2,196,040 shares, respectively 454,229 454,209 439,209
Additional paid-in capital - preferred 2,162,889 2,162,889 2,283,789
Additional paid-in capital - common 3,394,388 3,393,992 3,106,201
Retained earnings (deficit) (1,143,812) (234,852) 380,391
Treasury stock, at cost - 201,554, 201,554
and 45,770 shares, respectively (818,773) (818,773) (193,898)
Net unrealized gain (loss) on marketable equity
securities available for sale, net of taxes (161,106) 48,940 (62,003)
-------------- -------------- --------------
Total stockholders' equity 3,899,215 5,017,805 5,965,689
-------------- -------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 17,070,395 $ 17,952,057 $ 7,328,113
============== ============== ==============
</TABLE>
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended
December 31, June 30,
------------- ------------------------------
1996 1996 1995
<S> <C>
REVENUES:
Commissions and fees $ 467,201 $ 1,729,389 $ 1,665,078
Title insurance (net of reinsurance ceded of
$65,914 and $1,121, respectively 5,812,523 803,035 -
Investment gains (losses) (407,188) 661,147 443,134
Interest and dividends 179,878 173,103 176,474
Other revenues 189,633 28,185 769,767
--------------- ------------- -------------
Total revenues 6,242,047 3,394,859 3,054,453
--------------- ------------- -------------
EXPENSES:
Employee compensation and benefits 5,019,634 1,950,887 1,225,135
Write-offs of loans and investments 186,635 1,249,347 -
General and administrative expenses 2,113,326 869,676 969,947
Interest expense 42,085 84,558 87,476
Loss on retirement of fixed assets 44,852 - -
Write-down of excess of cost over fair value 81,012 - -
--------------- ------------- -------------
Total expenses 7,487,544 4,154,468 2,282,558
--------------- ------------- -------------
Equity in earnings (losses) of affiliates (52,766) 4,041 -
--------------- ------------- -------------
Earnings (losses) before income taxes (1,298,263) (755,568) 771,895
Income tax (benefit) expense (457,703) (281,925) 304,000
--------------- ------------- -------------
Net earnings (loss) (840,560) (473,643) 467,895
Preferred stock dividend 68,400 141,600 143,749
--------------- ------------- ------------
Net earnings (loss) applicable to common shares $ (908,960) $ (615,243) $ 324,146
=============== ============= =============
Earnings (loss) per common share $ (0.400) $ (0.287) $ 0.145
=============== ============= =============
Weighted-average number of shares outstanding 2,271,052 2,147,006 2,231,530
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTH PERIOD ENDED DECEMBER 31, 1996
AND THE YEARS ENDED JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized
Additional Additional Gain (Loss)
Paid-In Preferred Paid-In Retained on Securities
Common Capital Stock, Capital Earnings Treasury Available
Stock Common Series A Preferred (Deficit) Stock For Sale
<S> <C>
BALANCE, JULY 1, 1994 $ 439,209 $ 3,106,201 $ 10,250 $ 1,965,914 $ 56,245 $ (26,172) $ (32,229)
Treasury stock purchased - - - - - (167,726) -
Preferred stock sold - - 1,750 317,875 - - -
Net earnings - - - - 467,895 - -
Preferred dividends paid - - - - (143,749) - -
Change in valuation of securities - - - - - - (29,774)
---------- ----------- -------- ----------- ------------ ---------- ----------
BALANCE, JUNE 30, 1995 439,209 3,106,201 12,000 2,283,789 380,391 (193,898) (62,003)
Common stock issued 15,000 287,791 - - - - -
Preferred dividends paid - - - - (141,600) - -
Preferred stock redeemed - - (600) (120,900) - - -
Treasury stock purchased - - - - - (624,875) -
Net loss - - - - (473,643) - -
Change in valuation of securities - - - - - - 110,943
---------- ----------- -------- ----------- ------------ ---------- ----------
BALANCE, JUNE 30, 1996 454,209 3,393,992 11,400 2,162,889 (234,852) (818,773) 48,940
Common stock issued 20 396 - - - - -
Preferred dividends paid - - - - (68,400) - -
Net loss - - - - (840,560) - -
Change in valuation of securities - - - - - - (210,046)
---------- ----------- -------- ----------- ------------ ---------- ----------
BALANCE, DECEMBER 31, 1996 $ 454,229 $ 3,394,388 $ 11,400 $ 2,162,889 $ (1,143,812) $ (818,773) $ (161,106)
========== =========== ======== =========== ============ ========== ==========
</TABLE>
-4-
See notes to consolidated financial statements.
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended
December 31, June 30,
------------- --------------------------------
1996 1996 1995
<S> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $ (840,560) $ (473,643) $ 467,895
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Deferred income taxes (331,991) (276,283) 96,000
Depreciation and amortization 152,471 85,659 66,768
Write-down of investments - 1,271,569 -
Write-down of excess of cost over fair value 81,012 - -
Depletion of timberland - - 445,687
Commissions paid in stock - 33,743 -
Loss (gain) on sale of property 44,852 (21,065) -
Gain recognized on held to maturity securities (10,883) (2,408) -
Loss recognized on available-for-sale securities 258,344 12,952 -
Fee received in stock - (145,550) (125,000)
Gain on settlement of Unitel spin off - (587,365) -
Issuance of stock for services - 211,539 -
Issuance of stock for employee bonus 416 - -
Net decrease in notes receivable 40,314 96,848 226,946
Net decrease in notes receivable from related parties 58,709 51,946 106,710
Net change in marketable trading securities 260,720 160,682 (899,903)
Equity in losses (earnings) of affiliates 52,766 (4,041) -
Changes in current assets and liabilities:
Decrease (increase) in:
Accounts receivable 180,972 65,682 (23,168)
Prepaid expenses and other current assets 7,871 6,088 (22,614)
Advances to related parties (6,071) 371,053 (319,175)
Refundable income taxes 106,538 (233,611) -
Increase (decrease) in:
Accounts payable 42,940 (107,823) 126,643
Accrued expenses 106,323 7,477 (44,300)
Reserve for policy claims 27,949 (27,078) -
Income taxes payable - (89,594) (12,850)
-------------- ------------- -------------
Net cash provided by
operating activities 232,692 406,777 89,639
-------------- ------------- -------------
</TABLE>
-5-
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended
December 31, June 30,
------------- ----------------------
1996 1996 1995
<S> <C>
INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired - 1,012,322 -
Acquisition costs (12,492) (28,998) -
Net change in real estate investments (12,666) (9,301) (144,217)
Increase in numismatic and stamp investments - - (50,701)
Net change in other investments 136,870 (1,722,585) (440,481)
Proceeds from held to maturity securities 200,500 - (195,531)
Proceeds from sale of property and equipment 8,748 - -
Purchase of property and equipment (35,865) (47,735) (8,104)
Proceeds from available-for-sale securities 153,712 1,104,494 -
Purchase of available-for-sale securities (278,484) (250,019) -
Purchase of held to maturity securities (63,135) - -
-------------- ------------- -------------
Net cash provided (used) by
investing activities 97,188 58,178 (839,034)
-------------- ------------- -------------
FINANCING ACTIVITIES:
Issuance (purchase) of preferred stock - (121,500) 825,875
Payments on other liabilities (33,000) (41,003) (61,908)
Repayment of convertible notes - - (112,500)
Proceeds from lease buy-back - 158,084 -
Purchase of treasury stock - (233,625) (167,726)
Preferred stock dividends (68,400) (141,600) (143,749)
Payments on borrowed funds (103,126) - -
--------------- ------------ -------------
Net cash provided (used) by
financing activities (204,526) (379,644) 339,992
-------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 125,354 85,311 (409,403)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,707,327 1,622,016 2,031,419
------------- -------------- -------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 1,832,681 $ 1,707,327 $ 1,622,016
============== ============= =============
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED DECEMBER 31, 1996
AND THE YEARS ENDED JUNE 30, 1996 AND 1995
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Firstmark Corp. ("the Company") and it
subsidiaries, based in Waterville, Maine, are engaged in venture capital,
consulting services and title insurance. The Company invests its capital
in and provides loans to emerging growth or start up companies, and
provides financial consulting services to individuals, institutions, and
corporations. The Company also issues title insurance policies through
branch offices and independent agencies in Mid-Atlantic states of the
United States. The majority of the Company's title insurance business is
concentrated in Virginia.
Change in Fiscal Year - On February 4, 1997, the Board of Directors
approved a change in the Company's year for financial reporting purposes
from a fiscal year ending on June 30 to December 31. The decision to
change the fiscal year-end was made in order to conform the Company's
financial reporting year to the natural business year of the title
insurance industry. The consolidated financial statements include
presentation of the transition period for the six month period ended
December 31, 1996. Proforma data for the transition period ended December
31, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
(unaudited)
<S> <C>
Total revenues $ 7,750,960 $ 1,760,313
Total expenses 8,996,457 1,184,972
Earnings (losses) before income taxes (1,298,263) 575,341
Income tax expense (benefit) (457,703) 218,600
Net earnings (loss) applicable to common shares (908,960) 285,941
Earnings (loss) per common share (0.40) 0.13
</TABLE>
Management Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, all wholly-owned and majority-owned
subsidiaries. Investments in companies in which ownership interest range
from 20 to 50 percent, or in which the Company exercises significant
influence over operating and financial policies, are accounted for using
the equity method. Other investments are accounted for using the cost
method. All significant intercompany accounts and transaction have been
eliminated.
-7-
<PAGE>
Debt and Equity Securities - All marketable securities held for trading or
available-for-sale are stated at market value at the balance sheet date,
and securities held to maturity are stated at cost. Securities are
classified as trading, held for sale, or held to maturity based on
management's intent at the time they are purchased. The excess of cost
over market for securities available for sale not considered to be other
than temporary impaired is shown as a component of stockholders' equity on
the balance sheet, net of taxes. Gains or losses realized upon sale,
unrealized gains or losses on trading securities, and write-downs
necessitated by other than temporary impairment are reflected in income.
The cost of securities sold is based on the specific identification of
each security held at the time of sale.
Real Estate and Timber Investments - Investment real estate is stated at
the lower of cost or estimated net realizable value less cost of disposal.
Sales of units of a real estate development project are recorded when the
buyer's down payment is sufficient, collectibility of the receivable is
reasonably assured, and the Company has completed substantially all
development related to the property sold. Costs of individual units sold
are determined by allocating total costs based on the relative fair value
of the units. Timberland is stated at cost less depletion on harvested
timber.
Other Investments - Numismatic and stamp investments are carried at the
lower of cost or market. Other investments are carried at cost, unless
evidence indicates a loss has been incurred, at which time the investments
are marked to their net realizable value.
Title Plants - Title plants consist of title records relating to
particular regions and are stated at cost. The costs of acquired title
plants and building of new title plants, prior to the time the plants are
put into operation, are capitalized. Expenses such as salaries and
supplies associated with current maintenance are charged to expense in the
year incurred. The cost of title plants is not being amortized because
there is no diminution in their value.
Property and Equipment - Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is charged to expense over the
estimated useful lives of the assets and is computed using the
straight-line method for financial reporting purposes. Depreciation for
tax purposes is computed based upon accelerated methods. The costs of
major renewals or improvements are capitalized while the costs of ordinary
maintenance and repairs are charged to expense as incurred.
Intangible Assets - Goodwill represents the excess of purchase price over
net assets acquired, and is being amortized on a straight line basis over
5 to 20 years from the date of acquisition. The Company periodically
evaluates goodwill for impairment. In completing this evaluation, the
Company compares its best estimate of future cash flows with the carrying
value of goodwill. Other intangibles consist of debt issuance cost,
related to the issuance of the convertible notes payable, and are being
amortized over the five year life of the notes.
Other Real Estate Owned - Assets acquired in settlement of claims are
carried at estimated realizable value. Adjustments to reported estimated
realizable values and realized gains and losses on dispositions are
recorded as increases or decreases in income.
Reserve for Loan Losses - The Company measures impairment of loans in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by
SFAS No. 118. SFAS No. 114 requires that an impaired loan be measured
based on the present value of expected future cash flows discounted at the
-8-
<PAGE>
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of collateral if the loan is
collateral dependent. A loan is considered impaired when it is probable
that a creditor will be unable to collect all interest and principal
payments as scheduled in the loan agreement. The Company records interest
receipts on impaired loans as interest income only when the ultimate
collectibility of the principal is not in doubt. A valuation allowance is
maintained to the extent that the measure of the impaired loans is less
than the recorded investment.
Loan losses, net of recoveries on loans previously charged off, are
charged to the allowance. The allowance for loan losses is based upon
management's periodic evaluation of the portfolio with consideration given
to the overall loss experience, delinquency data, financial condition of
the borrowers, and such other factors that, in management's judgment,
warrant recognition in providing an adequate allowance.
Revenue Recognition - Title insurance premiums are recognized as income
when policies are issued or liabilities are incurred under title
commitments, whichever occurs first. An allowance for credits is provided
for unearned premiums.
Commission Revenues and Expenses - The Company records commission revenues
and expenses on the sale of life insurance policies or annuities when the
sale is complete and the customer has accepted delivery of the product.
Brokerage commissions are recorded as customer security transactions are
completed. All customer transactions are executed through correspondent
brokers, which carry and clear all customer accounts on a fully-disclosed
basis. The brokerage subsidiary is a member of the National Association of
Securities Dealers and the Securities Investor Protection Corporation.
Reserve for Policy Claims - Liabilities for reported claims are based on
management's estimate of the ultimate loss. Reserves for losses incurred
but not reported (IBNR) are estimated based on the use of actuarial
methods. Such liabilities are reviewed and updated by management, and any
adjustments resulting therefrom are reflected in income currently. Actual
results could differ from these estimates.
Reinsurance - In the normal course of business, the Company seeks to limit
its exposure to loss by, ceding reinsurance to other insurance companies
or reinsurers, certain levels of risk in various areas of exposure.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the reinsured policy.
Escrow and Trust Deposits - As a service to its customers, the Company
administers escrow and trust deposits representing undisbursed amounts
received for settlements of mortgage loans and indemnities against
specific title risks. These funds are not considered assets of the Company
and therefore are excluded from the accompanying consolidated balance
sheet.
Income Taxes - The Company uses an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax
assets and liabilities are computed annually for differences between the
consolidated financial statement and tax basis of assets and liabilities
that will result in taxable or deductible amounts in the future. The
taxable or deductible amounts are based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Income tax expense is the tax payable or refundable for
the period plus or minus the change during the period in deferred tax
assets and liabilities.
Earnings (Loss) Per Share - Earnings (loss) per share is computed by
dividing net earnings (loss), after reduction for preferred stock
dividends, by the weighted average number of common shares outstanding
during the year. Earnings (loss) per share is equivalent to fully diluted
earnings per share.
<PAGE>
Impact of Recently Issued Accounting Standards - In March 1995, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." This Statement establishes accounting standards
for the impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of.
This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. This Statement was effective
for financial statements for fiscal years beginning after December 15,
1995. The implementation of this standard did not have a material impact
on the Company's financial statements.
Statement of Cash Flows - The statement of cash flows is presented using
the indirect method which reconciles net income to net cash flows from
operating activities. The Company's definition of cash and cash
equivalents includes short-term, highly-liquid investments with maturities
of three months or less at date of purchase.
Reclassification - Certain reclassifications have been made to the
accompanying statements to permit comparison.
2. ACQUISITIONS
Southern Capital Corp. - In June of 1996, Southern Capital Corp. ("SCC"),
a Virginia corporation, was merged into Southern Capital Acquisition
Corporation ("Southern Capital"), which was acquired by the Company. As
part of the acquisition, the shareholders of SCC received 40,000 shares of
the Company's Series B, cumulative, non-voting mandatorily redeemable
preferred stock, par value $.20 per share. The mandatorily redeemable
preferred stock is not convertible by the holders prior to June 30, 1998,
but may be converted by the Company into not less than 2,000,000 shares of
the Company's common stock, subject to adjustment if the price of the
Company's stock is less than $4.00 per share at the time of conversion. If
not converted by the Company sooner, the mandatorily redeemable preferred
stock begins accruing dividends after January 1, 1997 and is redeemable at
the option of the holders at a price of $200 per share after June 30,
1998. As long as any of the Series B mandatorily redeemable preferred
stock is outstanding, the Company must set aside as a sinking fund for
redemption of the mandatorily redeemable preferred stock, on or before
April 1 of each year, commencing April 1, 1997, the sum of $1.0 million.
The acquisition has been accounted for using the purchase method of
accounting whereby the purchase cost was allocated to the fair value of
assets acquired and liabilities assumed based on valuations and other
studies performed as of the date of the acquisition. Accordingly, the
operating results of the acquired companies have been included in
consolidated operating results since the date of the acquisition. Combined
goodwill resulting from the acquisition amounted to approximately $1.0
million and is being amortized over 20 years on a straight-line basis.
- 10 -
<PAGE>
The following unaudited pro forma information has been prepared assuming
that the acquisition had taken place at the beginning of the respective
periods. The pro forma financial information does not purport to be
indicative of what would have occurred had the acquisition been effected
on the assumed dates.
Unaudited
---------------------------
June 30, June 30,
1996 1995
Revenues $12,225,000 $11,544,000
Net loss available for common shares $(1,038,000) $ (142,000)
Net loss per common share $( .25) $( .03)
Prime Securities - The Company issued common stock valued at $100,750 in
exchange for the property and equipment and $10,000 in cash of Prime
Securities, a Portland, Maine brokerage firm. The excess of the purchase
price over fair value of assets acquired was accounted for as goodwill and
amortized over 15 years on a straight-line basis. In November 1996, the
Company closed its subsidiary Firstmark Prime Securities. Accordingly, the
remaining goodwill was written-off as of the balance sheet date.
Other - The Company purchased the right to service the clients of a former
sales representative for a percentage of the commissions estimated to be
generated. The purchase was recorded as $100,000 of goodwill and was being
amortized as commissions were earned. In November of 1996, the Company
wrote-off the remaining balance attributed to this purchase.
- 11 -
<PAGE>
3. INVESTMENTS
The following is a summary of the Company's investments:
<TABLE>
<CAPTION>
December 31, June 30,
------------- -------------------------------
1996 1996 1995
<S> <C>
Marketable Securities:
Trading $ 125,750 $ 386,470 $ 932,153
Available-for-Sale:
Common Stocks 669,635 1,179,376 309,948
Preferred Stocks 231,031 176,000 -
Held to Maturity:
Bonds and Notes 1,867,343 2,000,536 -
------------- ------------- ------------
Total Marketable Securities 2,893,759 3,742,382 1,242,101
------------- ------------- ------------
Venture Capital Investments:
Loans 464,375 534,182 50,000
Loan Participations 221,840 288,403 200,000
Common Stocks 682,800 682,800 1,324,789
Preferred Stocks 225,000 225,000 -
Warrants 106,250 106,750 -
Limited Partnerships 136,275 189,041 -
------------- ------------- ------------
Total Venture Capital
Investments 1,836,540 2,026,176 1,574,789
------------- ------------- ------------
Real Estate Investments:
Real estate owned 1,090,306 1,142,591 772,345
Other real estate investments 473,905 408,954 394,330
------------- ------------- ------------
Total Real Estate
Investments 1,564,211 1,551,545 1,166,675
------------- ------------- ------------
Other Investments:
Numismatic and Stamp Investments 57,701 57,701 57,701
Art Pieces 2,209 2,209 2,209
------------- ------------- ------------
Total Other Investments 59,910 59,910 59,910
------------- ------------- ------------
Total Real Estate and
Other Investments 1,624,121 1,611,455 1,226,585
------------- ------------- ------------
Total Investments $ 6,354,420 $ 7,380,013 $ 4,043,475
============= ============= ============
</TABLE>
- 12 -
<PAGE>
Marketable Securities
In 1995, the Company implemented SFAS No. 115 on accounting for
investments in debt and equity securities. Accordingly, all investments in
securities held for trading and available-for-sale are carried at market,
and securities held to maturity are carried at amortized cost. Previously,
securities were carried at the lower of cost or market, except for the
securities of the brokerage subsidiary, which were carried at market. The
effect of the change was to increase 1995 income before income taxes by
$176,063, the amount of unrealized gains at the parent company on trading
securities held at June 30, 1995.
The following is a summary of gains and losses on marketable securities:
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended
December 31, June 30,
------------- ---------------------------------
1996 1996 1995
<S> <C>
Securities for Trading:
Gains (losses) on sales $ (77,334) $ (46,277) $ 244,473
Unrealized gains (losses) (71,510) 34,766 187,100
------------ ----------- -----------
Total trading gains (losses) (148,844) (11,511) 431,573
Securities Available for Sale:
Gains (losses) on sales (29,594) 23,950 11,561
Unrealized losses - other than
temporary impairment (228,750) - -
------------ ----------- -----------
Total gains (losses) on securities $ (407,188) $ 12,439 $ 443,134
============ =========== ===========
</TABLE>
Securities held to maturity and available for sale are as follows:
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C>
Available for Sale:
Common stocks $ 922,766 $ 28,893 $ 282,024 $ 669,635
Preferred stocks 222,000 10,281 1,250 231,031
-------------- ----------- ----------- -------------
1,144,766 39,174 283,274 900,666
-------------- ----------- ----------- -------------
Held to Maturity:
Bonds and Notes 1,867,343 14,715 448 1,881,610
-------------- ----------- ----------- -------------
Total $ 3,012,109 $ 53,889 $ 283,722 $ 2,782,276
============== =========== =========== =============
</TABLE>
- 13 -
<PAGE>
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C>
Available for Sale:
Common stocks $ 1,093,463 $ 434,653 $ 348,740 $ 1,179,376
Preferred stocks 176,666 2,162 2,828 176,000
-------------- ----------- ----------- -------------
1,270,129 436,815 351,568 1,355,376
-------------- ----------- ----------- -------------
Held to Maturity:
Bonds and Notes 2,000,536 - 7,012 1,993,524
-------------- ----------- ----------- -------------
Total $ 3,270,665 $ 436,815 $ 358,580 $ 3,348,900
============== =========== =========== =============
</TABLE>
<TABLE>
<CAPTION>
June 30, 1995
-------------------------------------------------------------
<S> <C>
Available for Sale:
Common stocks $ 401,951 $ 16,800 $ 108,803 $ 309,948
============= =========== =========== ============
</TABLE>
There were no investments classified as held to maturity and no available
for sale preferred stock at June 30, 1995.
Proceeds from sales of investments available for sale were $153,712,
$227,689 and $62,912 for the six month period ended December 31, 1996 and
the years ended June 30, 1996 and 1995, respectively. Gross gains of
$12,146, $26,271 and $4,561 were realized for the six month period ended
December 31, 1996 and the years ended June 30, 1996 and 1995,
respectively. Gross losses of $41,740 and $4,730 were realized for the six
month period ended December 31, 1996 and the year ended June 30, 1996,
respectively. There were no gross losses for the year ended December 31,
1995.
The contractual maturities of bonds and notes as of December 31, 1996 are
as follows:
Amortized Market
Cost Value
Due in 1 year or less $ 321,938 $ 321,775
Due after 1 year through 5 years 1,144,359 1,151,994
Due after 5 years through 10 years 401,046 407,841
------------- --------------
$ 1,867,343 $ 1,881,610
============= ==============
Venture Capital Investments
At June 30, 1995, the Company held a $681,569 investment in a television
marketing company, which included stock valued at $125,000 received for
consulting services provided by the Company. In addition to this
investment, a limited partnership in which the Company is a general
partner has invested $360,000 in the marketing company. The marketing
company has transferred certain of its
- 14 -
<PAGE>
operations to a new company, which is attempting to raise additional
capital. The Company has received shares of stock in the newly formed
company. Due to the uncertainty surrounding the newly formed company and
the inability to determine the recoverability of the investment, the
Company has written off the entire investment at June 30, 1996.
Additionally, during the year ended June 30, 1996, the Company provided
loans and venture capital to several start up companies. Due to the
uncertainty of the ability of these companies to become operational and
the inability to determine the recoverability of the investments, the
Company has written down several of these investments. Total write-downs
of these investments in the quarter ended June 30, 1996 were $1,249,347.
There were no write-downs in the six month period ended December 31, 1996
and fiscal year ended June 30, 1995. Included in the write-down amounts is
a $450,000 addition to a reserve for loan loss. The following is a summary
of activity in the reserve for losses on Venture Capital Investments:
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended
December 31, June 30,
------------- -------------------------
1996 1996 1995
<S> <C>
Balance, beginning $ 450,000 $ - $ -
Additions to reserve charged to expense - 450,000 -
----------- ----------- -------
Balance, ending $ 450,000 $ 450,000 $
=========== =========== =======
</TABLE>
The Company owned a 21% interest in Unity Telephone Company, which had two
wholly-owned subsidiaries: Unitel for its telephone operations and Unicel
for its cellular operations. In January 1994, Unity Telephone was merged
into InterCel. Prior to the merger, Unity Telephone spun off Unitel to its
stockholders in a taxable transaction. The Company received Unitel stock
with an appraised value of $642,720, of which $165,568 was estimated to be
an ordinary dividend distribution and $477,152 was estimated to be a
return of capital distribution. In addition, Firstmark received $367,071
in a cash distribution paid by InterCel to offset the Company's income
taxes payable to the transaction. The cash distribution was also
considered to be a return of capital dividend to the recipients.
Receipt of the InterCel shares in the merger were not recorded because of
an outstanding option on the Company's Unity holdings. The Unitel
investment was accounted for on the cost method because the Company does
not exert significant influence over the operations of Unitel. On July 21,
1995, the Company and the option holder reached an agreement in which
Firstmark will transfer its Unitel stock and a majority of the InterCel
shares received in exchange for cash and Firstmark stock owned by the
option holder. The Company retained 57,236 shares of InterCel stock and
will also retain up to 29,614 shares of InterCel stock that may be
released from an acquisitions escrow account in May 1997. The Company
reported a gain of $648,708 as a result of the agreement in July 1995 and
will report an additional gain in May 1997 when the escrow distribution
occurs.
- 15 -
<PAGE>
Real Estate Investments
Real estate investments include seasonal cottages, lots that are located
on or near Maine lakes, a residential lot in Maine, and ocean side lots in
Nova Scotia. These properties are being marketed or developed for
marketing. Timberland consists of one tract of timber that was fully
harvested at June 30, 1995. In addition, the Company has three subdivided
lots of approximately two acres each and approximately 84 acres of raw
land in Clarke County, Virginia and a single family housing unit in
Everett, Washington.
The Cumberland Ledges investment is a 67% interest in Cumberland Ledges, a
joint venture owning an undeveloped parcel of commercial real estate in
Cumberland, Maine. The Falmouth Hills investment is a 50% general
partnership interest in Falmouth Hills Limited Partnership, which owns
approximately 200 acres of raw residential land in Falmouth, Maine.
The Company periodically reevaluates its real estate investments and
adjusts their values in conjunction with a plan to market them more
aggressively. Total adjustments during the year ended June 30, 1996
amounted to $20,000 and were included in cost of real estate revenues. No
adjustments were recorded in 1995.
4. NOTES RECEIVABLES
The Company provides financing on certain real estate sales after making
an appropriate determination of the creditworthiness of the buyer.
Property sold is utilized as collateral and would be repossessed and
resold by the Company in the event of default. In addition, the Company
makes certain business and accommodation loans to its customers and
others. These loans are secured by real estate, insurance policies, and
other assets of the borrower to the extent deemed necessary by the
Company. Most of the Company's loans are due from customers residing in
Maine.
The following is a summary of notes receivable:
<TABLE>
<CAPTION>
December 31, June 30,
------------- ------------------------------
1996 1996 1995
<S><C>
Real estate mortgage loans $ 70,000 $ 86,183 $ 86,889
Business loans 154,429 178,560 211,245
----------- ----------- -----------
224,429 264,743 298,134
Less reserve for loan losses (45,000) (45,000) (30,000)
----------- ----------- -----------
$ 179,429 $ 219,743 $ 268,134
=========== =========== ===========
</TABLE>
-16-
<PAGE>
The following is a summary of activity in the reserve for losses on notes
receivable:
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended
December 31, June 30,
------------- -----------------------------
1996 1996 1995
<S> <C>
Balance, beginning $ 45,000 $ 30,000 $ 130,000
Additions to reserve charged to expense - 15,000 22,296
Loans charged off - - (122,296)
---------- ---------- ------------
Balance, ending $ 45,000 $ 45,000 $ 30,000
========== ========== ============
</TABLE>
5. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
December 31, June 30,
------------- --------------------------------
1996 1996 1995
<S> <C>
Land and land improvements $ 121,800 $ 195,339 $ 126,839
Building 364,433 360,950 -
Furniture, fixtures, and equipment 1,632,314 1,634,661 180,778
Leasehold improvements 165,507 165,088 -
Property under capital lease 158,083 158,083 -
Automobiles - 12,994 -
------------- ------------- -----------
2,442,137 2,527,115 307,617
Less accumulated depreciation 1,436,331 1,396,543 151,056
------------- ------------- -----------
Total property and equipment $ 1,005,806 $ 1,130,572 $ 156,561
============= ============= ===========
</TABLE>
Depreciation charged to operations was $105,931, $42,220 and $29,707 for
the six month period ended December 31, 1996 and the years ended June 30, 1996
and 1995, respectively.
6. BORROWINGS
<TABLE>
<CAPTION>
December 31, June 30,
------------- ---------------------------------
1996 1996 1995
<S> <C>
The convertible notes payable are due
April 1, 1997 and carry interest at 8%.
The notes are convertible into common
stock of the Company at $5.00 per share.
In addition, the Company has the right to
call the notes at par value plus a 5%
call premium $ 1,035,000 $ 1,035,000 $ 1,035,000
</TABLE
-17-
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
------------- -----------------------------------
1996 1996 1995
<S> <C>
Equity line of credit (assumed as part of relocation
of an employee) secured by a second deed of trust
on a single family residential housing unit in
Everett, Washington, monthly principal and
interest payments (interest at prime plus 3%) 15,506 16,877 -
Mortgage loan (assumed as part of relocation of an
employee) secured by a first deed of trust on a
single family residential housing unit in
Everett, Washington, monthly principal and interest
payments (interest at 6.1%) final payment due
December 2022 173,845 175,601 -
Bankline of credit, unsecured, interest only payments,
balance due on demand or in April 1998, the
expiration date of the line (interest at the
30 day LIBOR rate plus 2%) 400,000 400,000 -
Advance from shareholder, unsecured, interest
only payments, balance due January 1997
(interest at prime plus 1%) - 100,000 -
Capital lease obligations 125,084 158,083 -
------------- ------------- -------------
Total borrowings $ 1,749,435 $ 1,885,561 $ 1,035,000
============= ============= =============
</TABLE>
The Bank line of credit stipulates that any dividend paid by Southern
Title Insurance Corporation shall be used first to pay out any outstanding
loan balance under the Bank's line of credit.
In June of 1996, the Company entered into lease agreements for certain
office equipment which, in accordance with generally accepted accounting
principles, has been accounted for as a capital lease. As a result, the
present value of future minimum lease payments under these leases has been
recorded as property under capital leases, in the amount of $158,083. The
corresponding liabilities have been recorded as obligations under capital
leases.
The future minimum lease payments under the capital leases as of December
31, 1996 are as follows:
1997 $ 61,236
1998 61,236
1999 20,412
-----------
Total lease payments 142,884
Less: Amount representing interest 17,800
Present value of future minimum lease payments $ 125,084
===========
-18-
<PAGE>
7. INCOME TAXES
The following is a summary of income tax expense (benefit):
Current Deferred Total
Six Month Period Ended
December 31, 1996
Federal $ (85,212) $ (364,232) $ (449,444)
State (40,500) 32,241 (8,259)
------------ ------------ ------------
$ (125,712) $ (331,991) $ (457,703)
============ ============ ============
Year Ended
June 30, 1996
Federal $ (5,589) $ (247,200) $ (252,789)
State (53) (29,083) (29,136)
------------ ------------ ------------
$ (5,642) $ (276,283) $ (281,925)
============ ============ ============
Year Ended
June 30, 1995
Federal $ 166,000 $ 72,000 $ 238,000
State 42,000 24,000 66,000
------------ ------------ ------------
$ 208,000 $ 96,000 $ 304,000
============ ============ ============
The actual tax expense differs from the expected tax (computed at the U.S.
federal corporate tax rate of 34.0% applied to earnings before income taxes) for
the following reasons:
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended
December 31, June 30,
------------- --------------------------------
1996 1996 1995
<S> <C>
Expected tax expense (benefit) $ (441,409) $ (256,893) $ 262,444
State income taxes, net of federal taxes (5,451) (30,233) 43,560
Nondeductible goodwill amortization - - 1,765
Dividend deduction for corporations - - (3,487)
Other (10,843) 5,201 (282)
------------ ------------ -----------
$ (457,703) $ (281,925) $ 304,000
============ ============ ===========
</TABLE>
-19-
<PAGE>
The tax effects of each type of significant items that give rise to
deferred taxes are:
<TABLE>
<CAPTION>
December 31, June 30,
------------- -------------------------------
1996 1996 1995
<S> <C>
Deferred Tax Asset:
Allowance for loan losses $ 221,834 $ 240,324 $ 10,000
Net unrealized loss on investments 143,808 - 72,000
IBNR reserve 292,309 221,288 -
Net unrealized loss on real estate 117,608 106,588 -
NOL carryforward 538,119 225,602 -
Net unrealized loss on securities
available for sale 82,994 - -
Other 71,846 35,789 (2,000)
------------ ------------ ----------
Deferred tax asset 1,468,518 829,591 80,000
------------ ------------ ----------
Deferred Tax Liability:
Net unrealized gain on securities
available for sale - 35,874 -
Premium reserve 850,998 684,244 -
Purchase accounting adjustments 111,175 136,243 -
Depreciation 148,050 58,020 -
Other 17,436 17,436 -
------------ ------------ ----------
Deferred tax liability 1,127,659 931,817 -
------------ ------------ ----------
Net Deferred Tax Asset (Liability) $ 340,859 $ (102,226) $ 80,000
============ ============ ==========
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards
totaling $1,582,704 related to the acquisition of Southern Capital which
will be utilized by that subsidiary, subject to certain tax law
limitations. The Company expects to utilize these carryforwards prior to
their expiration dates and, accordingly, has recorded a deferred tax asset
of $538,119 for the amount of these carryforwards.
-20-
<PAGE>
8. RELATED PARTY TRANSACTIONS
Related party balances include receivables and advances from related
parties arising in the normal course of business. Interest at the current
rate is charged on notes, and no interest is charged on advances. Notes
receivable are substantially secured by real estate mortgages.
<TABLE>
<CAPTION>
December 31, June 30,
------------ ----------------------
1996 1996 1995
<S> <C>
Interest bearing notes:
Officers $ - $ 25,000 $ -
Employees and independent agents 88,200 97,123 100,145
Others 63,026 87,812 210,193
----------- ----------- -----------
$ 151,226 $ 209,935 $ 310,338
=========== =========== ===========
Advances to related parties:
Limited partnerships in operation $ 57,962 $ 50,505 $ -
Limited partnerships being formed - - 361,504
Other advances to employees and officers 1,225 2,611 62,665
----------- ----------- -----------
$ 59,187 $ 53,116 $ 424,169
=========== =========== ===========
Advances from related parties:
Advance from shareholder $ - $ 100,000 $ -
=========== =========== ===========
</TABLE>
The Company is the general partner in Firstmark Vacationland Partners, a
limited partnership that purchases, develops, and sells vacation property.
Non-interest bearing advances to Vacationland amounted to $4,764 and
$1,000 at December 31, 1996 and June 30, 1996, respectively.
The Company is the general partner in Venture One Limited Partnership, a
venture capital fund formed in 1995. The Company received management fees
from the partnership in the amount of $13,725 and $26,700 during the six
month period ended December 31, 1996 and the year ended June 30, 1996,
respectively. As of December 31, 1996, June 30, 1996 and 1995, the Company
had advances outstanding of $38,488, $28,625 and $361,000, respectively.
The Company is also the general partner in Equity First Limited
Partnership, an equity fund formed in 1995. The Company received
management fees from the partnership in the amount of $17,500 and $26,250
during the six month period ended December 31, 1996 and the year ended
June 30, 1996, respectively. As of December 31, 1996 and June 30, 1996,
the Company had advances outstanding of $10,210 and $20,880, respectively.
-21-
<PAGE>
9. CASH FLOW INFORMATION
The following is a summary of noncash investment and financing
transactions:
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended
December 31, June 30,
-------------- ------------------------------
1996 1996 1995
<S> <C>
Stock issued for business acquisition $ - $ 8,750,000 $ -
Purchase of client list for note - - 100,000
</TABLE>
The following non-cash revenues and expenses are included as adjustments
to reconcile net earnings (loss) to net cash provided by operating activities:
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended
December 31, June 30,
------------- -------------------------------
1996 1996 1995
<S> <C>
Stock issued for consulting services $ - $ 211,539 $ -
Stock received for consulting services - 145,550 125,000
Commissions paid in securities - 33,743 -
Gain on settlement of Unitel spin off
(Treasury stock received) - 300,000 -
Stock issued for employee bonus 416 - -
</TABLE>
Cash paid for interest and income taxes is as follows:
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended
December 31, June 30,
------------- ------------------------------
1996 1996 1995
<S> <C>
Interest $ 42,085 $ 85,000 $ 87,000
========== =========== ===========
Income taxes $ - $ 282,000 $ 220,850
========== =========== ===========
</TABLE>
-22-
<PAGE>
10. PREFERRED STOCK - SERIES A
At December 31, 1996, the Company had 57,000 shares of Series A Preferred
Stock outstanding. Each Series A share was issued with ten attached
warrants which allow for the purchase of common stock at $6.00 per share
within three years. The stock pays dividends at a 6% rate ($2.40 per
share) and is convertible into ten shares of common stock at $4.00 per
share.
11. COMMITMENTS AND CONTINGENCIES
The Company leases the majority of its offices and certain equipment under
noncancellable operating lease agreements. In addition the Company leases
its administrative offices in Waterville, Maine from a company controlled
by corporate officers and key people affiliated with the Company. The
facility is rented under a noncancelable operating lease expiring in 2003.
The lease calls for rent at $3,665 per month, of which a portion is
subleased. Future minimum lease payments under these lease agreements are
as follows as of December 31, 1996:
1997 $ 350,973
1998 287,474
1999 88,326
2000 86,987
2001 62,439
Thereafter 87,960
-----------
Total future minimum lease payments $ 964,159
===========
Total rental expense under noncancellable operating leases approximated
$227,229, $107,000 and $67,000 for the six month period ended December 31,
1996 and the years ended June 30, 1996 and 1995, respectively.
In the normal course of business, the Company is a party to several
lawsuits. At this time, the outcome of such suits are not determinable,
however, in the opinion of management, none of the proceedings will have a
material adverse effect on the Company's financial position or results of
operations.
12. RETIREMENT PLAN
The Company has 401(k) profit sharing plans (the "Plans") covering
employees who meet the participation requirements outlined in the Plans.
The Company's contribution aggregated $3,360, $8,608 and $1,163 for the
six month period ended December 31, 1996 and the years ended June 30, 1996
and 1995, respectively. Contributions to the Plans are made based on a
matching percentage of employee contributions as designated in the Plans.
13. REGULATORY REQUIREMENTS
The Company's title insurance subsidiary, Southern Title Insurance Corp
("Southern Title"), is subject to a $4,000,000 minimum level of capital
and surplus, at December 31, 1996, as required by statutes of the states
-23-
<PAGE>
in which it is authorized to do business. Southern Title is also subject
to regulations under which the payment of certain dividends requires the
prior approval of applicable insurance regulatory authorities. At December
31, 1996, Southern Title exceeded all minimum statutory capital
requirements.
The maximum amount of dividends which can be paid by insurers domiciled in
the Commonwealth of Virginia without prior approval of the Insurance
Commissioner is subject to restrictions relating to statutory surplus. As
required by state law, Southern Title's statutory surplus at December 31,
1996 was $4,317,628. In accordance with these restrictions, $317,628 is
available for dividends subject to the broad discretionary powers of
insurance regulatory authorities to further limit dividend payments of
insurance companies.
At December 31, 1996, investments and certificates of deposits with a book
value of $977,966 were either on deposit with various regulatory
authorities or held by Southern Title in accordance with statutory
requirements for the protection of its policyholders.
14. STATUTORY FINANCIAL INFORMATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"), which
differ in some respects from the statutory accounting requirements for
reporting in Southern Title's annual statements filed with insurance
regulatory authorities. Reconciliations of net earnings and stockholder's
equity as reported to the insurance regulatory authorities to that
reported in the accompanying consolidated financial statements are as
follows:
<TABLE>
<CAPTION>
Six Month Period Year Ended
Ended December 31,1996 June 30, 1996
---------------------------- ---------------------------
Net Net
Earnings Stockholders' Earnings Stockholders'
(Loss) Equity (Loss) Equity
<S> <C>
Balances - Firstmark
Consolidated - GAAP basis $ (908,960) $ 3,899,215 $ (615,243) $ 5,017,805
Adjustments:
Losses and stockholders'
deficit of companies
not included in
statutory reporting 772,536 4,512,176 629,772 2,258,144
------------ -------------- ------------ -------------
Balances - Southern Title -
GAAP basis (136,424) 8,411,391 14,529 7,275,949
Adjustments:
Statutory reserves (125,368) (2,571,409) 59,806 (2,446,041)
Restored non-admitted assets 16,189 (2,337,797) - (1,314,568)
IBNR reserve 46,001 693,660 (47,918) 656,532
Deferred income taxes (76,462) 121,783 (6,899) 149,738
------------ -------------- ------------ -------------
Balances - Southern Title -
statutory basis $ (276,064) $ 4,317,628 $ 19,518 $ 4,321,610
============ ============== ============ =============
</TABLE>
-24-
<PAGE>
15. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES
Activity in the liability for unpaid known claims and claim adjustment
expense is summarized as follows:
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended
December 31, June 30,
------------- ----------
1996 1996
<S> <C>
Balance, beginning $ 944,754 $ -
----------- -----------
Acquired balance at June 7, 1996 - 971,832
Less reinsurance recoverables 12,825 20,205
----------- -----------
Net balance 931,929 951,627
----------- -----------
Incurred related to:
Current year 26,142 35,807
Prior years 68,127 (22,222)
----------- -----------
Total incurred 94,269 13,585
----------- -----------
Paid net of recoveries related to:
Current year (31,281) 3,320
Prior years 97,601 37,343
----------- -----------
Total paid 66,320 40,663
----------- -----------
Net balance, ending 959,878 924,549
Plus reinsurance recoverables 12,825 20,205
----------- -----------
Balance, ending $ 972,703 $ 944,754
=========== ===========
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for claims and claim adjustment expense decreased by $32,150 and
$22,222 during the six months ended December 31, 1996 and the year ended
June 30, 1996, respectively.
State insurance regulations require an insurer to obtain reinsurance to
limit the primary insurer's coverage. The Company has elected reinsurance
limits lower than the State requirements. Although the ceding of insurance
does not discharge an insurer from its primary liability to an insured,
the reinsuring company assumes the related liability and, accordingly, the
ceding company's liabilities do not include amounts for reinsured
exposure. Reinsurance expected to be recovered on claims filed was $12,825
and $20,205 as of December 31, 1996 and June 30, 1996, respectively.
-25-
<PAGE>
The effect of reinsurance on premiums earned is as follows:
Six Month
Period Ended Year Ended
December 31, June 30,
1996 1996
Premiums assessed against policyholders $ 7,387,350 $ 804,156
Reinsurance ceded (65,914) (1,121)
------------- -----------
Net Premium Earned $ 7,321,436 $ 803,035
============= ===========
The Company evaluates the financial condition of its reinsurer and
monitors concentrations of credit risk arising from similar geographic
regions, activities, or economic characteristics of the reinsurer to
minimize its exposure to significant losses for reinsurance insolvencies.
16. DISCLOSURES CONCERNING THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined based on available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Short-Term Investments - The nature of these instruments and
their relatively short maturities provides for the reporting of fair value
equal to the historical cost.
Accounts Receivables and Accounts Payable - The nature of these
instruments and their relatively short maturities provides for the
reporting of fair value equal to the historical cost.
Investment Securities - The fair value of investment securities is based
on quoted market prices. The fair value of the Company's investment
securities is disclosed in Note 3 of these financial statements.
Venture Capital Investments - The fair values of some of the venture
capital investments are estimated primarily on the most recent rounds of
financing and securities transactions and to a lesser extent, on other
pertinent information, including financial condition and operations. For
other investments for which there are no quoted market prices, a
reasonable estimate of fair value could not be made without incurring
excessive costs. The investments are carried at the lower of cost or
estimated net realizable value.
Real Estate and Other Investments - The carrying amount is a reasonable
estimate of the fair value.
-26-
<PAGE>
Notes Receivable - The fair value of the Company's notes receivable is
estimated based on the current rates offered for similar issuances.
Convertible Notes Payable and Other Borrowings - The fair value of the
Company's convertible notes payable and other borrowings is estimated
based on the current rates available to the Company for debt of similar
terms and remaining maturities. At December 31, 1996 and June 30, 1996,
fair value approximates carrying value.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
--------------------------------- --------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C>
Venture Capital investments
for which it is:
Practicable to estimate
fair value $ 1,561,540 $ 2,077,540 $ 1,850,676 $ 2,360,675
Not practicable 334,911 - 235,411 -
Notes receivable 330,655 293,908 429,678 392,420
------------- ------------- ------------- -------------
$ 2,227,106 $ 2,371,448 $ 2,515,765 $ 2,753,095
============= ============= ============= =============
</TABLE>
-27-
<PAGE>
17. INDUSTRY SEGMENT INFORMATION
The following summarizes the Company's operating results and certain other
financial information by industry segment. The financial services segment
includes insurance consulting and marketing, investment advisory services,
financial planning, management consulting and venture capital services.
Financial services also includes the Company's investments in marketable
securities, loans, and cash and other investments.
<TABLE>
<CAPTION>
Six Month
Period Ended Year Ended
December 31, June 30,
------------- ---------------------------------
1996 1996 1995
<S> <C>
Revenues:
Financial Services $ 462,814 $ 1,687,170 $ 1,706,909
Venture Capital (305,558) 859,394 1,347,544
Title Insurance 7,593,704 848,295 -
-------------- -------------- --------------
7,750,960 3,394,859 3,054,453
-------------- -------------- --------------
Earnings (losses) before income taxes:
Financial Services (315,926) (70,400) 302,467
Venture Capital (621,995) (715,687) 469,428
Title Insurance (307,576) 26,478 -
Equity in earnings (losses)
of affiliates (52,766) 4,041 -
-------------- -------------- --------------
(1,298,263) (755,568) 771,895
-------------- -------------- --------------
Identifiable assets:
Financial Services 877,030 1,290,461 5,981,884
Venture Capital 4,746,263 4,918,428 1,346,229
Title Insurance 11,447,102 11,743,168 -
-------------- -------------- --------------
$ 17,070,395 $ 17,952,057 $ 7,328,113
============== ============== ==============
</TABLE>
18. SUBSEQUENT EVENTS
As of January 15, 1997, the Company has reached agreements in principle
with its President and its Chief Financial Officer for a series of
transactions whereby, the Company will transfer the stock of three
subsidiaries; Firstmark Capital Corp., Firm Investment Corp. and Firstmark
Properties, to the Chief Financial Officer. At the time of transfers, it
is anticipated that the three subsidiaries' total net assets will be
approximately $150,000, representing approximately four percent of the
Company's net assets at December 31, 1996. The Chief Financial Officer
will resign her position, but continue to serve the Company as a
consultant until July 1997. She will receive $30,000 for her services as a
consultant and will be compensated if holders of $500,000 or more of the
Company's convertible notes payable agree to extend the maturity of such
notes. The President will resign his position, but will continue to serve
as a consultant for one year and will receive $90,000.
-28-
<PAGE>
As a result of the above, the Company expects to be released from several
obligations. First, in connection with the transfer of the stock of the
subsidiaries Firstmark Capital Corp. will assume the Company's obligations
under the lease for the Company's principal office in Waterville, Maine.
Currently, the rent under this lease, which terminates on December 31,
2003, is approximately $43,980 per year. In addition, the President and
the Chief Financial Officer will cancel their three-year employment
agreements with the Company whereby they were entitled to receive base
compensation of $120,000 per year and additional compensation based on any
fees or commissions that they generated as employees of the Company.
The Board of Directors met and unanimously approved the conversion of its
Series B mandatorily redeemable preferred stock into 3,230,286 shares of
the Company's common stock effective April 2, 1997. Due to the Company's
investment in a radio broadcasting company, certain Federal Communication
Commission guidelines must be met prior to the actual issuance of the
common stock certificates.
The Series B mandatorily redeemable preferred stock entitles the holders
to dividends in the aggregate amount of $126,400. The preferred stock
dividend will be paid on or before June 30, 1997, but no earlier than
April 30, 1997. Additionally, the approval of the conversion of the Series
B Preferred Stock eliminated the obligation to establish a sinking fund
beginning April 1, 1997, for the redemption of such stock. The conversion
of the Series B mandatorily redeemable preferred stock required certain
amendments to the Company's Articles of Incorporation which were approved
by the Company's shareholders at a special meeting of shareholders held on
February 25, 1997. Had the stock conversion occurred on July 1, 1996, pro
forma net loss per share would have approximated $0.17.
Holders of $585,000 of the Company's 8% 1992 Promissory Notes due April
21, 1997, have agreed to extend the maturity date of the indebtedness
evidenced by the Company issuing new notes with a maturity date of March
1, 1999. The new notes increased the interest rate to 9% and added a more
favorable conversion feature. The holders of additional 8% 1992 Promissory
Notes will have the opportunity to extend the maturity date of the
indebtedness evidenced by their notes at any time prior to April 21, 1997.
Any notes that are not exchanged for new notes with a maturity of March 1,
1999, will be repaid with cash the Company currently has available or
expects to be available upon maturity of such notes.
* * * * * *
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
