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, 1998
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) 648-9048
(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, 1998 were
$70,148.
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, 1999 was $1,979,783.
The number of shares outstanding of Common Stock, as of March 31, 1999
was 5,319,876.
DOCUMENTS INCORPORATED BY REFERENCE
Part III -- The Company's definitive Proxy Statement for a Special
Meeting of Shareholders, which was filed with the Commission on January 29,
1999.
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TABLE OF CONTENTS
PART I
Page
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Item 1. Description of Business......................................................3
Item 2. Description of Property.....................................................10
Item 3. Legal Proceedings...........................................................11
Item 4. Submission of Matters to a Vote of Security Holders.........................12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....................12
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation....................................................13
Item 7. Financial Statements........................................................18
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................................18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...........................18
Item 10. Executive Compensation......................................................19
Item 11. Security Ownership of Certain Beneficial Owners and Management..............19
Item 12. Certain Relationships and Related Transactions..............................19
Item 13. Exhibits, List and Reports on Form 8-K......................................20
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Firstmark Corp. (the "Company") was incorporated in Maine in January
1982. The Company 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. Until March 5, 1999, the Company was principally engaged
in the business of issuing title insurance through a subsidiary, Southern Title
Insurance Corporation ("STIC"). See "Recent Developments -- Sale of STIC." 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 "-- Business and Operational Development."
RECENT DEVELOPMENTS -- SALE OF STIC
On March 5, 1999, the Company sold all of the issued and outstanding
capital stock of Investors Southern Corporation ("ISC") (the "Transaction")
pursuant to a Stock Purchase Agreement by and among the Company, Southern
Capital Acquisition Corporation, a Virginia corporation ("SCAC"), ISC, and STIC,
and Old Guard Group, Inc., a Pennsylvania corporation ("Old Guard"), dated as of
December 2, 1998 (the "Stock Purchase Agreement").
The Company is the parent company of SCAC, which owned all of the
outstanding shares of the capital stock of ISC prior to the Transaction. ISC is
a holding company and owns all of the outstanding shares of the capital stock of
STIC, a title insurance company, as well as several other entities conducting
activities related to the title insurance and settlement business. As a result
of the Transaction, ISC and STIC, the Company's principal operating subsidiary,
became wholly owned subsidiaries of Old Guard.
The purchase price paid by Old Guard consists of two components: cash
paid upon the consummation of the Transaction and a three year earn-out to be
paid, if earned, in cash in 2000, 2001 and 2002. Upon the consummation of the
Transaction, Old Guard paid to SCAC $6.75 million by wire transfer of
immediately available funds. In addition, in 2000, 2001 and 2002, SCAC will
receive additional cash payments based on the pre-tax net income of ISC and its
subsidiaries, including STIC, for each of the fiscal years ending December 31,
1999, 2000 and 2001. Such earn-out payments will be paid in cash within 90 days
following the end of each such fiscal year and will be in an amount equal to 25%
of (i) the pre-tax net income of ISC and its subsidiaries, including STIC, for
such fiscal year less (ii) the cumulative net loss of ISC and its subsidiaries,
if any, during all such prior fiscal years.
Pursuant to the Stock Purchase Agreement, Old Guard has agreed to
continue to operate ISC and its subsidiaries in a manner that is consistent with
past practice. In addition, Old Guard has agreed that, when determining ISC's
pre-tax net income, it will not allocate against the revenues of ISC and its
subsidiaries any liabilities or expenses that did not arise in the ordinary
course of business. Finally, Old Guard has agreed that it will not transfer any
of the business operations of ISC and its subsidiaries to itself or one of its
own subsidiaries or sell, assign or otherwise transfer the business of ISC and
its subsidiaries to a third party, whether by sale of assets or stock, merger or
otherwise.
Donald V. Cruickshanks, President and Chief Executive Officer of the
Company, will continue to serve as President and Chief Executive Officer of
STIC.
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BUSINESS AND OPERATIONAL DEVELOPMENT
ACQUISITION OF STIC. In June 1996, Southern Capital Corp. ("SCC"), the
former parent company of STIC, was merged with and into SCAC. 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.
Until March 5, 1999, SCAC, through its subsidiary, STIC, was principally
engaged in the business of issuing title insurance. SCAC also reviews investment
opportunities for its own account. Currently, SCAC is an investor in Champion
Broadcasting Corp. ("Champion"), a small market radio acquisition company that
historically acquired multiple stations in single markets ranked below the top
150 markets by Arbitron.
BOARD REVIEW OF COMPANY OPERATIONS. At the end of 1996, the Company
reviewed several of its operations that 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, extending the maturity of
some or all of the Company's convertible notes, which, if not extended, were due
on April 21, 1997.
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.
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.
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On January 24, 1997, James F. Vigue resigned as President and Chief
Executive Officer of the Company. Mr. Vigue was a consultant to the Company from
his resignation until January 1998 and continued to serve as the Chairman of the
Board of Directors until November 1998. For his services as a consultant, Mr.
Vigue was to receive $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. At the time of the assumption, the rent under the lease,
which terminates on December 31, 2003, was approximately $44,000 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 continued to serve as directors of the
Company until their resignations in November 1998. 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.
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
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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 represented approximately 57% of the $1,035,000 of
such notes outstanding. As of March 1, 1999, all of these extended notes were
paid in full by the Company. The holders of the remaining $450,000 of notes
redeemed their notes in April 1997.
RESTRUCTURING OF THE BOARD OF DIRECTORS. At the beginning of 1998, the
Board of Directors consisted of five members, three of whom (Messrs.
Cruickshanks and Vigue and Ms. Gilbert) were current or former executive
officers of the Company and two of whom (H. William Coogan, Jr. and Susan C.
Coogan, as trustee of The H. William Coogan Irrevocable Trust) were holders of
more than 20% of the issued and outstanding shares of the Company's common
stock.
In April 1998, Mr. and Mrs. Coogan resigned from the Board of Directors.
In May 1998, Steven P. Settlage, the President and a director of three real
estate development and consulting firms in the Richmond, Virginia area, was
appointed to the Board of Directors. In November 1998, Mr. Vigue and Ms. Gilbert
resigned from the Board of Directors, and George H. Morison, the President and
Chief Operating Officer of Patient First Corporation, a provider of primary
medical care based in Richmond, Virginia, was appointed to the Board of
Directors.
RELATED INDUSTRY SEGMENTS
The following description is a summary of the Company's historical
operations by industry segment.
Title Insurance
Until their sale to Old Guard on March 5, 1999, the title
insurance-related subsidiaries derived 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 were generated from 11 directly, indirectly
and/or partially owned and operated offices as well as an agency network of over
100 agents. The majority of these revenues were generated in Ohio and Virginia.
The sales and marketing efforts of STIC were generally targeted at the
residential housing and commercial real estate markets.
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
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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 "-- Business and
Operational Development") 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.
The following lists the subsidiaries of ISC, a subsidiary of the Company
until its sale to Old Guard on March 5, 1999 (see "Recent Developments -- Sale
of STIC"), and the services that they provide. ISC served as the holding company
for the Company's title insurance and related operations.
Southern Title Insurance Corporation Acquired: 1996 (Founded in 1925)
This subsidiary is a title insurance underwriter. It operates
through a combination of 11 directly, indirectly and/or partially owned
and operated offices as well as an agency network of over 100 agents.
Southern Title Agency Corporation Acquired: 1996
This subsidiary is a title insurance agency for two of the
national title insurance underwriters.
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:
Ashburn Title Services, L.C. 55%
Southern Title of Ohio, Inc. 75%
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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 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.
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.
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
As of December 31, 1998, the Company and its subsidiaries had
approximately 143 total employees, of which 24 were part-time. The Company
believes that its relations with its employees are good.
SIGNIFICANT CUSTOMERS
Prior to the sale of the Company`s title insurance-related subsidiaries
to Old Guard on March 5, 1999, the Company did not receive more than 10% of its
business or revenues from any single customer.
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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 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
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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
that 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 were well below the $3.4
million limit allowed by statute, as of December 31, 1998. STIC, however,
remains liable to the insureds for the total risk, whether or not the reinsurer
meets its obligations.
At December 31, 1998, 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, 1998 and 1997,
STIC ceded to Fidelity $192 million and $282 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
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 --
Business and Operational Development," above.
Prior to the sale of the Company's title insurance-related subsidiaries
to Old Guard on March 5, 1999, the Company owned 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 was not encumbered and
was 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.
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of business. Except as noted below, the Company was not involved in any
litigation outside the ordinary course of business.
LAKE ANNA LITIGATION. 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 alleged
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 certain real estate. Lake Anna alleged that it had succeeded to
the position of the lender. The Motion for Judgment sought relief in the amount
of $1,342,374.38 plus interest from May 6, 1996.
On May 22, 1998, a jury returned a verdict in favor of STIC. On August
5, 1998, following several post-verdict motions by Lake Anna, the court issued a
Final Order entering judgment on the verdict in favor of STIC. Lake Anna noted
its appeal and, on November 5, 1998, filed a Petition for Appeal with the
Virginia Supreme Court, which raises the same issues that were raised by Lake
Anna in its post-verdict motions. STIC subsequently filed a response stating
that there was no error, and counsel for STIC has advised that it is their
opinion that the trial court verdict should be affirmed.
In March 1999, the court rejected Lake Anna's appeal and affirmed the
trial court verdict in favor of STIC.
INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION. The Securities
and Exchange Commission (the "SEC") has entered an Order Directing Private
Investigation and Designating Officers to Take Testimony in a proceeding titled
In the Matter of Firstmark Corp. The SEC is investigating the possible violation
of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, as amended, and
Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5
thereunder by Firstmark Investment Corp. ("FIC"), Firstmark Capital Corp.
("FCC") and the Company. The private investigation focuses on events that have
occurred from, in or before January 1994 to the present. The Company transferred
FIC and FCC to Ivy L. Gilbert, a former director, officer and employee of the
Company, in January 1997.
The Company believes that any events at issue in the SEC's investigation
relate to the Company's prior management, all of whom have resigned from all of
their positions with the Company. Current management of the Company does not
have specific knowledge of the events at issue and is uncertain as to the
matters under investigation by the Commission. The private investigation remains
in its initial stages of discovery, and the Company continues to cooperate fully
with the Commission.
BURDEN LITIGATION. On February 16, 1999, D. Frick and Tammy F. Burden
filed a Complaint against the Company in the United States District Court for
the District of Maine. The Complaint is based on certain actions of the Company
beginning in 1992, at which time the Company was acting through its president,
James F. Vigue, in connection with the formation and administration of a trust
holding certain assets of the plaintiffs and the management of such assets. The
Complaint alleges that the Company, in its capacity as a trustee, breached
certain fiduciary and other duties owed to the plaintiffs and their trust,
including several duties relating to a breach of trust under Maine law, and
violated the anti-fraud provisions of the Maine Securities Act and the Maine
Unfair Trade Practices Act. The
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<PAGE>
plaintiffs have included in their request for relief (i) a complete accounting
of the trust from the date that the Company became trustee to the present, (ii)
restitution for breaches of trust in an amount equal to the damages suffered by
the plaintiffs, (iii) monetary damages in an amount equal to the value of the
trust's assets had they been placed in the hands of a prudent person, (iv) the
imposition of a constructive trust over all assets of the trust distributed or
paid to the Company and (v) exemplary and punitive damages. The plaintiffs
contend that their total damages are $510,000.
Pretrial discovery is in its initial stages. The Company has denied all
liability and it intends to defend the lawsuit vigorously.
OTHER CLAIMS. The Company's current management is also aware, or has
also been advised by counsel for the Company's prior management, that the
Company may be in the future the subject of civil litigation claims that have
been threatened by certain individuals who are or may have been shareholders of
the Company or customers of FIC, FCC or the Company. The Company believes that
any basis for such actions would arise from the conduct of prior management, but
it has insufficient information to assess whether any such claims, if asserted,
would have any merit. The Company has engaged counsel to make an assessment of
these threatened claims. The Company will vigorously defend any such claims that
may be asserted against it.
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 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 shares of Common Stock are currently listed on the Nasdaq SmallCap
Market under the symbol of "FIRM." Effective February 1998, the Nasdaq SmallCap
Market's continued listing requirements require, among others things, that
shares listed on the Nasdaq SmallCap Market maintain a minimum bid price of
$1.00 per share. The shares of Common Stock did not maintain this minimum bid
price standard on a consistent basis in 1998 and, on September 29, 1998, the
Nasdaq SmallCap Market notified the Company that the shares of Common Stock
would be subject to delisting proceedings if the Company was unable to
demonstrate compliance with this standard. On December 30, 1998, the Company
requested a hearing to stay a delisting and, on March 11, 1999, the Company
discussed its plan to improve its ability to maintain the listing of the common
stock on the Nasdaq SmallCap Market with a listing qualifications panel of The
Nasdaq Stock Market. The panel is currently evaluating the Company's plan and
the continued listing of shares of Common Stock. In the event that the shares of
Common Stock are delisted, trading of the shares of Common Stock would be
conducted in the over-the-counter trading markets, such as the OTC Bulletin
Board.
-12-
<PAGE>
The following table sets forth the high and low bid information for the
shares of Common Stock on the Nasdaq SmallCap Market for the quarters indicated.
<TABLE>
<CAPTION>
Bid Information
---------------
High ($) Low ($)
-------- -------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1997
- -----------------------------------
1st quarter.......................................... 3.50 2.00
2nd quarter.......................................... 2.25 1.38
3rd quarter.......................................... 1.81 1.50
4th quarter.......................................... 1.56 0.75
Fiscal Year Ended December 31, 1998
- -----------------------------------
1st quarter.......................................... 0.81 0.25
2nd quarter.......................................... 2.75 0.63
3rd quarter.......................................... 2.13 0.56
4th quarter.......................................... 1.06 0.38
</TABLE>
As of April 9, 1999, there were approximately 320 record holders of
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 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 transaction, see Item 1., "Description
of Business - General," above. Accordingly, the Company's results of operations
for the years ended December 31, 1998 and 1997 include the results of SCC for
each 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.
On March 5, 1999, the Company sold ISC and its subsidiaries, including
STIC, to Old Guard for $6.75 million in cash and a three year earn-out in cash
based on the pre-tax net income of ISC and its subsidiaries, including STIC, for
each of the fiscal years ending December 31, 1999, 2000 and 2001. See
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<PAGE>
Item 1., "Description of Business -- Recent Developments -- Sale of STIC,"
above. Generally accepted accounting principles ("GAAP") require that the
Company reflect the effects of the Transaction as of December 31, 1998,
including the loss on disposal, and segregate continuing operations from
discontinued operations. The discussion that follows is presented in a
comparable format for the two most recent fiscal years.
RESULTS OF OPERATIONS
Fiscal Year Ended December 31, 1998 vs. Fiscal Year Ended December 31, 1997
Continuing Operations
Investment gains amounted to approximately $22,000 for the year ended
December 31, 1998 compared to net gains of $310,000 in the prior year. The net
gains in the prior year were primarily the result of a gain (approximately
$381,000) recognized on the receipt of shares of Intercel stock previously held
in escrow, which was partially offset by losses on the sales of certain
investments, principally small cap stocks. Interest and dividends revenue
decreased approximately $63,000 to $49,000 in 1998 as compared to $112,000 in
1997.
Operating expenses and general and administrative expenses decreased by
approximately $360,000 during the current year compared to the prior year. This
decrease is primarily the result of the elimination of employee compensation and
benefits and other expenses associated with the resignations of former officers
of the Company and the transfer of several subsidiaries to a former officer in
1997, which was offset in part by increased legal fees pertaining to the DiBello
lawsuit, the investigation by the Securities and Exchange Commission and other
matters pending against the Company. For further information on certain of these
matters, see Item 3, "Legal Proceedings," above. Reserves for and write-offs of
loans and investments increased by $619,000 to $1,164,000 in 1998 compared to
$545,000 in 1997. Reserves and write-offs in the current year included primarily
$450,000 relating to the Company's investments in Champion, approximately
$309,000 pertaining to marketable securities (where the investments were
considered to have permanent diminutions in value), $156,000 relating to two of
the Company's remaining venture capital investments and $210,000 pertaining to
its real estate holdings. While some of these investments may increase in value
in the future, reserves and write-offs were considered appropriate at this time
because currently available information indicated a deterioration in values or
there was a lack of reliable information supporting the Company's carrying
values for those investments.
Discontinued Operations
Title insurance revenues for 1998 increased to approximately $13.8
million, an increase of approximately $3.0 million or 28% compared to title
insurance revenues of approximately $10.8 million in 1997. Approximately $1.7
million of the increase was attributable to increases in title insurance
premiums earned due to the favorable interest rate environment, which has
generated a significant number of refinancings in the residential and commercial
markets, and continued growth in new and existing markets. Abstract related
income increased approximately $1.3 million during the same period. Investment
gains decreased to approximately $7,000 for the current year compared to net
gains of $21,000 in the prior year. Interest and dividends revenue decreased
approximately $50,000 to $270,000 for 1998 as compared to $320,000 for 1997. The
decrease was primarily the result of a one-time dividend of approximately
$94,000 received in the prior year.
Operating expenses and general and administrative expenses increased
$2.2 million or 19.5% from 1997 to 1998. The increase is primarily due to
increases in commissions paid to agents and
-14-
<PAGE>
increases in the costs for searches, examinations and abstracts. Commissions
paid to agents in 1998 increased $517,000 or 13.0%, which is consistent with the
increase in agency premiums earned of 17.0% over 1997. Employee compensation and
benefits increased approximately $1.1 million or 25.0% in 1998 due primarily to
expanding operations at the affiliate level. STIC's loss expense increased
$557,000 to $1,060,000 in 1998 from $502,000 in 1997. The increase was primarily
the result of an increase of $400,000 in the incurred but not reported ("IBNR")
claims liability, which management agreed to as an element of the transaction
with Old Guard.
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 SCC 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 - Business and Operational
Development," above. Net investment gains amounted to $330,000 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. The gains were
partially offset by losses on the sales of certain investments, principally
small-cap stocks. Write-offs of loans and investments amounted to approximately
$584,000 in the 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.
LIQUIDITY AND CAPITAL RESOURCES
Continuing Operations
At December 31, 1998, the cash and cash equivalents of the Company
amounted to approximately $54,000, and the Company had borrowed $80,000 against
its $500,000 line of credit. As a result of the sale of ISC and its
subsidiaries, the Company received $6.75 million from Old Guard on March 5,
1999. After payment of transaction-related costs, retirement of the Company's 9%
Convertible Notes Payable and retirement of borrowings against the Company's
$500,000 line of credit, the Company retained approximately $5.4 million to
invest. Accordingly, the Company's cash and cash equivalents remaining after the
sale are expected to exceed its obligations as they become due. The Company
continues to maintain the availability of the line of credit with First Union
National Bank.
-15-
<PAGE>
Discontinued Operations
The cash and cash equivalents of the discontinued operations were in
excess of $3.2 million at December 31, 1998. Although a significant portion of
that amount (approximately $2.5 million) was held by STIC and is subject to
certain regulatory requirements as to use, such funds are expected to be used
primarily by STIC and, accordingly, should be sufficient to enable STIC and
related companies in the discontinued operations to satisfy their obligations as
they become due. As an element of the sale of their operations, Old Guard
transferred $750,000 as an additional capital contribution to STIC in March
1999. After the closing of the transaction, the discontinued operations became a
part of Old Guard.
YEAR 2000 ISSUES
Year 2000 issues relate primarily to the inability of certain
computerized devices (hardware, software and equipment) to process year-dates
properly after 1999. Many existing computer programs have been written using
only two digits to define an applicable year rather than four digits.
Accordingly, on January 1, 2000, many date-sensitive programs and devices may
recognize a date using the two digits "00" as the year 1900 rather than the year
2000. This situation could result in inaccurate processing of data, erroneous
results or other system failures.
The Company continues to address the Year 2000 issues relating to its
operations with the intent that it (i) identify areas of potential exposure,
both internal and external to the organization, (ii) assess the risks and costs
associated with eliminating or reducing that exposure, (iii) develop a plan to
take necessary actions before the year 2000 and (iv) consider the need for a
contingency plan to handle the most reasonably likely worst case scenarios.
To date, the Company has primarily focused on the identification and
assessment of its Year 2000 issues. The Company has completed an initial
assessment of its accounting and operational software and discussed the payroll
and human resources software with its third party service provider. Management
believes, based on discussions with software vendors and initial tests of the
accounting and operational software, that such software is currently Year 2000
compliant and that the Company's risks in these areas are minimal. Management
has been told by the Company's third party service provider that the current
version of the payroll and human resources software is also Year 2000 compliant
and plans to perform tests of this system in the near future to assess any
potential problems.
Costs associated with remediation of Year 2000 issues are not expected
to be material to the Company's financial position, results of operations or
cash flows. To date, such costs have totaled less than $10,000, and the Company
expects that future costs will not exceed $10,000. These costs would include
primarily minimal additional data processing consulting costs, purchases of new
personal computers to replace computers that cannot be modified to handle
date-sensitive data correctly and potentially the costs to purchase upgrades to
certain accounting software programs.
No contingency plan has been developed to date since the potential
impact of the Year 2000 issues facing the Company is currently considered to be
minimal. However, management will continue to assess the need for a contingency
plan if additional risks are identified in the further testing of existing,
updated or new hardware and software or if it becomes aware of other concerns
not presently contemplated in the evaluation of the Company's ability to be Year
2000 compliant.
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
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<PAGE>
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 is
complying with SFAS 130 beginning with its 1998 fiscal year.
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 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
is complying with the methodologies and reporting established by SFAS 131.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. FAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The impact of adopting FAS No. 133 has not yet
been determined.
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.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this report
following Item 13 below:
Independent Auditors' Report
Financial Statements
Consolidated Balance Sheets, December 31, 1998 and 1997
Consolidated Statements of Operations, Years Ended December 31,
1998 and 1997
Consolidated Statements of Stockholders' Equity, Years Ended
December 31, 1998 and 1997
Consolidated Statements of Cash Flows, Years Ended December 31,
1998 and 1997
Notes to Consolidated Financial Statements
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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Pursuant to General Instruction E(3) of Form 10-KSB, the information
contained under the headings "Election of Directors -- Nominees for Election"
and "-- Executive Officers Who Are Not Directors" on pages 7 and 8 of the
Company's definitive Proxy Statement for a Special Meeting of Shareholders,
which was filed with the Commission on January 29, 1999, is incorporated herein
by reference.
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 Commission 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 1998, all
filing requirements applicable to its officers and directors were complied with.
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<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Pursuant to General Instruction E(3) of Form 10-KSB, the information
contained under the headings "Election of Directors -- Director Compensation,"
"-- Executive Compensation," "-- Stock Options," and "-- Employment Agreements"
on pages 10 and 11 and of the Company's definitive Proxy Statement for a Special
Meeting of Shareholders, which was filed with the Commission on January 29,
1999, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction E(3) of Form 10-KSB, the information
contained under the headings "Election of Directors -- Security Ownership of
Management and Certain Beneficial Owners" on page 9 of the Company's definitive
Proxy Statement for a Special Meeting of Shareholders, which was filed with the
Commission on January 29, 1999, is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company obtains certain related party receivables and payables in
the normal course of business and through advances for accommodation. In
addition, the Company has certain loans receivable from related parties at terms
consistent with those provided to other customers. The loans are substantially
secured by real estate mortgages. The balances at December 31, 1998 that
reflected advances and loans to former employees of Firstmark Financial Services
(formerly Financial Capital Corp.), a subsidiary of the Company until January
24, 1997, amounted to $9,773.
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 at the
time that the lease was signed. 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 Financial
Services (formerly Firstmark Capital Corp.), a former subsidiary of the Company,
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.
SATISFACTION OF OBLIGATION TO H. WILLIAM COOGAN, JR. STIC and H. William
Coogan, Jr., a five percent owner of Common Stock and formerly a director of the
Company, were parties to an agreement dated January 2, 1998 (the "Coogan
Agreement"). Pursuant to the Coogan Agreement, Mr. Coogan agreed to terminate
his employment contract with STIC as of December 31, 1997 and forego a lump sum
payment of $270,000 payable upon such termination in return for STIC's agreement
to pay Mr. Coogan $311,000 over a three-year period commencing January 2, 1998.
Such payments took the form of monthly payments of $8,639, less applicable
withholdings, a portion of which could have been applied to health insurance,
disability coverage and a leased automobile. STIC's obligation to make such
monthly payments terminated on December 31, 2000. As a condition to the sale of
the Company's title insurance-related subsidiaries to Old Guard on March 5,
1999, the Company was required to satisfy STIC's remaining obligations under the
Coogan Agreement or provide security for the payment of the monthly benefits
otherwise due to Mr. Coogan under the Coogan Agreement. The Company satisfied
STIC's remaining obligations under the Coogan Agreement with a cash payment of
$165,573 to Mr. Coogan on March 11, 1999.
For related party information, see Note 9 to the Consolidated Financial
Statements.
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<PAGE>
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.
(b) Reports on Form 8-K.
On December 7, 1999, the Company filed a Current Report on Form 8-K
dated December 3, 1998 to disclose, under Item 5, the announcement of the
signing of a definitive agreement for the sale of the Company's title
insurance-related subsidiaries to Old Guard.
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<PAGE>
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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial position of the Company and
subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As discussed in Notes 1 and 3 to the consolidated financial statements on March
5, 1999, the Company sold its principal subsidiary to the Old Guard Group, Inc.
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 31, 1999
<PAGE>
<TABLE>
<CAPTION>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- ----------------------------------------------------------------------------------
ASSETS 1998 1997
<S> <C> <C>
Cash and cash equivalents $ 53,575 $ 290,037
Receivables:
Receivables - trade, net 2,703 27,613
Receivables - related parties 48,062 47,752
Income tax - 248,776
------- -------
Total receivables 50,765 324,141
------- -------
Notes receivable:
Notes receivable - net 25,290 65,817
Notes receivable - related parties 9,773 50,322
------ ------
Total notes receivables 35,063 116,139
------- -------
Investments:
Marketable securities 139,112 198,216
Venture capital investments - net 424,728 1,228,545
Real estate and other investments 613,653 809,668
-------- -------
Total investments 1,177,493 2,236,429
---------- ---------
Other assets:
Property, plant, and equipment - net 11,260 16,391
Excess of cost over fair value - 961,272
Deferred tax asset - net of valuation allowance 296,680 19,242
Other assets 11,603 11,429
------- ------
Total other assets 319,543 1,008,334
-------- ---------
Net assets of discontinued title insurance operations 6,189,261 7,995,050
---------- ---------
TOTAL ASSETS $7,825,700 $11,970,130
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
LIABILITIES:
Accounts payable and other liabilities $ 215,333 $ 199,003
Borrowed funds 565,000 585,000
Deferred tax liability 296,680 19,242
Related party payable 114,712 132,812
-------- -------
Total liabilities 1,191,725 936,057
---------- -------
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 1,100,286 1,100,286
Additional paid-in capital - preferred 2,162,889 2,162,889
Additional paid-in capital - common 11,432,709 11,498,331
Retained earnings (deficit) (7,353,293) (2,725,070)
Treasury stock, at cost - 181,554 and
201,554 shares, respectively. (737,528) (818,773)
Net accumulated comprehensive income -
net of taxes 17,512 (194,990)
------- ---------
Total stockholders' equity 6,633,975 11,034,073
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 7,825,700 $11,970,130
============ ===========
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
REVENUES:
Investment gains $ 21,523 $ 309,802
Interest and dividends 48,625 111,873
Other revenue - 3,332
---------- ---------
Total revenues 70,148 425,007
---------- ---------
EXPENSES:
Employee compensation and benefits 108,977 285,592
Write-offs of loans and investments 1,164,355 545,298
General and administrative expenses 536,381 704,862
Interest expense 49,363 64,557
---------- ---------
Total expenses 1,859,076 1,600,309
---------- ---------
Loss from continuing operations
before income taxes (1,788,928) (1,175,302)
INCOME TAX (BENEFIT) EXPENSE (103,848) 880,417
---------- ---------
Net loss from continuing operations (1,685,080) (2,055,719)
DISCONTINUED OPERATIONS:
Income from discontinued operations - net of tax 432,776 798,951
Loss from disposal of discontinued operations - net of tax (3,239,119) (61,290)
---------- ---------
NET LOSS (4,491,423) (1,318,058)
---------- ---------
Other comprehensive income - net of tax:
Unrealized holding gains (losses)
arising during period 20,125 (47,151)
Less: Reclassification adjustment
for gains included in net income 192,377 13,267
-------- ------
Other comprehensive income (loss) 212,502 (33,884)
-------- --------
COMPREHENSIVE INCOME (LOSS) $(4,278,921) $(1,351,942)
=========== ============
PREFERRED STOCK DIVIDEND 136,800 263,200
-------- -------
NET LOSS APPLICABLE TO COMMON SHARES $(4,628,223) $(1,581,258)
=========== ============
Loss per common share - basic and diluted $ (0.87) $ (0.34)
=========== ==========
Weighted-average number of shares outstanding 5,303,684 4,675,912
========== =========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------------------
ADDITIONAL ADDITIONAL
PAID-IN PAID-IN
CAPITAL - PREFERRED CAPITAL - RETAINED
COMMON COMMON STOCK - PREFERRED EARNINGS TREASURY
STOCK STOCK SERIES A STOCK (DEFICIT) STOCK
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ 454,229 $ 3,394,388 $ 11,400 $ 2,162,889 $(1,143,812) $(818,773)
Net loss - - - - (1,318,058) -
Reclassification adjustment for gains
included in incom - - - - - -
Net change in unrealized gain on
securities available f-r sale - - - - - -
Conversion of mandatorily redeemable
preferred stock 646,057 8,103,943 - - - -
Preferred dividends paid - - - - (263,200) -
--------- ---------- ---------- ----------- ------------- ----------
BALANCE, DECEMBER 31, 1997 1,100,286 11,498,331 11,400 2,162,889 (2,725,070) (818,773)
Net loss - - - - (4,491,423) -
Treasury stock issued - (65,622) - - - 81,245
Reclassification adjustment for gains
included in incom - - - - - -
Net change in unrealized gain on
securities available f-r sale - - - - -
Preferred dividends paid - - - - (136,800) -
--------- ---------- ---------- ----------- ------------- ----------
BALANCE, DECEMBER 31, 1998 $ 1,100,286 $ 11,432,709 $ 11,400 $ 2,162,889 $(7,353,293) $(737,528)
============ ============ ========== ============ ============= ===========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME TOTAL
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $(161,106) $ 3,899,215
Net loss - (1,318,058)
Reclassification adjustment for gains
included in incom 13,267 13,267
Net change in unrealized gain on
securities available f-r sale (47,151) (47,151)
Conversion of mandatorily redeemable
preferred stock - 8,750,000
Preferred dividends paid - (263,200)
-------- ---------
BALANCE, DECEMBER 31, 1997 (194,990) 11,034,073
Net loss - (4,491,423)
Treasury stock issued - 15,623
Reclassification adjustment for gains
included in incom 192,377 192,377
Net change in unrealized gain on
securities available f-r sale 20,125 20,125
Preferred dividends paid - (136,800)
-------- ---------
BALANCE, DECEMBER 31, 1998 $ 17,512 $ 6,633,975
========= ===========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES FROM CONTINUING OPERATIONS:
Net loss from continuing operations $(1,685,080) $(2,055,719)
Adjustments to reconcile net loss to net cash
used by operating activities:
Deferred income taxes (103,848) 926,613
Depreciation and amortization 5,131 54,995
Amortization of goodwill 44,933 -
Write-down of investments 664,170 621,085
Write-down of real estate 210,000 -
Write-down of note receivable 28,529 6,759
Loss on sale of assets - 114,574
Gain recognized on available for sale securities (7,402) -
Other than temporary adjustment 308,523 -
Gain on sale of securities - (621,076)
Increase in cash surrender value - (19,505)
Shares of stock received - 478,039
Changes in assets and liabilities:
Decrease (increase) in:
Net change in marketable trading securities - 81,994
Accounts receivable 24,600 (265,798)
Net decrease in notes receivable 12,020 98,803
Net decrease in notes receivable from
related parties 40,527 100,904
Prepaid expenses and other current assets 1,042 (34,425)
Advances to related parties - 6,171
Refundable income taxes 248,776 81,596
Increase (decrease) in:
Accounts payable 21,961 (127,789)
Accounts payable to related party (18,101) -
Reserve for policy claims - 3,000
---------- ---------
Net cash used by operating activities (204,219) (549,779)
---------- ---------
(Continued)
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
FIRSTMARK CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
INVESTING ACTIVITIES:
Proceeds from sale of numismatic and
stamp investments - 19,300
Proceeds from sale of real estate - 271,873
Other payments received on real estate - 37,805
Proceeds from held to maturity securities - 66,643
Proceeds from sale of property and equipment - 56,000
Proceeds from available-for-sale securities 79,362 590,782
Proceeds from payments of venture capital loans 139,647 8,820
Purchase of available-for-sale securities (1,592) (883)
Purchase of real estate and other investments (13,985) -
--------- ---------
Net cash provided by investing activities 203,432 1,050,340
-------- ---------
FINANCING ACTIVITIES:
Repayment of convertible notes - (450,000)
Proceeds from borrowed funds 80,000 -
Proceeds from issuance of treasury stock 15,625 -
Preferred stock dividends (136,800) (263,200)
Payments on borrowed funds (100,000) (49,439)
---------- --------
Net cash used by financing activities (141,175) (762,639)
---------- ---------
CASH USED BY CONTINUING OPERATIONS (141,962) (262,078)
---------- ---------
DISCONTINUED OPERATIONS:
Operating activities (225,620) (486,594)
Investing activities 219,085 673,433
Financing activities (87,965) (189,531)
--------- ---------
Cash used by discontinued operations (94,500) (2,692)
--------- -------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (236,462) (264,770)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 290,037 554,807
-------- -------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 53,575 $ 290,037
========= =========
See notes to consolidated financial statements.
</TABLE>
-6-
<PAGE>
FIRSTMARK CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Firstmark Corp. ("the Company") and its
subsidiaries, based in Richmond, Virginia, are engaged primarily in the
management of its venture capital investments and in title insurance.
Firstmark Corp. issues title insurance policies through branch offices and
independent agencies in the Mid-Atlantic Region of the United States. The
majority of Firstmark's title insurance business is concentrated in
Virginia and Ohio.
Sale of Principal Subsidiary - On March 5, 1999, Firstmark Corp. sold all
of the outstanding capital stock of Investors Southern Corporation ("ISC")
pursuant to an agreement between Firstmark Corp., Southern Capital
Acquisition Corporation ("SCAC"), ISC, Southern Title Insurance Corporation
("STIC") and Old Guard Group, Inc. ("Old Guard") dated December 2, 1998.
Firstmark Corp. is the parent company of SCAC, which owned all of the
outstanding shares of the capital stock of ISC prior to the sale. ISC is a
holding company and owns all of the outstanding shares of the capital stock
of STIC, a title insurance company, as well as several other entities
conducting activities related to the title insurance and settlement
business. As a result of the transaction ISC and STIC, Firstmark's
principal operating subsidiary, became wholly owned subsidiaries of Old
Guard. The results of operations of ISC have been reported separately as
discontinued operations in the accompanying financial statements and the
prior year has been restated (see Note 3).
Transfer of Other Subsidiaries - In January 1997, the Company reached
agreements in principle with its former President and its former 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 former Chief Financial
Officer. At the time of the transfer, the three subsidiaries' total net
assets amounted to approximately $100,000, representing approximately four
percent of the Company's net assets at December 31, 1996. The former 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 former President resigned his position, but
continued to serve as a consultant for one year and received $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. At
the time of assumption, the rent under this lease, which terminates on
December 31, 2003, was approximately $44,000 per year. In addition, the
former President and the former 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>
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 Standards ("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 on that date.
Real Estate and Timber Investments - Investment in real estate is stated at
the lower of cost or estimated net realizable value, less cost of disposal.
Sales of units of a real estate development project are recorded when the
buyer's down payment is sufficient, collectibility of the receivable is
reasonably assured, and the Company has completed substantially all
development related to the property sold. Costs of individual units sold
are determined by allocating total costs based on the relative fair value
of the units. Timberland is stated at cost, less depletion on harvested
timber.
Other Investments - 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 (Discontinued Operations) - 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. Title plants are
included as part of the net assets of discontinued title insurance
operations.
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.
-8-
<PAGE>
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.
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 (Discontinued Operations) - 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.
Reserve for Policy Claims (Discontinued Operations) - 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 (Discontinued Operations) - 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 (Discontinued Operations) - 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.
-9-
<PAGE>
Earnings (Loss) Per Common 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 common share is equivalent to diluted earnings per
common 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.
Reclassifications - Certain reclassifications have been made to the
accompanying statements to permit comparison.
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 has adopted
SFAS 130 beginning with its 1998 fiscal year.
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 certain balance
sheet items are required to be presented, and such amount 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 has adopted
methodologies for reporting in compliance with SFAS 131.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS No. 133"). FAS No. 133
establishes accounting and reporting standards for derivative instruments
and for hedging activities. FAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company does
not anticipate any impact on financial reporting as a result of SFAS 133.
-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.
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 was being amortized over 20 years on a straight-line basis. The
remaining goodwill was written off at December 31, 1998 as a result of the
disposition of the Company's title insurance operation.
3. DISCONTINUED OPERATIONS
As discussed in Note 1, the Company sold its wholly owned subsidiary ISC to
Old Guard. The purchase price paid by Old Guard consists of two components:
cash paid in the amount of $6,750,000 upon consummation of the transaction
on March 5, 1999 and a three year earn-out to be paid in cash within 90
days of the end of each of the fiscal years ending December 31, 1999, 2000,
and 2001. The earn-out payment will be in an amount equal to 25% of the
pre-tax net income of ISC and subsidiaries for such fiscal years less the
cumulative net loss of ISC and its subsidiaries during all such prior
years. As the three year earn-out is contingent on future earnings of the
Discontinued Title Insurance Operations, the calculation of the loss on
disposal considers only the cash payment of $6,750,000 as proceeds from the
sale. Accordingly, the Company has recognized a loss on disposal of a
segment of its business in the amount of $3,239,119 as of December 31,
1998. The loss includes the excess of Net Assets of Discontinued Title
Insurance Operations over net cash received in an amount of $2,235,636. The
loss also includes the write off of goodwill, which resulted from the June
1996 acquisition of SCC in the amount of $915,119 and prepaid legal fees in
the amount of $88,364 as of December 31, 1998.
-11-
<PAGE>
The assets and liabilities of the title insurance business are classified
in the Company's consolidated balance sheets as "Net Assets of Discontinued
Title Insurance Operations" and consist of the following:
<TABLE>
<CAPTION>
INVESTORS SOUTHERN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------------------
ASSETS 1998 1997
<S> <C> <C>
Cash and cash equivalents $ 3,208,446 $ 1,932,575
Receivables 1,416,632 1,332,100
Investments 1,812,559 2,075,953
Title plants 3,563,008 3,563,008
Property and equipment - net 721,795 814,142
Deferred tax asset 933,441 900,831
Other assets 173,665 156,804
-------- -------
TOTAL ASSETS $11,829,546 $10,775,413
============ ===========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
<S> <C> <C>
Accounts payable and other liabilities $ 572,943 $ 376,460
Borrowed funds 407,440 475,465
Reserve for title policy claims 1,490,825 1,027,607
Deferred tax liability 933,441 900,831
-------- -------
Total liabilities 3,404,649 2,780,363
---------- ---------
<CAPTION>
STOCKHOLDER'S EQUITY:
Common stock 1,004,218 1,004,318
Additional paid-in capital 8,779,167 8,779,167
Retained earnings (deficit) (1,373,649) (1,792,675)
Accumulated other comprehensive income, net of taxes 15,161 4,240
------- -----
Total stockholder's equity 8,424,897 7,995,050
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $11,829,546 $10,775,413
============ ===========
</TABLE>
-12-
<PAGE>
The net income from operations of the title insurance business is reflected in
the Company's consolidated statements of operations as "Income from Discontinued
Operations" and is summarized as follows:
<TABLE>
<CAPTION>
INVESTORS SOUTHERN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
REVENUES:
Title insurance premiums earned $10,101,954 $ 8,443,549
Title insurance premiums ceded (47,243) (95,224)
--------- --------
Net title insurance premiums 10,054,711 8,348,325
Abstract related income 3,753,826 2,493,517
Investment gains 7,399 20,455
Interest and dividends 270,351 320,063
Other revenues 404,200 570,552
-------- -------
Total revenues 14,490,487 11,752,912
----------- ----------
EXPENSES:
Commision to agents 4,488,725 3,971,917
Salaries and employee benefits 5,408,843 4,325,710
Provision for policy claims 1,059,682 502,392
General and administrative expenses 2,577,963 2,527,496
Minority interest 528,124 368,718
-------- -------
Total expenses 14,063,337 11,696,233
----------- ----------
INCOME BEFORE INCOME TAX BENEFIT $ 427,150 $ 56,679
INCOME TAX BENEFIT 5,626 767,006
------ -------
NET INCOME $ 432,776 $ 823,685
========== =========
</TABLE>
Net income from discontinued operations for 1997 as reported on the Company's
consolidated statement of operations includes a loss in the amount of $24,732
from the discontinued financial services segment as discussed in Note 1.
-13-
<PAGE>
4. INVESTMENTS
The following is a summary of the Company's investments:
<TABLE>
<CAPTION>
CONTINUING OPERATIONS
-----------------------------
1998 1997
<S> <C> <C>
Marketable securities:
Available-for-sale $ 139,112 $ 198,216
---------- ---------
Venture capital investments:
Loans 324,728 464,375
Loan participations - 107,920
Common stocks - 400,000
Preferred stocks 100,000 225,000
Warrants - 31,250
-------- ------
Total venture capital investments 424,728 1,228,545
-------- ---------
Real estate investments:
Real estate owned 315,357 435,358
Other real estate investments 289,087 365,101
-------- -------
Total real estate investments 604,444 800,459
-------- -------
Other investments:
Stamp investments 7,000 7,000
Art pieces 2,209 2,209
------ -----
Total other investments 9,209 9,209
------ -----
Total real estate and other investments 613,653 809,668
-------- -------
Total Investments - Continuing Operations $1,177,493 $2,236,429
=========== ==========
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
DISCONTINUED OPERATIONS
-----------------------------
1998 1997
<S> <C> <C>
Marketable securities:
Available-for-sale:
Common stocks $ 75,748 $ 23,207
Preferred stocks 137,250 127,031
Held to maturity:
Bonds and notes 1,470,410 1,800,091
---------- ---------
Total marketable securities 1,683,408 1,950,329
Other investments:
Common stocks 5,100 55,100
------ ------
Total Investments - Discontinued Operations $1,688,508 $2,005,429
=========== ==========
</TABLE>
Marketable Securities
Securities held to maturity and available for sale are as follows:
CONTINUING OPERATIONS
December 31, 1998
----------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale:
Common stocks $135,545 $ 3,964 $ 397 $139,112
========= ======== ====== ========
DECEMBER 31, 1997
------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale:
Common stocks $500,080 $15,874 $ 317,738 $198,216
========= ======== ========== ========
Proceeds from sales of investments available for sale were $79,362 and
$586,901 for the years ended December 31, 1998 and 1997, respectively.
Gross gains of $7,402 and $595,417 were realized for the years ended
December 31, 1998 and 1997, respectively. Gross losses of $41,940 were
realized for the year ended December 31, 1997. There were no losses
realized on the sale of marketable securities during the year ended
December 31, 1998. During 1998 the Company realized losses in the amount of
$308,523 as a result of a write-down due to other than temporary impairment
of marketable securities.
-15-
<PAGE>
<TABLE>
<CAPTION>
DISCONTINUED OPERATIONS
December 31, 1998
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available-for-sale:
Common stocks $ 70,027 $ 11,221 $ 5,500 $ 75,748
Preferred stocks 120,000 17,500 250 137,250
-------- ------- ---- --------
190,027 28,721 5,750 212,998
Held-to-maturity:
Bonds and notes 1,470,410 18,764 1,726 1,487,448
---------- ------- ------ ---------
Total $1,660,437 $ 47,485 $ 7,476 $1,700,446
=========== ========= ======== ==========
<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 $ 23,813 $ 1,111 $ 1,717 $ 23,207
Preferred stocks 120,000 7,031 - 127,031
-------- ------ ------- -------
143,813 8,142 1,717 150,238
Held-to-maturity:
Bonds and notes 1,800,091 19,070 2,076 1,817,085
---------- ------- ------ ---------
Total $1,943,904 $ 27,212 $ 3,793 $1,967,323
=========== ========= ======== ==========
</TABLE>
Proceeds from sales of investments available for sale were $17,979 and $634,440
for the years ended December 31, 1998 and 1997, respectively. Gross gains of
$4,081 and $96,451 were realized for the years ended December 31, 1998 and 1997,
respectively. Gross losses of $82 were realized for the year ended December 31,
1997. There were no losses recognized for the year ended December 31, 1998.
The contractual maturities of bonds and notes as of December 31, 1998 are as
follows:
DISCONTINUED OPERATIONS
-------------------------------
December 31, 1998
Amortized Market
Cost Value
Due in 1 year or less $ 525,025 $ 525,391
Due after 1 year through 5 years 945,385 962,887
-------- -------
$1,470,410 $1,488,278
========== ==========
-16-
<PAGE>
Venture Capital Investments - The Company has provided loans and venture
capital to several start up companies. Due to the uncertainty of the
ability of these companies to become operational or 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 years ended December 31, 1998 and 1997, were $606,250 and $376,493,
respectively.
As a result of an agreement reached on July 21, 1995, the Company received
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 in 1997 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 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. There
were no sales of real estate for the year ended December 31, 1998.
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, 1998
and 1997, amounted to $210,000 and $110,710, respectively.
5. NOTES RECEIVABLE
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:
1998 1997
Business loans $ 80,063 $161,139
Less reserve for loan losses (45,000) (45,000)
--------- --------
Total notes receivable - net $ 35,063 $116,139
========= ========
-17-
<PAGE>
6. PROPERTY, PLANT, AND EQUIPMENT
The following is a summary of property, plant and equipment - net:
CONTINUING OPERATIONS
--------------------------
1998 1997
Furniture, fixtures, and equipment $ 34,706 $ 34,706
Less: Accumulated depreciation 23,446 18,315
------- ------
Total property, plant, and equipment - net $ 11,260 $ 16,391
========= ========
Depreciation charged to operations was $5,131 and $5,760 for the years
ended December 31, 1998 and 1997, respectively.
DISCONTINUED OPERATIONS
----------------------------
1998 1997
Land and land improvements $ 68,500 $ 68,500
Building 364,433 364,433
Furniture, fixtures, and equipment 1,585,571 1,527,443
Leasehold improvements 178,864 168,876
Property under capital lease 168,217 162,084
-------- -------
2,365,585 2,291,336
Less: Accumulated depreciation 1,643,790 1,477,194
---------- ---------
Total property, plant, and equipment - net $ 721,795 $ 814,142
========== =========
Depreciation charged to operations was $190,625 and $195,340 for the years
ended December 31, 1998 and 1997, respectively.
-18-
<PAGE>
7. BORROWINGS
CONTINUING OPERATIONS
----------------------
1998 1997
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 (The notes were
subsequently paid in March 1999) $ 485,000 $ 585,000
Bankline of credit, with interest paid
monthly at LIBOR rate plus 2%, balance
due on demand or at August 31, 1999 80,000 -
------- ---------
Total borrowings $ 565,000 $ 585,000
========== =========
DISCONTINUED OPERATIONS
------------------------
1998 1997
Bankline of credit, unsecured, quarterly
principal payments of $12,500, plus
monthly interest, balance due on demand
or at October 31, 1999, the expiration
date of the line (interest at the 30 day
LIBOR rate plus 2%) $ 387,500 $ 400,000
Capital lease obligations 19,940 75,465
------- ------
Total borrowings $ 407,440 $ 475,465
========== =========
The bank line of credit from discontinued operations stipulates that any
dividend paid by Southern Title Insurance Corporation shall be used first
to pay out any outstanding loan balance under the line of credit.
In June of 1996, the Southern Title Insurance Corporation 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 $19,940. The corresponding liabilities have been
recorded as obligations under capital leases.
The future minimum lease payments, which were assumed by Old Guard as part
of the March 5, 1999 transaction, under the capital leases as of December
31, 1998, are as follows:
Total lease payments $ 25,515
Less: Amount representing interest 5,575
-----
Present value of future minimum lease payments $ 19,940
========
-19-
<PAGE>
8. INCOME TAXES
The following is a summary of income tax expense (benefit):
1998 CONTINUING OPERATIONS
-----------------------------------------
CURRENT DEFERRED TOTAL
Federal $ - $(103,848) $(103,848)
State - - -
-------- ----------- ----------
$ - $(103,848) $(103,848)
======== =========== ==========
1997
Federal $ - $ 875,358 $ 875,358
State (46,196) 51,255 5,059
--------- ------- -----
$(46,196) $ 926,613 $ 880,417
========== ========== =========
1998 DISCONTINUED OPERATIONS
-----------------------------------------
CURRENT DEFERRED TOTAL
Federal $ - $ (5,626) $ (5,626)
State - -
-------- ---------- ---------
$ $ (5,626) $ (5,626)
======== ========== =========
1997
Federal $ - $(683,509) $(683,509)
State - (83,497) (83,497)
--------- --------- --------
$ - $(767,006) $(767,006)
========= =========== ==========
-20-
<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:
CONTINUING OPERATIONS
----------------------
1998 1997
Expected tax expense (benefit) $(608,236) $(399,603)
State income taxes - net of federal taxes - 3,337
Realization of a valuation allowance 504,332 1,365,853
Other 56 (89,170)
--- --------
$(103,848) $ 880,417
=========== =========
DISCONTINUED OPERATIONS
--------------------------
1998 1997
Expected tax expense (benefit) $ 140,556 $ (9,977)
State income taxes - net of federal taxes - (55,106)
Realization of a valuation allowance (130,925) (724,666)
Other (15,257) 22,743
--------- ------
$ (5,626) $(767,006)
========== ==========
-21-
<PAGE>
The tax effects of each type of significant item that gives rise to the
deferred taxes are:
<TABLE>
<CAPTION>
CONTINUING OPERATIONS
-----------------------------
1998 1997
<S> <C> <C>
Deferred Tax Asset:
Allowance for loan losses $ 17,100 $ 17,100
Net unrealized loss on investments 366,928 149,726
Net unrealized loss on real estate 235,913 159,678
Net operating loss carryforwards 1,601,237 938,652
Net unrealized loss on securities available for sale - 102,634
Other 17,305 17,305
------- ------
Deferred tax asset 2,238,483 1,385,095
Less: Valuation allowance (1,941,803) (1,365,853)
------------ -----------
Net deferred tax asset $ 296,680 $ 19,242
========== ========
Deferred Tax Liability:
Net unrealized gain on securities available for sale $ 1,213 $ -
Unrealized gain on sale of subsidiaries 275,900 -
Depreciation 2,131 1,806
Other 17,436 17,436
------- ------
Deferred tax liability $ 296,680 $ 19,242
========== ========
Net deferred taxes $ - $ -
========= =========
<CAPTION>
DISCONTINUED OPERATIONS
-----------------------------
1998 1997
Deferred Tax Asset:
Allowance for loan losses $ 38,000 $ 26,133
IBNR reserve 453,570 213,502
Net operating loss carryforwards (426,085) (61,285)
Net unrealized loss on securities available for sale - (2,185)
--------- -------
Deferred tax asset $ 65,485 $ 176,165
========= =========
Deferred Tax Liability:
Net unrealized gain on securities available for sale $ 860,776 $ 838,750
Unrealized gain on sale of subsidiaries 7,810 -
Depreciation 64,855 62,081
------- ------
Deferred tax liability 933,441 900,831
Less: Valuation allowance (867,956) (724,666)
---------- ---------
Net deferred taxes $ - $ -
======== ========
</TABLE>
During the year ended December 31, 1998 and 1997, the Company recorded a
valuation allowance of $1,073,847 and $641,187, respectively on the net deferred
tax assets to reduce the total amount that
-22-
<PAGE>
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.
9. 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.
1998 1997
Interest bearing notes:
Employees and independent agents $ 9,773 $ 50,322
-------- --------
Advances to related parties:
Limited partnerships in operation $ 48,062 $ 47,752
--------- --------
10. CASH FLOW INFORMATION
The following noncash revenues and expenses are included as adjustments to
reconcile net loss to net cash used by operating activities:
1998 1997
Stock received in demutualization
of insurance company $ - $ 96,915
======== ========
Stock received in final settlement of
Unitel spin-off $ - $381,124
======== ========
Cash paid for interest and income taxes is as follows:
1998 1997
Interest $101,810 $108,318
========= ========
-23-
<PAGE>
11. PREFERRED STOCK
At December 31, 1998 and 1997, 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 of date of issue. Since all of the Series A
Preferred Stock was issued prior to June 30, 1995, the warrants have
expired. 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.
12. 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, 1998:
1999 $ 133,693
2000 25,151
2001 21,465
------
Total future minimum lease payments $ 180,309
=========
As of December 31, 1998, the principal office lease for the Company's
discontinued title insurance operations had expired and the Company was
leasing such space on a month-to-month basis at the rate specified in the
expired lease. A lease was signed in early 1999 for new office space with a
term from April 1999 through April 2006. The monthly base rent in the first
year of the lease will approximate $15,400. These leases will be assumed by
Old Guard as a result of the transaction.
Total rental expense under noncancelable operating leases approximated
$314,336 and $778,705 for the years ended December 31, 1998 and 1997,
respectively.
The Company is involved in litigation from time to time in the ordinary
course of business. Currently, various lawsuits, claims and proceedings are
pending against the Company, which pertain primarily to the subsidiary
operations of the entities that were transferred to the former Chief
Financial Officer in January 1997. These actions generally relate to the
conduct of prior management in carrying out their fiduciary and other
responsibilities with respect to the management of customer accounts and
their actions as trustees for certain of these accounts. The Company
intends to defend itself vigorously against these actions. The Securities
and Exchange Commission (the "SEC") is conducting a private investigation
of certain of these allegations, which is in its initial stages of
discovery. The Company is cooperating fully with the SEC. At this time, the
outcome of such lawsuits, claims and proceedings are not determinable.
13. 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 $34,463 and $34,601 for the years
ended December 31, 1998 and 1997, respectively. Contributions to the Plans
are made based on a matching percentage of employee contributions as
designated in the Plans.
14. REGULATORY REQUIREMENTS
The Company's title insurance subsidiary, STIC, is subject to a $4,000,000
minimum level of capital and surplus, at December 31, 1998 and 1997, as
required by statutes of the states in which it is
-24-
<PAGE>
authorized to do business. STIC is also subject to regulations under which
the payment of certain dividends requires the prior approval of applicable
insurance regulatory authorities. At December 31, 1998 and 1997, STIC
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, STIC's statutory surplus at December 31, 1998 and
1997 was $4,596,190 and $4,264,702, respectively. In accordance with these
restrictions, $596,190 and $264,702, respectively, is available for
dividends subject to the broad discretionary powers of insurance regulatory
authorities to further limit dividend payments of insurance companies.
At December 31, 1998 and 1997, investments and certificates of deposits
with a book value of $989,961 and $977,966, respectively, were either on
deposit with various regulatory authorities or held by Southern Title in
accordance with statutory requirements for the protection of its
policyholders.
15. 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. Reconciliation's 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>
1998 1997
--------------------------- -------------------------------
Net Net
Earnings Stockholders' Earnings Stockholders'
(Loss) Equity (Loss) Equity
<S> <C> <C> <C> <C>
Balances - Firstmark
Consolidated -
GAAP basis $(4,491,423) $ 6,633,975 $ (1,318,058) $ 11,034,073
Adjustments:
Losses and stockholders'
deficit of companies
not included in
statutory reporting 4,812,268 2,151,191 1,397,155 (2,580,672)
---------- ---------- ---------- -----------
Balances - Southern Title -
GAAP basis 320,845 8,785,166 79,097 8,453,401
Adjustments:
Statutory reserves (174,852) (2,816,191) (69,930) (2,641,339)
Restored nonadmitted
assets 31,230 (2,687,411) 18,611 (2,262,429)
IBNR reserve 541,757 1,149,603 (85,814) 607,846
Deferred income taxes 107,629 165,023 (28,183) 107,223
-------- -------- --------- -------
Balances - Southern Title -
statutory basis $ 826,609 $ 4,596,190 $ (86,219) $ 4,264,702
========== ============ ========== ===========
</TABLE>
-25-
<PAGE>
16. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claims adjustment expenses
is summarized as follows:
1998 1997
Balance, beginning $1,027,607 $ 972,703
----------- ---------
Incurred related to:
Current period 874,206 210,189
Prior periods 185,471 292,203
-------- -------
Total incurred 1,059,677 502,392
---------- -------
Paid net of recoveries related to:
Current period 133,891 152,386
Prior periods 462,568 295,102
-------- -------
Total paid 596,459 447,488
-------- -------
Balance, ending $1,490,825 $1,027,607
=========== ==========
As a result of changes in estimates of insured events in prior periods, the
provision for claims and claims adjustment expenses increased by $557,290
and decreased by $106,732, and an increase of $400,000 in the IBNR reserve,
which was an element of the transaction with Old Guard, during the years
ended December 31, 1998 and 1997, 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
exposures. Premiums earned in 1998 and 1997 exclude $47,243 and $95,224,
respectively, of charges for reinsurance ceded to reinsurance companies. No
reinsurance is expected to be recovered on claims filed as of December 31,
1998 and 1997.
The effect of reinsurance on premiums earned is as follows:
1998 1997
Premiums assessed against policyholders $10,101,954 $ 8,443,549
Reinsurance ceded (47,243) (95,224)
------------ -----------
Net premium earned $10,054,711 $ 8,348,325
============ ===========
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.
-26-
<PAGE>
17. 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 4 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.
Notes Receivable - The fair value of the Company's notes receivable is
based on the current estimated net realizable value.
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, 1998 and 1997, fair value
approximates carrying value.
-27-
<PAGE>
<TABLE>
<CAPTION>
The estimated fair values of the Company's financial instruments are as
follows:
1998 1997
-------------------------- -----------------------------
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 $424,728 $424,728 $1,283,645 $1,283,645
Notes receivable 35,063 35,063 116,139 116,139
------- ------- -------- -------
$459,791 $459,791 $1,399,784 $1,399,784
========= ========= =========== ==========
</TABLE>
18. 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.
1998 1997
Revenues:
Financial services $ - $ 5,266
Venture capital 70,148 425,007
Title insurance 14,490,487 11,752,912
----------- ----------
$14,560,635 $12,183,185
=========== ===========
Earnings (losses) before income taxes:
Financial services $ - $ (24,731)
Venture capital (1,788,928) (1,175,302)
Title insurance 427,150 56,679
-------- ------
$(1,361,778) $(1,143,354)
=========== ===========
Identifiable assets:
Venture capital $ 1,636,443 $ 3,975,080
Title insurance 11,829,546 10,775,413
----------- ----------
$13,465,989 $14,750,493
=========== ===========
-28-
<PAGE>
19. OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
CONTINUING OPERATIONS
December 31, 1998
---------------------------------------------
Tax
Before-Tax (Expense) Net-of-tax
Amount or Benefit Amount
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising
during period $ 13,945 $ (4,741) $ 9,204
Less: Reclassification adjustment for gains
realized in net income 291,481 (99,104) 192,377
-------- --------- -------
Other comprehensive income $ 305,426 $(103,845) $ 201,581
========== =========== =========
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
Tax
Before-Tax (Expense) Net-of-tax
Amount or Benefit Amount
<S> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period $ (67,874) $ 23,077 $ (44,797)
Less: Reclassification adjustment for gains
realized in net income 42,748 (14,534) 28,214
------- --------- ------
Other comprehensive income $ (25,126) $ 8,543 $ (16,583)
=========== ======== ==========
<CAPTION>
DISCONTINUED OPERATIONS
December 31, 1998
---------------------------------------
Tax
Before-Tax (Expense) Net-of-tax
Amount or Benefit Amount
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising
during period $16,547 $(5,626) $10,921
-------- --------- -------
Other comprehensive income $16,547 $(5,626) $10,921
======== ========= =======
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
Tax
Before-Tax (Expense) Net-of-tax
Amount or Benefit Amount
<S> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period (3,567) 1,213 (2,354)
Less: Reclassification adjustment for
gains realized in net income $(22,647) $ 7,700 $(14,947)
---------- -------- ---------
Net unrealized gains (losses) $(26,214) $ 8,913 $(17,301)
========== ======== =========
Other comprehensive income $(26,214) $ 8,913 $(17,301)
========== ======== =========
</TABLE>
* * * * * *
-30-
<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 23, 1999. 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 23, 1999
--------------------------------- Officer and Director
Donald V. Cruickshanks (Principal Executive Officer)
Chief Financial Officer, Secretary April 23, 1999
/s/ RONALD C. BRITT and Treasurer (Principal Financial
--------------------------------- and Principal Accounting Officer)
Ronald C. Britt
/s/ GEORGE H. MORISON
--------------------------------- Director April 22, 1999
George H. Morison
Director April __, 1999
----------------------------------
Steven P. Settlage
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SUMMARY FINANCIAL INFORMATION IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 53,575
<SECURITIES> 139,112
<RECEIVABLES> 27,993
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 34,706
<DEPRECIATION> 23,446
<TOTAL-ASSETS> 7,825,700
<CURRENT-LIABILITIES> 0
<BONDS> 565,000
0
11,400
<COMMON> 1,100,286
<OTHER-SE> 5,522,289
<TOTAL-LIABILITY-AND-EQUITY> 7,825,700
<SALES> 0
<TOTAL-REVENUES> 70,148
<CGS> 0
<TOTAL-COSTS> 0
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</TABLE>
