SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment No. 1
to
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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.)
P.O. Box 1398
Richmond, Virginia 23218
(Address of Principal Executive Offices) (Zip Code)
(804) 648-6000
(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 December 31, 1997 were
$12,195,921.
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 March 31, 1998 was $1,609,530.
The number of shares outstanding of Common Stock, as of December 31,
1997 was 5,299,876.
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TABLE OF CONTENTS
PART I
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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.....................................11
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation.....................................................................11
Item 7. Financial Statements.........................................................................16
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................................................16
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............................................17
Item 10. Executive Compensation.......................................................................18
Item 11. Security Ownership of Certain Beneficial Owners and Management...............................20
Item 12. Certain Relationships and Related Transactions...............................................20
Item 13. Exhibits, List and Reports on Form 8-K.......................................................21
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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."
Recent Developments
Acquisition of STIC. In June 1996, Southern Capital Corp. ("SCC"), the
parent company of STIC, 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 was not convertible by the
holders, but could 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. The Series B Preferred Stock was converted into shares of
Common Stock in October 1997.
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. ("Champion"), 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 believes that it
has limited exposure to environmental litigation.
Board Review of Company Operations. At the end of 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.
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,
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extending the maturity of some or all of the Company's convertible notes, which,
if not extended, were due on April 21, 1997. See Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," below.
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 $156,000 and net assets of approximately $56,000; 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 agreed to serve the Company as a consultant
until July 1997. In addition to the transfer of the subsidiaries, Ms. Gilbert
received $30,000, payable over six months, for her services as a consultant and
an additional $28,500 for other assistance relating to the extension of the
maturity of $585,000 of the Company's convertible notes. Ms. Gilbert assigned
the right to receive the payments for her services as a consultant to Firstmark
Capital Corp.
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 was a consultant to the Company from his resignation
until January 1998. For his services as a consultant, Mr. Vigue received
$90,000, payable over 12 months. Mr. Vigue assigned the right to receive these
payments to Firstmark Capital Corp.
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. 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 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) was paid on August 13, 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.
Extension of Notes. In March 1997, holders of $585,000 of the Company's
8% convertible notes due April 21, 1997, agreed to extend the maturity date of
the indebtedness evidenced by these notes to March 1, 1999 at an interest rate
of nine percent. This amount represents approximately 57% of the $1,035,000 of
such notes outstanding. The holders of the remaining $450,000 of notes redeemed
their notes in April 1997.
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 Ohio and Virginia. The
sales and marketing efforts of STIC are generally targeted at the residential
housing and commercial real estate markets.
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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
Until their sale to Ivy Gilbert on January 24, 1997, the financial
services subsidiaries derived 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 invested its own capital in marketable
securities and other investments and made various business and other loans.
There was no geographical limitation of the financial services and
investment segment.
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 held certain real estate holdings of the
Company. Its principal holding was sold in April 1997.
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 "--
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 North Carolina, 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 provided:
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 Acquired: January 1986
Firstmark Investment Corp.)
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 approximately 73 total employees,
of which nine are part-time, as of December 31, 1997. 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 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
the protection of policyholders rather than for the benefit of investors.
Although their scope
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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 reinsurance treaties (or reinsurance
treaty 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 self-imposed 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, 1997. STIC, however,
remains liable to the insureds for the total risk, whether or not the reinsurer
meets its obligations.
At December 31, 1997, 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, 1997 and 1996,
STIC ceded to Fidelity $282 million and $291 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
December 31, 2003. The lease was renewable and negotiable after five years.
Effective January 24, 1997, Firstmark Capital Corp. assumed the lease
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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. For further information, see Item 1., "Description of Business --
Recent Developments," above.
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. 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, 1997, the Company
was not involved in any litigation outside the ordinary course of business.
On August 7, 1996, Lake Anna Development, L.C. ("Lake Anna") filed a
Motion for Judgment against STIC in the Circuit Court of Louisa County in the
Commonwealth of Virginia. The Motion for Judgment alleges that STIC breached a
contractual obligation under a title insurance policy that contained affirmative
mechanics' lien coverage when STIC denied liability under the exclusions of the
title insurance policy. STIC issued the title insurance policy at issue to the
lender, a federal savings bank, in connection with the development of the
insured project. Lake Anna alleges that it has succeeded to the position of the
lender. The Motion for Judgment seeks relief in the amount of $1,342,374.38 plus
interest from May 6, 1996. STIC denies any liability to the lender and is
vigorously defending the claims asserted against it.
On June 20, 1997, the beneficiaries of the DiBello Loving Trust filed a
civil lawsuit against James Vigue, former President and Chief Executive Officer
of the Company, Ivy Gilbert, former Treasurer and Chief Financial Officer of the
Company, and the Company. The lawsuit is pending in the Maine Superior Court for
Kennebec County. The beneficiaries allege that James Vigue, as trustee of the
trust, mismanaged the trust, breached his duties as trustee, made
misrepresentations to them, was negligent in the management of the trust and
violated the Maine Securities Act and the Maine Unfair Trade Practices Act. They
allege that Ivy Gilbert participated in the breach of trust. They allege that
the Company is liable for Mr. Vigue's actions and is liable as a trustee and for
violation of the Maine Securities Act and the Maine Unfair Trade Practices Act.
The beneficiaries claim compensatory damages in a range of $500,000 to $1
million, plus punitive damages. Pretrial discovery is in its initial stages.
Thus, the Company is unable to assess the likelihood of an adverse result. The
Company has denied all liability and it intends to defend the lawsuit
vigorously.
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Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the transition period covered by
this report.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Common Stock of the Company is traded on the Nasdaq SmallCap Market
under the symbol of "FIRM".
The following table sets forth the high and low bid information for the
Common Stock on the Nasdaq SmallCap Market for the quarters indicated.
Bid Information
High ($) Low ($)
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Fiscal Year Ended June 30, 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 Ended December 31, 1996
July 1 to September 30................. 4.63 4.25
October 1 to December 31............... 4.63 3.25
Fiscal Year Ended December 31, 1997
1st quarter............................ 3.75 2.00
2nd quarter............................ 2.63 1.50
3rd quarter............................ 2.03 1.50
4th quarter............................ 1.75 0.75
As of December 31, 1997, there were approximately 460 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 of Financial Condition
and Results of Operation
General
The following discussion provides information about the major
components of the results of operations and financial condition, liquidity and
capital resources of the Company. This discussion and
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analysis should be read in conjunction with the Consolidated Financial
Statements and Notes to Consolidated Financial Statements.
In June 1996, SCC was merged with and into SCAC, a subsidiary of the
Company. For further information on this transactions, see Item 1., "Description
of Business - General," above. Accordingly, the Company's results of operations
for the year ended December 31, 1997 include the results of SCC for the entire
year, while the results of operations for previous periods include the results
of SCC only for the period from June 7, 1996 forward.
In addition, 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.
Results of Operations
Fiscal Year Ended December 31, 1997 vs. Fiscal Year Ended December 31, 1996
Total revenues during the year ended December 31, 1997 increased to
$12.2 million, an 88% increase over the prior year, primarily due to the
inclusion of the results of operations of Southern Capital Corp. for the entire
year as compared to just over six months in the prior year. Title insurance
revenues amounted to approximately $10.8 million in the current year as compared
to $6.6 million in the prior year. Revenues from commissions and fees decreased
from $1.2 million in the prior year to less than $6,000 in the current year.
This change was the result of Management's decision to close certain business
operations, which were not considered profitable, in the latter part of 1996 and
to transfer several subsidiaries to the former chief financial officer in
January 1997 in exchange for the surrender of certain employment and
compensation benefits. For further information, see Item 1., "Description of
Business - Recent Developments," above. Net investment gains (losses) amounted
to $642,000 in the current year as compared to a loss of $467,000 in the prior
year. The current year included a gain (approximately $381,000) recognized on
the receipt of shares of Intercel stock previously held in escrow and an
additional gain of $98,000 when these and other shares of Intercel were
ultimately sold. Write-offs of loans and investments amounted to approximately
$655,000 in ther current year as compared to $1.1 million in 1996. Approximately
$233,000 of the write-offs in the current year related to the Company's
investment in Champion, with the balance relating principally to venture capital
and real estate investments. In the prior year the $1.1 million loss primarily
related to the writeoffs of principally venture capital investments and loans in
several startup companies, where the future value and collectibility of such
amounts were uncertain.
Operating expenses and general and administrative expenses increased to
approximately $12.2 million in the current year compared to $9.1 million in the
prior year. This increase also results from the inclusion of the title insurance
operations, which are very labor intensive, for the full year as compared to
less than seven months of such operations in the prior year.
Six Months Ended December 31, 1996 vs. Six Months Ended December 31, 1995
Over the course of the six months ended December 31, 1996, 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
included 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
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$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. For further information on this transfer,
see Item 1., "Description of Business -- Recent Developments," above. 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.
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. The shares of the Preferred Stock were subsequently converted into
3,230,286 shares of the Common Stock in October 1997.
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.
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<PAGE>
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. 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.
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. For further information, see Item 1., "Description of Business --
Recent Developments," above.
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
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<PAGE>
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.
Liquidity and Capital Resources
The Company's cash and cash equivalents were approximately $2,293,000
at December 31, 1997, and $1,833,000 at December 31, 1996. However, a
significant portion of the cash and cash equivalents (approximately $1,707,000
at December 31, 1997 and $1,136,000 at December 31, 1996) was held by STIC and
is subject to certain regulatory requirements as to use.
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 will be sufficient to enable the Company to satisfy its
obligations as they come due. Additionally, the Company has an available line of
credit of $500,000, for which no borrowings are outstanding as of December 31,
1997.
Reference is made to Item 1., "Description of Business - Regulation,"
above concerning payments of dividends from the title insurance companies.
Year 2000
The Company has assessed the potential impact of the year 2000 on its
key financial, operations and information systems. Management does not believe
that the Company will encounter significant systems problems related to the year
2000. The financial impact of making required systems changes is not expected to
be material to the Company's financial position, results of operations or cash
flows.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income," established standards for the reporting and
presentation of comprehensive income, which is divided into net income and other
comprehensive income. Other comprehensive income items are to be classified by
their nature and by their related accumulated balances in the appropriate
financial statements of a company. Generally, other comprehensive income
includes transactions not typically recorded as a component of net income such
as foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain debt and equity securities. SFAS 130 requires that
such items be presented with equal prominence on a comparative basis in the
appropriate financial statements for fiscal years beginning after December 15,
1997. Accordingly, the Company intends to comply with SFAS 130 beginning with
its 1998 fiscal year. Management has not yet determined the impact, if any, of
this statement on the Company.
Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures about Segments of an Enterprise and Related Information,"
establishes standards and disclosure requirements for the way companies report
information about operating segments, including related product information,
both in annual and interim reports issued to stockholders. Operating segments
are components of a company about which separate financial information is
available and which are used in determining resource allocations and performance
results. Information such as segment net earnings, appropriate revenue and
expense items and
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<PAGE>
certain balance sheet items are required to be presented. and such amounts are
required to be reconciled to the Company's combined financial information. This
standard is effective for financial statements issued for periods ending after
December 31, 1997, including interim periods. The Company will assess the
methodologies and reporting for compliance with SFAS 131.
Forward-Looking Statements
Certain statements in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Although the Company believes that its expectations with respect to
certain forward-looking statements are based upon reasonable assumptions within
the bounds of its business and operations, there can be no assurance that actual
results, performance or achievements of the Company will not differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements.
Item 7. Financial Statements
The following financial statements are filed as a part of this report
following Item 13 below:
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report
Financial Statements
Consolidated Balance Sheets, December 31, 1997 and 1996 and
June 30, 1996
Consolidated Statements of Operations, Year Ended December 31, 1997,
Six Month Period Ended December 31, 1996 and Year Ended June 30, 1996
Consolidated Statements of Stockholders' Equity, Year Ended
December 31, 1997, Six Month Period Ended December 31, 1996 and
Year Ended June 30, 1996
Consolidated Statements of Cash Flows, Year Ended December 31, 1997,
Six Month Period Ended December 31, 1996 and Year Ended June 30, 1996
Notes to Consolidated Financial Statements
</TABLE>
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, 48, 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 President of Firm
Investment Corp. 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, 36, 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 President of Firstmark Capital Corp. 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 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, 40, 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., 44, 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 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, 43, 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
Chesapeake Capital Lending Fund, L.P., a SBIC applicant. From 1987
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<PAGE>
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.
Executive Officers. The business experience of Donald V. Cruickshanks,
the Company's President and Chief Executive Officer, for the past five years is
summarized above. The business experience of Ronald C. Britt, the current Chief
Financial Officer, for the past five years is summarized below:
RONALD C. BRITT, 46, has been Chief Financial Officer and Treasurer of
the Company since May 1997. Prior to his engagement by the Company, Mr. Britt
was self-employed as an accounting and business consultant. He is a certified
public accountant and has over 15 years experience in public accounting. Mr.
Britt is a 1974 graduate of the University of Virginia.
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 1997, all filing requirements applicable to its
officers and directors were complied with.
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.
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<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
Securities
Name and Other Annual Underlying
Principal Position Year Salary ($) Bonus ($) Compensation Options (1)
- ------------------ ---- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Donald V. Cruickshanks, 1997 135,000 6,436 (5) -
President and Chief Executive 1996 (3) 68,282 - (5) -
Officer (2) 1996 (4) 126,975 - (5) -
1995 124,375 7,979 (5) -
James F. Vigue, Chairman of the 1997 10,000 (7) - 82,500 (8) -
Board (6) 1996 (3) 60,000 (7) - (5) 5,000
1996 (4) - - 205,351 5,000
1995 - - 177,241 5,000
H. William Coogan, Jr., Chairman 1997 135,000 - (5) -
and Chief Executive Officer of 1996 (3) 68,282 1,540 9,187 (10) -
SCC (9) 1996 (4) 126,975 - (5) -
1995 124,375 6,250 (5) -
</TABLE>
- ---------------
(1) The options listed in the table were not approved by the Company's
stockholders and were terminated in connection with the resignation of
Mr. Vigue as an employee and an officer of the Company.
(2) Mr. Cruickshanks was elected President and Chief Executive Officer on
January 24, 1997. Prior to January 24, 1997, he served as President of
SCC. SCC merged with and into a subsidiary of the Company on June 7,
1996. For further information, see Item 1., "Description of Business --
Recent Developments," above.
(3) Six months ended December 31, 1996.
(4) Fiscal year ended June 30, 1996.
(5) 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.
(6) Mr. Vigue served as President and Chief Executive Officer until January
24, 1997.
(7) As of March 28, 1996, per contract, the Chairman of the Board was
entitled to receive a base compensation of $120,000 per year. This
employment agreement was terminated on January 24, 1997. For further
information, see Item 1., "Description of Business -- Recent
Developments," above.
(8) Amount represents consulting fees earned, which Mr. Vigue assigned to
Firstmark Capital Corp.
(9) SCC merged with and into a subsidiary of the Company on June 7, 1996.
(10) 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.
Compensation of Directors. The Company does not compensate its
Directors for attending meetings of the Board of Directors.
Employment Agreements. STIC and Donald V. Cruickshanks, the President
and Chief Executive Officer and a Director of the Company, are parties to an
employment agreement for a term commencing January 2, 1998, and terminating
December 31, 2000. The agreement provides for his employment as
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<PAGE>
President and Chief Executive Officer of STIC. Under the agreement, Mr.
Cruickshanks is entitled to base compensation of $140,000 per year, with an
increase in compensation of $5,000 per year. Mr. Cruickshanks is entitled
further to receive additional compensation in an amount up to 10% of the annual
after-tax profits of STIC. 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 March 31, 1998 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
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., P.O. Box 1398,
Richmond, Virginia 23218.
Name Common Stock Percent
- ---- ------------ -------
Directors
Donald V. Cruickshanks 1,065,995 20.1%
James F. Vigue (1)(2) 157,674 3.0%
Ivy L. Gilbert (1)(3) 156,624 3.0%
H. William Coogan, Jr. 1,001,389 18.9%
Susan C. Coogan (4) 1,162,903 21.9%
All Directors and executive officers as a
group (5 persons) 3,391,798 64.0%
The H. William Coogan Irrevocable Trust 1,162,903 21.9%
4712 Charmian Road
Richmond, Virginia 23226
- -----------
(1) Mailing address is One Financial Place, 222 Kennedy Memorial Drive,
Waterville, Maine 04901.
(2) Amount includes 4,324 shares held by his spouse, Ivy L. Gilbert, and
55,899 held in varios retirement plans.
(3) Amount includes 50,525 shares held as custodian for her minor children
and 101,775 shares held by her spouse, James F. Vigue.
(4) Amount includes 1,162,903 held by The H. William Coogan Irrevocable
Trust, of which Ms. Coogan is sole trustee.
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
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<PAGE>
related parties at terms consistent with those provided to other customers. The
loans are substantially secured by real estate mortgages. Balances at December
31, 1997 are as follows:
Advances to Related Parties $ 53,016
Loans to Related Parties $ 50,322
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. For further information, see Item 1., "Description of Business --
Recent Developments," above.
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.
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.
No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.
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<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
Consolidated Financial Statements for the
Year Ended December 31, 1997, and the
Six Month Period Ended December 31, 1996
and the Year Ended June 30, 1996
and Independent Auditors' Report
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE SIX MONTH PERIOD ENDED DECEMBER 31, 1996
AND THE YEAR ENDED JUNE 30, 1996:
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 7-28
<PAGE>
DELOITTE & TOUCHE LLP
Suite 500
Eighth & Main Building
707 East Main Street
Richmond, Virginia 23219
Telephone: (804)697-1500
Facsimile: (804)697-1825
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Firstmark Corp.
We have audited the consolidated balance sheets of Firstmark Corp. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1997, 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audits provide 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, 1997 and 1996, and the results of their operations and their cash
flows for the year ended December 31, 1997, the six month period ended December
31, 1996 and for the year ended June 30, 1996 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
April 10, 1998
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
ASSETS 1997 1996
Cash and cash equivalents $ 2,293,136 $ 1,832,681
Receivables:
Receivables - trade, net 1,221,636 884,497
Receivables - related parties 53,016 59,187
----------- -----------
Total receivables 1,274,652 943,684
----------- -----------
Notes receivable:
Notes receivable, net 65,817 179,429
Notes receivable - related parties 50,322 151,226
----------- -----------
Total notes receivables 116,139 330,655
----------- -----------
Income taxes receivables 248,776 330,372
Investments:
Marketable securities 2,148,545 2,893,759
Venture capital investments, net 1,283,645 1,836,540
Real estate and other investments 809,668 1,624,121
----------- -----------
Total investments 4,241,858 6,354,420
----------- -----------
Other Assets:
Title plants 3,563,008 3,544,243
Property, plant and equipment, net 830,533 1,005,806
Excess of cost over fair value 961,272 1,013,696
Deferred tax asset, net of allowance 920,073 1,468,518
Other assets 168,234 246,320
----------- -----------
Total other assets 6,443,120 7,278,583
----------- -----------
TOTAL ASSETS $14,617,681 $17,070,395
=========== ===========
See notes to consolidated financial statements.
<PAGE>
December 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
LIABILITIES:
Accounts payable and other liabilities $ 575,463 $ 571,383
Borrowed funds 1,060,465 1,749,435
Reserve for title policy claims 1,027,607 972,703
Deferred tax liability 920,073 1,127,659
----------- -----------
Total liabilities 3,583,608 4,421,180
----------- -----------
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
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, Series A, $0.20 par value -
authorized 250,000 shares; issued 57,000,
(liquidation preference $2,280,000) 11,400 11,400
Common stock, $0.20 par value - authorized
30,000,000 shares; issued 5,501,430 and
2,271,144 shares, respectively 1,100,286 454,229
Additional paid-in capital - preferred 2,162,889 2,162,889
Additional paid-in capital - common 11,498,331 3,394,388
Retained earnings (deficit) (2,725,070) (1,143,812)
Treasury stock, at cost - 201,554 shares (818,773) (818,773)
Net unrealized loss on marketable equity
securities available for sale, net of taxes (194,990) (161,106)
----------- -----------
Total stockholders' equity 11,034,073 3,899,215
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $14,617,681 $17,070,395
=========== ===========
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Month
Year Ended Period Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
<S> <C> <C> <C>
REVENUES:
Commissions and fees $ - $ 467,201 $ 1,729,389
Title insurance (net of reinsurance ceded of
$81,627, $65,914 and $1,121, respectively) 10,841,842 5,812,523 803,035
Investment gains (losses) 641,531 (407,188) 661,147
Interest and dividends 138,664 179,878 173,103
Other revenues 573,884 189,633 28,185
------------- ------------ ------------
Total revenues 12,195,921 6,242,047 3,394,859
------------- ------------ ------------
EXPENSES:
Employee compensation and benefits 8,583,580 5,019,634 1,950,887
Write-offs of loans and investments 654,785 186,635 1,249,347
General and administrative expenses 3,599,144 2,113,326 869,676
Interest expense 108,318 42,085 84,558
Loss on retirement of fixed assets - 44,852 -
Write-down of excess of cost over fair value - 81,012 -
Minority interest 368,718 - -
------------- ------------ ------------
Total expenses 13,314,545 7,487,544 4,154,468
------------- ------------ ------------
Equity in earnings (losses) of affiliates - (52,766) 4,041
------------- ------------ ------------
Loss from continuing operations
before income taxes (1,118,624) (1,298,263) (755,568)
Income tax (benefit) expense 113,412 (457,703) (281,925)
------------- ------------ ------------
Net loss from continuing operations (1,232,036) (840,560) (473,643)
Discontinued operations
Loss from discontinued operations, net 24,732 - -
Loss from disposal of discontinued operations, net 61,290 - -
------------- ------------ ------------
Net loss (1,318,058) (840,560) (473,643)
------------- ------------ ------------
Preferred stock dividend 263,200 68,400 141,600
------------- ------------ ------------
Net loss applicable to common shares $ (1,581,258) $ (908,960) $ (615,243)
============= ============ ============
Loss per common share - basic and diluted $ (0.34) $ (0.40) $ (0.29)
============= ============ ============
Weighted-average number of shares outstanding 4,675,912 2,271,052 2,147,006
============= ============ ============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997,
SIX MONTH PERIOD ENDED DECEMBER 31, 1996
AND THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Additional Additional
Paid-In Preferred Paid-In
Common Capital Stock, Capital
Stock Common Series A Preferred
<S> <C> <C> <C> <C>
BALANCE, JULY 1, 1995 $ 439,209 $ 3,106,201 $ 12,000 $ 2,283,789
Common stock issued 15,000 287,791 - -
Preferred dividends paid - - - -
Preferred stock redeemed - - (600) (120,900)
Treasury stock purchased - - - -
Net loss - - - -
Change in valuation of securities - - - -
----------- ------------ -------- -----------
BALANCE, JUNE 30, 1996 454,209 3,393,992 11,400 2,162,889
Common stock issued 20 396 - -
Preferred dividends paid - - - -
Net loss - - - -
Change in valuation of securities - - - -
----------- ------------ -------- -----------
BALANCE, DECEMBER 31, 1996 454,229 3,394,388 11,400 2,162,889
Conversion of mandatorily redeemable preferred stock 646,057 8,103,943 - -
Preferred dividends paid - - - -
Net loss - - - -
Change in valuation of securities - - - -
----------- ------------ -------- -----------
BALANCE, DECEMBER 31, 1997 $ 1,100,286 $ 11,498,331 $ 11,400 $ 2,162,889
=========== ============ ======== ===========
</TABLE>
<TABLE>
Net
Unrealized
Gain (Loss)
Retained on Securities
Earnings Treasury Available
(Deficit) Stock For Sale
<S> <C> <C> <C>
BALANCE, JULY 1, 1995 $ 380,391 $ (193,898) $ (62,003)
Common stock issued - - -
Preferred dividends paid (141,600) - -
Preferred stock redeemed - - -
Treasury stock purchased - (624,875) -
Net loss (473,643) - -
Change in valuation of securities - - 110,943
------------ ---------- ----------
BALANCE, JUNE 30, 1996 (234,852) (818,773) 48,940
Common stock issued - - -
Preferred dividends paid (68,400) - -
Net loss (840,560) - -
Change in valuation of securities - - (210,046)
------------ ---------- ----------
BALANCE, DECEMBER 31, 1996 (1,143,812) (818,773) (161,106)
Conversion of mandatorily redeemable preferred stock - - -
Preferred dividends paid (263,200) - -
Net loss (1,318,058) - -
Change in valuation of securities - - (33,884)
------------ ---------- ----------
BALANCE, DECEMBER 31, 1997 $ (2,725,070) $ (818,773) $ (194,990)
============ ========== ==========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Month
Year Ended Period Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $ (1,318,058) $ (840,560) $ (473,643)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Deferred income taxes 159,608 (331,991) (276,283)
Depreciation and amortization 249,110 152,471 85,659
Write-down of investments 654,785 - 1,271,569
Write-down of note receivable 6,759 - -
Write-down of excess of cost over fair value - 81,012 -
Commissions paid in stock - - 33,743
Loss (gain) on sale of assets 113,874 44,852 (21,065)
Gain recognized on held to maturity securities - (10,883) (2,408)
(Gain) loss on sale of securities (641,531) 258,344 12,952
Fee received in stock - - (145,550)
Gain on settlement of Unitel spin off - - (587,365)
Increase in cash surrender value (19,505) - -
Issuance of stock for services - - 211,539
Issuance of stock for employee bonus - 416 -
Shares of stock received 478,039 - -
Equity in losses (earnings) of affiliates - 52,766 (4,041)
Changes in assets and liabilities:
Decrease (increase) in:
Net change in marketable trading securities 81,994 260,720 160,682
Accounts receivable (337,139) 180,972 65,682
Net decrease in notes receivable 98,803 40,314 96,848
Net decrease in notes receivable from
related parties 100,904 58,709 51,946
Prepaid expenses and other current assets (85,540) 7,871 6,088
Advances to related parties 6,171 (6,071) 371,053
Refundable income taxes 81,596 106,538 (233,611)
Increase (decrease) in:
Accounts payable 4,078 42,940 (107,823)
Accrued expenses - 106,323 7,477
Reserve for policy claims 54,904 27,949 (27,078)
Income taxes payable - - (89,594)
-------------- ------------- -------------
Net cash provided (used) by
operating activities (311,148) 232,692 406,777
-------------- ------------- -------------
</TABLE>
(Continued)
-5-
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Six Month
Year Ended Period Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
<S> <C> <C> <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)
Proceeds from sale of numismatic and
stamp investments 19,300 - -
Net change in other investments - 136,870 (1,722,585)
Proceeds from sale of real estate 567,466 - -
Other payments received on real estate 37,805 - -
Proceeds from held to maturity securities 321,643 200,500 -
Proceeds from sale of property and equipment 56,175 8,748 -
Purchase of property and equipment (87,203) (35,865) (47,735)
Proceeds from available-for-sale securities 1,221,341 153,712 1,104,494
Proceeds from payments of Venture Capital loans 8,820 - -
Purchase of available-for-sale securities (143,434) (278,484) (250,019)
Purchase of held to maturity securities (259,375) (63,135) -
Additions to title plant (18,765) - -
----------- ----------- -----------
Net cash provided by
investing activities 1,723,773 97,188 58,178
----------- ----------- -----------
FINANCING ACTIVITIES:
Issuance (purchase) of preferred stock - - (121,500)
Payments on other liabilities - (33,000) (41,003)
Repayment of convertible notes (450,000) - -
Proceeds from lease buy-back - - 158,084
Purchase of treasury stock - - (233,625)
Preferred stock dividends (263,200) (68,400) (141,600)
Payments on borrowed funds (238,970) (103,126) -
----------- ----------- -----------
Net cash used by
financing activities (952,170) (204,526) (379,644)
----------- ----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 460,455 125,354 85,311
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,832,681 1,707,327 1,622,016
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 2,293,136 $ 1,832,681 $ 1,707,327
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997,
SIX MONTH PERIOD ENDED DECEMBER 31, 1996
AND THE YEAR ENDED JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Firstmark Corp. ("the Company") and its
subsidiaries, based in Richmond, Virginia, are engaged primarily in title
insurance and the management of its venture capital investments. The
Company issues title insurance policies through branch offices and
independent agencies in the Mid-Atlantic Region of the United States. The
majority of the Company's title insurance business is concentrated in
Virginia and Ohio. Until January 1997, the Company also invested its
capital in and provided loans to emerging growth or start up companies,
and provided financial consulting services to individuals, institutions,
and corporations.
On January 1997, the Company reached agreements in principle with its
President and its Chief Financial Officer for a series of transactions
whereby the Company transferred the stock of three subsidiaries (Firstmark
Capital Corp., Firm Investment Corp. and Firstmark Properties) to the
Chief Financial Officer. At the time of the transfers, the three
subsidiaries' total net assets amounted to was approximately $100,000,
representing approximately four percent of the Company's net assets at
December 31, 1996. The Chief Financial Officer resigned her position, but
continued to serve the Company as a consultant until July 1997. She
received $30,000 for her services as a consultant and was compensated for
aiding the Company in obtaining extension of maturity dates of $500,000 or
more of the Company's convertible notes payable. The President resigned
his position, but continued to serve as a consultant for one year and
should receive $90,000 for such service.
As a result of the above, the Company was released from several
obligations. First, in connection with the transfer of the stock of the
subsidiaries, Firstmark Capital Corp. assumed 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 canceled their three-year employment
agreements with the Company whereby they were entitled to receive base
compensation of $120,000 per year.
-7-
<PAGE>
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 year ended December
31, 1996 consists of the following:
Total revenues $ 7,750,960
Total expenses 8,996,457
Earnings (losses) before income taxes (1,298,263)
Income tax expense (benefit) (457,703)
Net earnings (loss) applicable to common shares (908,960)
Earnings (loss) per common share (0.40)
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 and affiliates. 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 transactions have
been eliminated.
Debt and Equity Securities - In accordance with Statement of Financial
Accounting Statements ("SFAS") No. 115, all marketable securities
classified as 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, available-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 temporarily 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 method. At December 31, 1997, all trading
securities were transferred to available for sale at market value; all
gains or losses on such securities were reflected in income.
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.
-8-
<PAGE>
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 costs
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 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 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.
-9-
<PAGE>
Commission Revenues and Expenses - The Company recorded commission
revenues and expenses on the sale of life insurance policies or annuities
when the sale was complete and the customer had accepted delivery of the
product. Brokerage commissions were recorded as customer security
transactions were completed. All customer transactions were executed
through correspondent brokers, which carry and clear all customer accounts
on a fully-disclosed basis. The former brokerage subsidiary was 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
sheets.
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 - The Company adopted the provisions of SFAS No.
128, "Earnings Per Share," for the year ended December 31, 1997. SFAS No.
128 establishes new standards for computing and presenting earnings per
share (EPS). The statement replaces the presentation of primary EPS with
basic EPS and the presentation of fully diluted EPS with diluted EPS.
Basic EPS is computed by dividing net income, less required dividends on
redeemable preferred stock, by the weighted average number of common
shares outstanding during the year. Diluted EPS is computed using the
weighted average number of common shares outstanding during the year,
including the dilutive effect of all potential common shares. Basic
earnings (loss) per share is equivalent to diluted earnings per share as a
result of the antidilutive per share effect of losses from continuing
operations.
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.
-10-
<PAGE>
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 began accruing dividends after January 1, 1997. On April
2, 1997 the mandatorily redeemable preferred stock along with accrued
dividends was converted into 3,230,286 shares of common stock.
Additionally, the approval of the conversion of the Series B Preferred
Stock eliminated an 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.
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.
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, December 31,
1997 1996
<S> <C> <C>
Marketable Securities:
Trading $ - $ 125,750
Available-for-Sale:
Common Stocks 221,423 669,635
Preferred Stocks 127,031 231,031
Held to Maturity:
Bonds and Notes 1,800,091 1,867,343
------------- -------------
Total Marketable Securities 2,148,545 2,893,759
------------- -------------
Venture Capital Investments:
Loans 464,375 464,375
Loan Participations 107,920 221,840
Common Stocks 455,100 682,800
Preferred Stocks 225,000 225,000
Warrants 31,250 106,250
Limited Partnerships - 136,275
------------- -------------
Total Venture Capital
Investments 1,283,645 1,836,540
------------- -------------
Real Estate Investments:
Real estate owned 435,358 1,090,306
Other real estate investments 365,101 473,905
------------- -------------
Total Real Estate
Investments 800,459 1,564,211
------------- -------------
Other Investments:
Numismatic and Stamp Investments 7,000 57,701
Art Pieces 2,209 2,209
------------- -------------
Total Other Investments 9,209 59,910
------------- -------------
Total Real Estate and
Other Investments 809,668 1,624,121
------------- -------------
Total Investments $ 4,241,858 $ 6,354,420
============= =============
</TABLE>
(Continued)
-12-
<PAGE>
Marketable Securities
The following is a summary of gains and losses on marketable securities:
<TABLE>
<CAPTION>
Six Month
Year Ended Period Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
<S> <C> <C> <C>
Securities for Trading:
Gains (losses) on sales $ 3,908 $ (77,334) $ (46,277)
Unrealized gains (losses) 36,922 (71,510) 34,766
------------ ------------ -----------
Total trading gains (losses) 40,830 (148,844) (11,511)
Securities Available-for-Sale:
Gains (losses) on sales 652,037 (29,594) 23,950
Unrealized losses - other than
temporary impairment (51,336) (228,750) -
------------ ------------ -----------
Total gains (losses) on marketable
securities $ 641,531 $ (407,188) $ 12,439
============ ============ ===========
</TABLE>
Securities held to maturity and available for sale are as follows:
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available-for-Sale:
Common stocks $ 523,893 $ 16,985 $ 319,455 $ 221,423
Preferred stocks 120,000 7,031 - 127,031
-------------- ---------- ----------- -------------
643,893 24,016 319,455 348,454
-------------- ---------- ----------- -------------
Held-to-Maturity:
Bonds and Notes 1,800,091 19,070 2,076 1,817,085
-------------- ---------- ----------- -------------
Total $ 2,443,984 $ 43,086 $ 321,531 $ 2,165,539
============== ========== =========== =============
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-Sale:
<S> <C> <C> <C> <C>
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>
Proceeds from sales of investments available for sale were $1,221,341,
$153,712 and $227,689 for the year ended December 31, 1997, the six month
period ended December 31, 1996 and for the year ended June 30, 1996,
respectively. Gross gains of $691,868, $12,146 and $26,271 were realized
for the year ended December 31, 1997, the six month period ended December
31, 1996 and for the year ended June 30, 1996, respectively. Gross losses
of $42,022, $41,740 and $4,730 were realized for the year ended December
31, 1997, the six month period ended December 31, 1996 and for the year
ended June 30, 1996, respectively.
The contractual maturities of bonds and notes as of December 31, 1997 are
as follows:
Amortized Market
Cost Value
Due in 1 year or less $ 308,681 $ 306,605
Due after 1 year through 5 years 1,292,871 1,304,755
Due after 5 years through 10 years 198,539 205,725
------------- --------------
$ 1,800,091 $ 1,817,085
============= ==============
Venture Capital Investments
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 operations to a new company, which is attempting to raise
additional capital. The Company 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. The ownership of this investment was transferred to the former CFO
in the transaction described in Note 1.
-14-
<PAGE>
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 year ended December 31, 1997 were $544,075 and
for the year ended June 30, 1996 were $1,249,347. There were no
write-downs in the six month period ended December 31, 1996. Included in
the write-down amounts is a $450,000 addition to a reserve for loan loss.
An additional $100,000 was added to the reserve for the year ended
December 31, 1997. The following is a summary of activity in the reserve
for loan losses on Venture Capital Investments:
<TABLE>
<CAPTION>
Six Month
Year Ended Period Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
<S> <C> <C> <C>
Balance, beginning $ 450,000 $ 450,000 $ -
Additions to reserve charged to expense 100,000 - 450,000
----------- ----------- -----------
Balance, ending $ 550,000 $ 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 from 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 was 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 the
Company transferred its Unitel stock and a majority of the InterCel shares
received in exchange for cash and Company stock owned by the option
holder. The Company retained 57,236 shares of InterCel stock and also
retained the rights to 29,038 shares of InterCel stock that were released
from an acquisitions escrow account in May 1997. The Company reported a
gain of $463,096 as a result of the release and subsequent sale of the
stock from the acquisitions escrow account.
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 fully-harvested tract of timber,
which was
-15-
<PAGE>
sold during the year ended December 31, 1997 for a loss of $10,658. In
addition, the Company had 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. These lots and the
single family housing unit were sold during the year ended December 31,
1997 for a loss of $37,114.
The Cumberland Ledges investment is a 67% interest in Cumberland Ledges
joint venture, which owns 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 write-downs during the years ended December 31, 1997
and June 30, 1996 amounted to $110,710 and $20,000 respectively and were
included in cost of real estate revenues. No adjustments were recorded in
the six month period ended December 31, 1996.
4. NOTES RECEIVABLE
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, net:
December 31, December 31,
1997 1996
Real estate mortgage loans $ - $ 70,000
Business loans 110,817 154,429
----------- -----------
110,817 224,429
Less reserve for loan losses (45,000) (45,000)
----------- -----------
Total notes receivable, net $ 65,817 $ 179,429
=========== ===========
-16-
<PAGE>
The following is a summary of activity in the reserve for losses on notes
receivable:
<TABLE>
<CAPTION>
Six Month
Year Ended Period Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
<S> <C> <C> <C>
Balance, beginning $ 45,000 $ 45,000 $ 30,000
Additions to reserve charged to expense - - 15,000
Loans charged off - - -
---------- ---------- ----------
Balance, ending $ 45,000 $ 45,000 $ 45,000
========== ========== ==========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment, net:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Land and land improvements $ 68,500 $ 121,800
Building 364,433 364,433
Furniture, fixtures, and equipment 1,562,149 1,632,314
Leasehold improvements 168,876 165,507
Property under capital lease 162,084 158,083
------------- -------------
2,326,042 2,442,137
Less accumulated depreciation 1,495,509 1,436,331
------------- -------------
Total property, plant and equipment, net $ 830,533 $ 1,005,806
============= =============
</TABLE>
Depreciation charged to operations was $179,573, $105,931, and $42,220 for
the year ended December 31, 1997, for the six month period ended December
31, 1996 and the year ended June 30, 1996, respectively.
6. BORROWINGS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
The convertible notes payable are due March 1, 1999 and carry
interest at 9%. 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 $ 585,000 $ -
-17-
<PAGE>
December 31, December 31,
1997 1996
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
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
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
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
Capital lease obligations 75,465 125,084
------------- -------------
Total borrowings $ 1,060,465 $ 1,749,435
============= =============
</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 $75,465. The
corresponding liabilities have been recorded as obligations under capital
leases.
-18-
<PAGE>
The future minimum lease payments under the capital leases as of December
31, 1997 are as follows:
1998 $ 61,236
1999 20,412
----------
Total lease payments 81,648
Less: Amount representing interest 6,183
----------
Present value of future minimum lease payments $ 75,465
==========
7. INCOME TAXES
The following is a summary of income tax expense (benefit):
<TABLE>
<CAPTION>
Current Deferred Total
<S> <C> <C> <C>
Year Ended
December 31, 1997
Federal $ - $ 191,849 $ 191,849
State (46,196) (32,241) (78,437)
------------ ------------ ------------
$ (46,196) $ 159,608 $ 113,412
============ ============ ============
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)
============ ============ ============
</TABLE>
-19-
<PAGE>
The actual tax expense (benefit) differs from the expected tax benefit
(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
Year Ended Period Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
<S> <C> <C> <C>
Expected tax expense (benefit) $ (409,580) $ (441,409) $ (256,893)
State income taxes, net of federal taxes (51,768) (5,451) (30,233)
Realization of a valuation allowance 641,187 - -
Other (66,427) (10,843) 5,201
------------ ------------ ------------
$ 113,412 $ (457,703) $ (281,925)
============ ============ ============
</TABLE>
The tax effects of each type of significant items that give rise to
deferred taxes are:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Deferred Tax Asset:
Allowance for loan losses $ 43,233 $ 221,834
Net unrealized loss on investments 130,218 143,808
IBNR reserve 213,502 292,309
Net unrealized loss on real estate 159,678 117,608
Net operating loss carryforwards 877,367 538,119
Net unrealized loss on securities
available for sale 119,957 82,994
Other 17,305 71,846
------------- -------------
Deferred tax asset 1,561,260 1,468,518
------------- -------------
Deferred Tax Liability:
Premium reserve 838,750 850,998
Purchase accounting adjustments - 111,175
Depreciation 63,886 148,050
Other 17,437 17,436
------------- -------------
Deferred tax liability 920,073 1,127,659
Less: valuation allowance (641,187) -
------------- -------------
Net Deferred Tax Asset $ - $ 340,859
============= =============
</TABLE>
-20-
<PAGE>
During the year ended December 31, 1997, the Company recorded a valuation
allowance of $641,187 on the net deferred tax assets to reduce the total
amount that management believes will ultimately be realized. Realization
of deferred tax assets is dependent upon sufficient future taxable income
during the period that temporary differences and carryforwards are
expected to be available to reduce taxable income.
The Company has net operating loss carryforwards of approximately $2.4
million for federal income tax purposes, which expire beginning in 2012.
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, December 31,
1997 1996
<S> <C> <C>
Interest bearing notes:
Employees and independent agents $ 50,322 $ 88,200
Others - 63,026
----------- -----------
$ 50,322 $ 151,226
=========== ===========
Advances to related parties:
Limited partnerships in operation $ 47,752 $ 57,962
Other advances to employees and affiliates 5,264 1,225
----------- -----------
$ 53,016 $ 59,187
=========== ===========
</TABLE>
The Company received management fees from partnerships in which it was the
general partner in the amount of $31,225 and $52,950 during the six month
period ended December 31, 1996 and the year ended June 30, 1996,
respectively.
9. CASH FLOW INFORMATION
The following is a summary of non-cash investment and financing
transactions:
<TABLE>
<CAPTION>
Six Month
Year Ended Period Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
<S> <C> <C> <C>
Stock issued for business acquisition $ - $ - $ 8,750,000
</TABLE>
-21-
<PAGE>
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
Year Ended Period Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
<S> <C> <C> <C>
Stock issued for consulting services $ - $ - $ 211,539
Stock received for consulting services - - 145,550
Commissions paid in securities - - 33,743
Gain on settlement of Unitel spin off
(Treasury stock received) - - 300,000
Stock issued for employee bonus - 416 -
Stock received in demutualization of
insurance company 96,915 - -
Stock received in final settlement of
Unitel spin-off 381,124 - -
</TABLE>
Cash paid for interest and income taxes is as follows:
<TABLE>
<CAPTION>
Six Month
Year Ended Period Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
<S> <C> <C> <C>
Interest $ 108,318 $ 42,085 $ 85,000
============ ========== ===========
Income taxes $ - $ - $ 282,000
============ ========== ===========
</TABLE>
10. PREFERRED STOCK
At December 31, 1997 and 1996, the Company had 57,000 shares of nonvoting
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.
-22-
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
The Company leases the majority of its offices and certain equipment under
noncancellable operating lease agreements. Future minimum lease payments
under these lease agreements are as follows as of December 31, 1997:
1998 513,154
1999 84,078
2000 45,107
2001 18,459
Thereafter -
-----------
Total future minimum lease payments $ 660,798
===========
Total rental expense under noncancellable operating leases approximated
$778,705, $227,229, and $107,000 for the year ended December 31, 1997, the
six month period ended December 31, 1996 and for the year ended June 30,
1996, 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 $34,601 for the year ended December
31, 1997, $3,360 for the six month period ended December 31, 1996 and
$8,608 the year ended June 30, 1996. 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, 1997 and 1996, as required by statutes of the
states 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, 1997 and 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,
1997 and 1996 was $4,264,702 and $4,317,628, respectively. In accordance
with these restrictions, $264,702 and $317,628, respectively, is available
for dividends subject to the broad discretionary powers of insurance
regulatory authorities to further limit dividend payments of insurance
companies.
-23-
<PAGE>
At December 31, 1997 and 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>
Year Ended Six Month Period Year Ended
December 31,1997 Ended December 31,1996 June 30, 1996
-------------------------- -------------------------- --------------------------
Net Net Net
Earnings Stockholders' Earnings Stockholders' Earnings Stockholders'
(Loss) Equity (Loss) Equity (Loss) Equity
<S> <C> <C> <C> <C> <C> <C>
Balances - Firstmark
Consolidated -
GAAP basis $ (1,318,058) $ 11,034,073 $ (908,960) $ 3,899,215 $ (615,243) $ 5,017,805
Adjustments:
Losses and stockholders'
deficit of companies
not included in
statutory reporting 1,397,155 (2,580,672) 772,536 4,512,176 629,772 2,258,144
------------ ------------- ---------- ----------- ---------- -----------
Balances - Southern Title -
GAAP basis 79,097 8,453,401 (136,424) 8,411,391 14,529 7,275,949
Adjustments:
Statutory reserves (69,930) (2,641,339) (125,368) (2,571,409) 59,806 (2,446,041)
Restored non-admitted
assets 18,611 (2,262,429) 16,189 (2,337,797) - (1,314,568)
IBNR reserve (85,814) 607,846 46,001 693,660 (47,918) 656,532
Deferred income taxes (28,183) 107,223 (76,462) 121,783 (6,899) 149,738
------------ ------------- ---------- ----------- ---------- -----------
Balances - Southern Title -
statutory basis $ (86,219) $ 4,264,702 $ (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
Year Ended Period Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
<S> <C> <C> <C>
Balance, beginning $ 972,703 $ 944,754 $ -
------------- ------------ ------------
Acquired balance at June 7, 1996 - - 971,832
Less reinsurance recoverables - 12,825 20,205
------------- ------------ ------------
Net balance 972,703 931,929 951,627
------------- ------------ ------------
Incurred related to:
Current period 210,189 26,142 35,807
Prior periods 292,203 68,127 (22,222)
------------- ------------ ------------
Total incurred 502,392 94,269 13,585
------------- ------------ ------------
Paid net of recoveries related to:
Current period 152,386 (31,281) 3,320
Prior periods 295,102 97,601 37,343
------------- ------------ ------------
Total paid 447,488 66,320 40,663
------------- ------------ ------------
Net balance, ending 1,027,607 959,878 924,549
Plus reinsurance recoverables - 12,825 20,205
------------- ------------ ------------
Balance, ending $ 1,027,607 $ 972,703 $ 944,754
============= ============ ============
</TABLE>
As a result of changes in estimates of insured events in prior periods,
the provision for claims and claim adjustment expense increased by
$298,668 during the year ended December 31, 1997 and 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. No
reinsurance recoveries are expected as of the year ended December 31,
1997.
-25-
<PAGE>
The effect of reinsurance on premiums earned is as follows:
<TABLE>
<CAPTION>
Six Month
Year Ended Period Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
<S> <C> <C> <C>
Premiums assessed against policyholders $ 10,923,469 $ 7,387,350 $ 804,156
Reinsurance ceded (81,627) (65,914) (1,121)
-------------- ------------- -----------
Net Premium Earned $ 10,841,842 $ 7,321,436 $ 803,035
============== ============= ===========
</TABLE>
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. At
December 31, 1997, due to their relatively short maturities, the reporting
of fair value equals the historical cost.
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, 1997 and 1996, fair value
approximates carrying value.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
--------------------------------- --------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Venture Capital investments
for which it is:
Practicable to estimate
fair value $ 1,283,645 $ 1,283,645 $ 1,561,540 $ 2,077,540
Not practicable 9,209 - 334,911 -
Notes receivable 116,140 116,140 330,655 293,908
------------- ------------- ------------- -------------
$ 1,408,994 $ 1,399,785 $ 2,227,106 $ 2,371,448
============= ============= ============= =============
</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
Year Ended Period Ended Year Ended
December 31, December 31, June 30,
1997 1996 1996
<S> <C> <C> <C>
Revenues:
Financial Services $ 5,266 $ 462,814 $ 1,687,170
Venture Capital 648,144 (305,558) 859,394
Title Insurance 11,542,511 6,084,791 848,295
-------------- -------------- --------------
$ 12,195,921 $ 6,242,047 $ 3,394,859
============== ============== ==============
Earnings (losses) before income taxes:
Financial Services $ (24,731) $ (315,926) $ (70,400)
Venture Capital (1,217,676) (621,995) (715,687)
Title Insurance 37,761 (307,576) 26,478
Equity in earnings (losses)
of affiliates - (52,766) 4,041
-------------- -------------- --------------
$ (1,204,646) $ (1,298,263) $ (755,568)
============== ============== ==============
Identifiable assets:
Financial Services $ - $ 877,030 $ 1,290,461
Venture Capital 3,746,952 4,746,263 4,918,428
Title Insurance 10,872,729 11,447,102 11,743,168
-------------- -------------- --------------
$ 14,619,681 $ 17,070,395 $ 17,952,057
============== ============== ==============
</TABLE>
* * * * * *
-28-
<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: April 20, 1998 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> <C>
/s/ Donald V. Cruickshanks President and Chief Executive April 20, 1998
- ------------------------------------------- Officer and Director
Donald V. Cruickshanks (Principal Executive Officer)
/s/ Ronald C. Britt Chief Financial Officer, Secretary and April 15, 1998
- ------------------------------------------- Treasurer (Principal Financial and
Ronald C. Britt Principal Accounting Officer)
/s/ James F. Vigue Chairman of the Board April 17, 1998
- -------------------------------------------
James F. Vigue
/s/ Ivy L. Gilbert
- ------------------------------------------- Director April 17, 1998
Ivy L. Gilbert
- ------------------------------------------- Director April __, 1998
H. William Coogan, Jr.
- ------------------------------------------- Director April __, 1998
Susan C. Coogan
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,293,136
<SECURITIES> 2,148,545
<RECEIVABLES> 1,287,453
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,326,042
<DEPRECIATION> (1,495,509)
<TOTAL-ASSETS> 14,617,681
<CURRENT-LIABILITIES> 0
<BONDS> 1,060,465
0
11,400
<COMMON> 1,100,286
<OTHER-SE> 7,759,498
<TOTAL-LIABILITY-AND-EQUITY> 14,617,681
<SALES> 0
<TOTAL-REVENUES> 12,195,921
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,106,227
<LOSS-PROVISION> 100,000
<INTEREST-EXPENSE> 108,318
<INCOME-PRETAX> (1,118,624)
<INCOME-TAX> 113,412
<INCOME-CONTINUING> 1,232,036
<DISCONTINUED> 86,022
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,318,058)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
