Item 1. Business
Four Corners Financial Corporation is a Delaware corporation formed under the name American Management Educational Corporation ("Educational Corp.") in 1974. In 1981 Educational Corp. changed its name to American Management Energy Corporation ("AMEC") and commenced a limited oil and gas operation. Subsequently, it discontinued the educational financial management consulting and security investigation business which it had been conducting as well as the oil and gas operation. Thus, AMEC was inactive and without employees from 1983 until May 12, 1987.
On that date, AMEC sold to a former principal stockholder all of its assets, consisting of certain oil and gas leases valued at approximately $40,000 in consideration of his assumption of all of the liabilities of AMEC and his agreement to indemnify AMEC against specified claims.
On May 14, 1987, control of AMEC was transferred to Frank B. Iacovangelo and Bernard J. Iacovangelo through the acquisition of shares from certain stockholders.
On April 12, 1988, AMEC acquired all of the issued and outstanding stock of Four Corners Abstract Corporation ("Abstract") which was then owned by Frank B. Iacovangelo and Bernard J. Iacovangelo and their affiliates, in exchange for 9,293,100 shares of AMEC. Abstract was formed in 1980 and has conducted operations since that date. At the time of the acquisition of Abstract, AMEC changed its name to Four Corners Financial Corporation ("FCFC"). Messrs. Iacovangelo are also officers, directors and principal stockholders of FCFC. Since that time, the main source of FCFC's business has been conducted through Abstract which remains a wholly owned subsidiary of FCFC.
On October 17, 1988, FCFC acquired a controlling interest in Mid-State Abstract Corporation ("Mid-State") for $95,000. In January 1989, FCFC made an exchange offer to acquire the remaining shares of Mid-State, resulting in FCFC owning approximately 84% of the outstanding voting shares being held by parties not affiliated with FCFC. In February, 1991, Mid-State merged into Abstract and all outstanding shares of Mid- State were changed and converted into shares of FCFC Common Stock.
In January, 1989, FCFC acquired all of the outstanding shares of Livingston Abstract Corporation ("Livingston") in Geneseo, New York for a purchase price of $8,000, the assumption and agreement to pay the balance of three notes aggregating $17,985, and the issuance (at a later date) of 20,000 shares of the Company's Common Stock and commenced operations at the location at that time.
In January, 1990, FCFC acquired all of the outstanding shares of Picciano Abstract Company, Inc. ("Picciano") of Binghamton, New York for a purchase price of $15,000 and the issuance of 20,000 shares of the Company's Common Stock and commenced operations at that location at that time.
On July 1, 1990, Livingston and Picciano merged into Abstract.
On December 23, 1991, the Company acquired all of the outstanding shares of Proper Appraisal Specialists, Inc. ("Proper Appraisal") of Buffalo, New York for a purchase price of $10,000 and the issuance of 90,000 shares of the Company's Common Stock. Since that date, Proper Appraisal Specialists, Inc. has been inactive while the Company operated an appraisal business begun in 1989 under Four Corners Abstract. In September, 1995 the Company sold the assets of its appraisal division to Rynne, Murphy & Associates, Inc. (See Footnote No. 9 of the accompanying audited financial statements).
In May, 1992, the Company opened a branch office in Goshen, New York (Orange County) to service the Hudson Valley area.
In February, 1993, the Company closed its Geneseo Office and consolidated those operations with its Rochester location. The Company also consolidated its Cheektowaga Appraisal office with its branch in downtown Buffalo, New York in December, 1993.
In September, 1994, the Company relocated its Goshen office to Newburgh, New York. Subsequently, in March, 1995, the Newburgh office was closed. The Company now provides service to the Mid-Hudson area of New York State through independent contractors.
Four Corners Financial Corporation and its subsidiaries, Four Corners Abstract Corporation ("Abstract") and Proper Appraisal, provide services and products that are utilized in substantially all commercial and residential real estate transactions. As used herein, "Company" includes Four Corners Financial Corporation, Abstract and Proper Appraisal unless the context otherwise requires.
These services and products are offered through offices in Buffalo, Rochester, Syracuse, Utica, Lockport, Binghamton and Albany, all located in central and western New York and through subcontractors in other areas of New York State.
Services and Products
The Company's services and products include real estate title and other public record searching, the preparation of abstracts of title and the issuance of title insurance as agent for certain national underwriting companies. Other services and products include real estate appraisals, abstract storage and escrow closing services. All of the Company's services and products may be required in connection with the mortgaging, sale or purchase of commercial or residential real property.
Services and Products (cont)
Substantially all of the Company's revenues were derived from its abstracting and title insurance services. Although all of the Company's services and products can be obtained from other vendors at prices comparable to those of the Company, the Company believes that dealing with a single source for all of these products is convenient for customers and helps to reduce the time required for the performance of these services for a particular real estate transaction. Through it's Corporate Customer Service Department located in Rochester, New York using a statewide network of service providers, the Company is able to perform these title services virtually anywhere in New York State.
Response time is important in many real estate transactions and the ability of the Company to provide its services and products in a timely manner is significant in the attraction and retention of customers.
Abstracts
The purchase, sale, leasing and financing of a parcel of real estate in New York State outside of New York City, usually require the preparation of an abstract of title. The abstract is a summary of each transaction affecting the parcel which is reflected in the records of the Clerk of the County where the subject property is located. The abstract is examined by attorneys and others to determine prior interests in, or encumbrances on, the property which have to be disposed of in order to have "clear" title. The information used to create or redate an abstract is obtained by title searchers, that is, persons who search various official records for interests which may affect the ownership interest in, or title to, real property. Such interests may include real property taxes, corporate franchise taxes, bankruptcies, mechanics liens, income tax or sales tax liens, litigation liens, judgment liens, security interests in fixtures and mortgages as well as interests of prior owners (including deceased owners) which have not been adequately transferred. Title searchers summarize their findings and deliver them to word processors who produce the abstract of title.
An abstract usually exists for most properties. Thus, the Company is most often requested merely to "redate" it. This involves examining the records only from the date of the last transaction summarized in the abstract. However, where no abstract is available or when newly subdivided parcels are involved, a new abstract is created starting with a warranty deed which meets the local standards for title certification (e.g. at least 60 years old for Rochester, New York property).
The information contained in abstracts which the Company creates or redates is indexed and retained by the Company, becoming part of its "title plant". These "back titles" are valuable assets which facilitate the preparation and redating of future abstracts. The title plant also aids the expeditious preparation of title insurance reports and policies.
The Company also offers an abstract storage service. When mortgages are placed on real property, the bank or mortgage company usually retains the abstract of title. Thus, a large volume mortgagee would require substantial storage space as well as numerous personnel to index, store and retrieve these abstracts. Through its abstract storage service, the Company picks up these abstracts and stores them for the lender, redelivering them when requested. At the present time, the Company stores approximately 15,000 abstracts. The Company does not charge for this service but believes that it helps to generate abstract "redating" revenues, since a person needing a redate of an abstract stored by the Company can, by ordering that redate from the Company, avoid having to deliver the abstract elsewhere for the redate. The Company estimates that revenues thus generated amounted to approximately $25,000 in 1996, $27,000 in 1995 and $35,000 in 1994.
Abstract and title companies are often asked to act as an escrow closing agent in a real estate transaction. This practice is allowable under New York State law. In this capacity, usually as a function of providing title insurance on real estate, the Company is asked to hold funds in escrow bank accounts until certain requirements are met or title defects are cured by the parties involved in the transaction. For this service the Company charges a fee based upon the length of time which the funds are to be held and/or the number of transactions (deposits, checks) to be handled. Also, the Company acts as a conduit for the sale and purchase of mortgages between financial institutions insuring that mortgage documents are received and funds for the purchase of mortgages are wired from buyer to seller in the correct amount and in a specified time frame. The Company also acts as settlement agent on Home Equity loans and refinanced mortgage loans for its Title Insurance underwriters and certain banks/lenders. During 1996, escrow closing services generated approximately $31,000 as compared to $90,000 and $44,000 in 1995 and 1994, respectively.
Other public record searches provided by the Company include guaranteed tax searches, foreclosure certificates of title, surrogate court searches, UCC financing searches, franchise tax searches, judgment searches, new name searches, back title searches, bankruptcy searches and foreclosure searches. While these searches are most often needed by attorneys in connection with real estate transactions, they may be useful to other customers for other purposes, for example, to lenders extending credit.
Title Insurance
Title insurance policies are statements of the terms and conditions upon which the title insurance underwriter will insure title to real estate, showing ownership, outstanding liens, encumbrances and other matters of public record. The beneficiaries of title insurance policies are generally buyers of real property and secured lenders, and the policy amount is usually based upon either the purchase price of the property or the amount of the loan secured by the property. The title
Title Insurance (cont)
policy protects the insured against title defects, liens and encumbrances not specifically excepted from its coverage. Most lenders require title insurance as a condition to making loans secured by real estate.
Title insurance is substantially different from other types of insurance. Fire, auto, health and life insurance protect against losses due to future events that cannot generally be eliminated. Title insurers, however, seek to eliminate future losses by accurately performing record searches and examinations of title to real property, and to the extent possible, requiring that obvious defects be "cured" as a condition of and prior to issuance of the policy.
Among the most commonly issued title insurance policies are standard or extended coverage policies for owners and lenders. Owners' policies insure title to real estate against defects in or liens or encumbrances against title, unmarketability of title and lack of access to the subject property. Lenders' policies insure against the invalidity of the lien of the insured mortgage, insure the priority of the lien or encumbrance as stated in the title policy, and insure against the invalidity of any assignment of the insured mortgage provided the assignment is shown in the policy. The terms of coverage have generally become standardized in accordance with forms approved by industry groups such as the American Land Title Association.
Since title insurance premiums are based upon mortgage amounts and tend to be higher on a per unit basis than amounts charged for abstract services, labor costs as a percentage of revenue in title insurance are lower than in abstract services. As a result, gross margin levels are higher. Therefore, one of the Company's main goals has been to increase its revenues from title insurance.
The Company's total revenue for 1996 decreased by 3%, to $3,706,778 as compared to $3,822,215 in 1995, mainly due to a decrease in real estate activity and demand for the Company's products. However, due to the competitive nature of the title insurance industry, i.e. controlled business arrangements between businesses ordering title insurance products and those businesses producing title insurance policies be they attorneys, mortgage lenders, mortgage brokers, real estate brokers, the Company's revenue from title insurance decreased from $1,610,147 to $1,302,970 in 1996. Revenue from title insurance represented 35% of total company revenues as compared to 42% in 1995 and 41% in 1994.
The title insurance premium is based upon the policy amount and the type of coverage provided by the policy. Title insurance rates, including those of the Company's competitors, are regulated by the State of New York Insurance Department. The premium for title insurance is due and must be paid in full prior to the issuance of the policy which is generally on the closing date of the real estate transaction.
Title Insurance (cont)
The use of title insurance in connection with real estate transactions, particularly residential purchases and financing, in the Company's marketing area has been significantly increased since the early 1980's by the expanded role of the national secondary residential mortgage market, and the growth of nationwide lending, both residential and commercial, by banks and insurance companies. As a result, almost all residential and commercial real estate transfers and/or financings, except most home equity transactions, involve the issuance of a title insurance policy. This same period of time has seen, until recently, a general inflation of real estate prices resulting in increasing levels of insurance coverage and related premiums. However, this expanding market has also seen a significant increase in the number of companies providing such insurance in the Company's marketing area, both directly and through agents. See "Competition".
The Company is not a title insurance underwriter. In selling title insurance, the Company acts as agent for several national title insurance underwriting companies. The Company has agency relationships with the following title insurance underwriters: Old Republic National Title Insurance Company, Albany, New York; Stewart Title Insurance Company, New York City; and Lawyers Title Insurance Corporation, Richmond, Virginia. Generally, such relationships are cancelable by either party upon short notice. The Company believes that in the event of the cancellation of its existing agency relationships, it would have no difficulty in securing similar relationships with other title insurance underwriters.
The choice of an underwriter by the Company is based upon such considerations as the amount of the premium "split" offered, which varies among underwriters, the terms under which the title underwriter will require indemnification for policy losses attributable to errors made by the Company in searching and examining the title, the scope of services offered to the agent by the title underwriter, and the fact that certain underwriters will not insure titles in certain geographical areas within New York State. Typically, the title insurance premium "split" is approximately 80% to the Company and 20% to the underwriter.
The title insurance underwriters for which the Company acts as agent are licensed by the State of New York. Currently, there is no requirement under New York law that requires an agent such as the Company to hold a license.
Appraisals
In 1989, the Company added to its services the furnishing of residential real estate appraisals. With the purchase of Proper Appraisal Specialists, Inc. in 1991, the Company added the appraisal of commercial properties to its product line.
Appraisals (cont)
Since that time, appraisals were performed by certified and/or licensed appraisers under the guidance of either a Senior Residential Appraiser (SRA) or an individual with a General Appraisal License from New York State. In areas
where the Company did not have a direct branch operation, the Company procured the services of licensed appraisers on a subcontractor basis. As a result of an agreement dated September 27, 1995, the company sold the assets of its appraisal division to Rynne, Murphy and Associates, Inc., a well-known, professional residential/ commercial real estate appraisal company located in Rochester, N.Y. for $125,000, allocated as follows:
Fixed Assets $ 12,500 Customer lists and goodwill 100,000 Covenant not-to-compete 12,500 -------- $125,000 ========
The purchase price of the fixed assets is in the form of a $12,500 non-interest bearing note receivable in ten quarterly installments of $1,250 beginning May 1, 1996.
The purchase price of the customer lists, goodwill, and covenant not- to-compete is in the form of a $112,500 note receivable in quarterly installments, plus interest at 9%, beginning May 1, 1996.
Payment for these assets is contingent based upon 19% of the buyer's gross margin on sales attributable to the Company's customers. These payments are to be applied by the Company in the following order: the $1,250 guaranteed payment, interest and principal. Any unpaid interest is forgiven on a quarterly basis.
It is anticipated that 19% of the buyer's gross margin will not exceed the $1,250 guaranteed payment and interest for that quarter. As a result, the buyer would not be required to make any principal payments for the contingent portion of the note. At December 31, 1996, the Company has fully reserved this portion of the note receivable.
Under this strategic partnership arrangement with Rynne, Murphy and Associates, Inc., the Company will continue to market and sell appraisals to its customers. However, since the appraisal reports will be prepared by Rynne, Murphy and Associates staff appraisers, the Company has and will continue to realize a substantial savings in payroll and other overhead expenses associated with running its appraisal operation.
Appraisals (cont)
Appraisal services provide an estimated value for a particular property. Appraisals are required in a variety of situations including transfer of ownership, financing, tax matters, relocation services, insurance purposes, estimation of liquidation value and divorce. The Company's customers for appraisals have included lending institutions, banks, attorneys, municipalities, relocation companies, government agencies, corporations and private individuals. The Company's errors and omissions insurance coverage also covers appraisal services. During 1995, all of the Company's appraisals were performed by Rynne,
Murphy & Associates, Inc. for which the Company was paid a commission for the placement of orders. During 1995, the Company derived approximately 5% of its gross revenues from the furnishing of real estate appraisals versus 10% in 1994.
Marketing
Services and products provided by the Company are utilized in substantially all commercial and residential real estate transactions. Therefore, its marketing efforts are directed primarily toward the persons who place the orders for such services and products in the typical real estate transaction or other real estate related activity - attorneys, mortgage brokers, lenders, builders, and other persons and entities engaged in the real estate business generally.
Marketing activities are conducted by a direct sales force of three employees under the direction of the Company's Director of Sales and Marketing. Marketing efforts include direct solicitation and advertising in publications targeted to serve mortgage lenders and attorneys, attendance at trade shows and conventions, and news releases.
The Company believes that its ability to offer many of the services and products necessary in a real estate transaction is an important factor in the attraction and retention of business, since customers can therefore order those items from a single source. In its marketing activities, the Company emphasizes this factor and the equally important factors of competitive price, accuracy, response time, excellent service and reliability, all of which the Company believes it provides to its customers.
Significant Customers
During 1996, there were no customers accounting for more than 10% of the Company's gross revenues.
Industry Considerations and Seasonality
The Company's business is related to the general real estate market and the fluctuations which occur therein. As a result of economic factors affecting the real estate industry, namely fluctuating interest rates, mortgage refinances continued during the first quarter of 1994 at which time long term interest rates were at very low levels. However, beginning in the second quarter and fearing an increase in the levels of inflation, the Federal Reserve Board began increasing interest rates. By year end 1994 there were an unprecedented number of consecutive monthly interest rate increases. As a direct result, deeds and mortgages recorded in New York State during 1994 fell by 7.18% as compared to 1993 according to statistics compiled by the New York State Land Title Association. As a consequence, the Company's revenues fell sharply causing the company to incur a significant net loss for the year ended December 31, 1994.
Activity continued to be sluggish during 1995, when recorded deeds or mortgages fell by an average 11.50% from 1994 levels. Company revenues declined
during 1995 by nearly 20% as a result of these factors. As a result of the plan developed by Company management subsequent to year end 1994 to significantly reduce the Company's overhead expense structure in order to improve operations and cash flow, the Company returned to profitability in 1995. Interest rates remained relatively stable during 1996, an election year, while the economy continued to rebound and consumer confidence also improved. Evidenced by an increase of 11% in recorded deeds and mortgages for 1996 as compared to 1995. However, due to competitive factors effecting the Company's title insurance revenue base, the Company's total revenues for 1996 declined slightly. Despite this decline in revenue, the Company remained profitable in 1996. There can be no assurance that these or other factors will enable the Company to maintain its revenue and profitability in periods of declining real estate activity.
The demand for the Company's services and products is directly dependent upon the activity of the real estate market which, in turn, is closely related to changes in interest rates. Thus, the Company's business is cyclical as well as seasonal, with lowest volume when interest rates are high and in the winter and early spring.
Banking Relationship
During 1995, Company management worked closely with bank officials and its public accounting firm to develop a plan to restructure Company expenses and improve operations and cash flow. On December 13, 1995, the amount outstanding on the Company's note payable to a bank, $133,333, and $185,000 of the amount borrowed under its Line-of-Credit agreement were refinanced with the same bank. The note payable to the bank requires the Company to meet certain financial covenants at December 31, 1995 and 1996 (see Note 5 of the Accompanying Consolidated Financial Statements as of December 31, 1995 and 1994).
Banking Relationship (cont)
At December 31, 1996 the Company's total indebtedness to its bank has decreased to $276,500 as compared to $401,213 at December 31, 1995.
Potential Liabilities
Abstract companies, including the Company, certify their searches and abstracts for accuracy. In its title insurance business, the Company relies upon its abstracts and other information and considerations, including standards prescribed by its principals, in determining whether title is insurable. If the Company makes a determination of insurability, it issues a policy of title insurance on behalf of its principal, the underwriting company. As an issuer of certified searches and abstracts, the Company may, depending on applicable law and the facts of a particular case, be liable for money damages in the event of errors in its searches and abstracts. As an agent issuing title policies on behalf of an underwriter, the Company may, again depending on applicable law and the facts of a particular case, be liable to either the underwriter or the insured in the event of errors in abstracting or determinations of insurability,
negligence, or breaches of agreements with its principals. There are no significant claims pending against the Company based upon any of the foregoing considerations, but the potential for such claims, and possible liability thereon, is a risk that is inherent in the Company's business, and such claims may be asserted at any time. During the most recent past five years, the amount paid by the Company for such claims, in the aggregate, is less than $35,000. The Company has errors and omissions insurance coverage of $1,000,000, which complies with requirements of its principals and is also deemed adequate by the Company's management.
Employees
The Company and its subsidiaries employed approximately 66 persons at December 31, 1996, as compared to 66 in 1995 and 94 in 1994. Certain members of the Company's management must sign Confidentiality Agreements which prohibits the solicitation of information or resources to existing or potential competitors. The employees of the Company are not covered by any collective bargaining or other agreements and management believes its employee relations to be good.
Service Marks
The names "Four Corners Financial Corporation" and "Four Corners Abstract" have been registered as service marks with the U.S. Patent and Trademark Office. While the Company considers its service marks to be important, management does not consider any service mark to be critical to future operations of the Company or the marketing of any of the Company's services or products.
Competition
The Company competes with numerous providers of abstract and title insurance services, most of which fall into two main categories. The first are the large, integrated national or statewide companies which underwrite their own title insurance policies either directly or through agents. Such agents include not only independent companies, but also attorneys who sell title insurance policies as "examining counsel" for underwriters of title insurance. The second are the small, local companies which provide abstracts and write policies only as agents for others. Both types of companies are found in the markets served by the Company and offer substantial competition. Because of the relative ease of entry into the market place, the Company may meet additional competition from newly formed companies in one or more of its market areas.
The use of title insurance in residential real estate transactions has grown in recent years because of the development of the national secondary residential mortgage market which requires title insurance for virtually all residential mortgages. Also, in recent years, institutional lenders have generally required title insurance in virtually all commercial mortgages. However, during the same period, there has been a significant increase in the number of companies providing such insurance in the Company's market area, both directly and through
agents.
The principal elements of competition are accuracy and speed (response time). Prices for abstract and appraisal services are generally comparable among vendors. However, in recent years, the Company experienced significant price competition from new abstract companies entering its market areas. Prices for title insurance are standardized and regulated by the New York State Insurance Department which requires that rates be filed for approval by the New York State Title Insurance Rate Service Association, Inc. (TIRSA). Personal relationships are extremely important in retaining business and obtaining new business. Excellent service and reliability, which the Company believes it provides, are the principal means of developing and maintaining such relationships.
Item 2.
Item 2. Properties
Prior to July, 1995, principal offices of the Company were located at 80 West Main Street, Rochester, New York. These facilities, approximately 15,000 square feet, were leased from Wegman Building Associates, a partnership in which Messrs. Frank B., Bernard J. and Anthony M. Iacovangelo, directors and/or officers of the Company, are partners. Abstract had a one year lease for this space expiring on December 31, 1995, which provided for an annual net rent of $68,000. However, effective July 31, 1995, the Company moved its Rochester facilities to 370 East Avenue. These facilities are leased from Fitch Building Associates, another partnership in which Messrs. Frank B., Bernard J., and Anthony M. Iacovangelo are partners.
Abstract now leases approximately 9,000 square feet of such space at a net annual rent of $72,000, pursuant to a lease expiring June 30, 2000. The Company believes that the terms of its rental are at least comparable to those which it might have obtained if dealing with a non-affiliated third person. Rent and common charges were approximately $72,000, $72,000 and $58,000 in 1996, 1995 and 1994, respectively. During 1994, total unpaid rent of $109,000 was forgiven by Wegman Building Associates and reflected as an extraordinary item. The Company owed approximately $18,100 and $20,000 for unpaid rent at December 31, 1996 and 1995, respectively.
In addition, the Company leases space for its branch offices in Buffalo (3,993 square feet), Albany (1,410 square feet), Syracuse (2,087 square feet), Lockport (625 square feet), Binghamton (760 square feet) and Oswego (350 square feet). The building which houses the Utica branch (2,000 square feet) was sold by the Company in 1994. Per this agreement, the Company was allowed to operate from this location on a month-to-month tenancy through July 1, 1995. Effective August 1, 1995, the Company entered into a lease for 1,611 square feet in a nearby office building for its Utica Branch office.
The Company also leases space in the County Clerk's offices in Monroe, Erie, Onondaga and Niagara counties, and occupies space in the County Clerk's office in Oneida County.
The Company believes it has adequate insurance coverage with respect to fire and other casualty losses.
Item 3.
Item 3. Legal Proceedings
There are no pending legal proceedings to which the Company is a party or of which any of its property is the subject.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the last quarter of the fiscal year covered by this report.
Executive Officers of Registrant
The executive officers of the Company are as follows:
Name Age Position with the Company ---- --- -------------------------
Frank B. Iacovangelo 57 President, Treasurer and Director
Bernard J. Iacovangelo 49 Vice President, Secretary and Director
William S. Gagliano 47 Executive Vice President and Director
Business Background of Executive Officers
Set forth below is a brief description of the business backgrounds of the executive officers of the Company.
Frank B. Iacovangelo has served as President, Treasurer, and a director of the Company since May, 1987. He is a practicing attorney and has been a partner in the law firm of Gallo & Iacovangelo of Rochester, New York for more than five years. Mr. Iacovangelo is also an officer, director and principal shareholder of Faber Construction Co., Inc. and Forest Creek Equity Corp., real estate development companies, and an owner of numerous real estate projects. In addition, Mr. Iacovangelo is President and director of Four Corners Abstract Corp., a wholly-owned subsidiary of the Company, which he co-founded in 1980. From 1987 until June, 1989, Mr. Iacovangelo was Chairman of the Board of Directors of a food service business which filed a petition under Chapter 11 of the U.S. Bankruptcy Code on November 20, 1989.
Bernard J. Iacovangelo has served as Vice President, Secretary, and a director of the Company since May, 1987. He is an attorney and has had more than five years of experience as a partner in the law firm of Gallo & Iacovangelo.
His principal activity for the last five years has been as President, director and principal shareholder of Forest Creek Equity Corp., a real estate development company. Mr. Iacovangelo is also a principal shareholder of Faber Construction Co., Inc. and an owner of numerous real estate projects as well as co-founder, officer and director of Four Corners Abstract Corp., a wholly-owned subsidiary of the Company.
William S. Gagliano has served as Executive Vice President of the Company and Four Corners Abstract Corp. since June, 1990. He was elected Director of the Company in July, 1992. As Executive Vice President, he is responsible for day to day operations of the Company. He joined Four Corners Abstract Corp. in 1987 as Vice President of Finance and Administration.
Messrs. Frank and Bernard Iacovangelo are brothers.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Security Holder Matters
There is a very limited trading in the Company's Common Stock. The range of high and low bid prices and high and low asked prices for the years 1994, 1995 and 1996 is shown below, as reported by the National Quotations Bureau, Inc. and as adjusted to reflect the Company's one for four (1 for 4) reverse stock split which became effective July 31, 1992.
COMMON STOCK DATA
1994 BID ASKED ---- --- -----
1st Quarter *Unpriced *Unpriced 2nd Quarter *Unpriced *Unpriced 3rd Quarter *Unpriced *Unpriced 4th Quarter *Unpriced *Unpriced
----
1st Quarter *Unpriced *Unpriced 2nd Quarter *Unpriced *Unpriced 3rd Quarter *Unpriced *Unpriced 4th Quarter *Unpriced *Unpriced
----
1st Quarter *Unpriced *Unpriced 2nd Quarter *Unpriced *Unpriced 3rd Quarter *Unpriced *Unpriced 4th Quarter *Unpriced *Unpriced
February 16, 1989 $2.00 $2.00 $3.00 $3.00 (last available)
* = Listed in pink sheets without prices
The above quotations represent prices between dealers and do not include retail markup, markdown or commission. They do not represent actual transactions and have not been adjusted for stock dividends or splits.
The Company's agreement with its Bank places a restriction on its payment of dividends. No dividends were declared or paid during 1994, 1995 or 1996.
On March 25, 1997, the Company had 1,209 holders of record of its common stock.
ITEM 6
ITEM 6 SELECTED FINANCIAL DATA
FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA
The financial data included in this table has been selected by the Company and has been derived from the financial statements for those years. The following statement should be read in conjunction with the financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Notes:
(1) In 1992, the Company's stockholders approved a one-for-four reverse stock split. In conjunction with this reverse stock split, the authorized number of shares was reduced to 15,000,000 and par value was increased to $.04 per share. All years have been restated to reflect this action.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
1. Liquidity and Capital Resources
The Company's cash flow resulted from operations, bank loans and advances made by principal stockholders.
In 1996, the operations of the Company generated cash of $174,519. This cash flow, along with cash reserves of $62,791, was sufficient to fund investments in assets of $58,474 and a net debt reduction of $142,224. The cash flow from operations of $210,839 funded investments in assets of $38,881 and a net debt reduction of $138,099 in 1995. During the calendar year 1994, an operating cash flow of $52,351 funded an investment in assets and a corresponding decrease in debt financing of $62,399 and $60,672, respectively.
Cash Flow From Operations. The cash provided by operations was less in 1996, being $174,519 versus $210,839 in 1995. This change was primarily due to a slightly smaller net profit of $86,718 incurred in 1996 as compared to that of $97,384 in the previous year. The positive impact arose primarily from non-cash depreciation and amortization expense, as well as an increase in accounts payable of $33,918. The cash provided by operations in 1995 of $210,839 was higher than the 1994 amount of $52,351. This was attributable to positive net income of $97,384 in 1995 in comparison to the sizeable 1994 net loss of $534,030.
Cash Flow from Investing Activities. The Company made capital expenditures of $16,346, $39,325, and $31,469 in 1996, 1995 and 1994 respectively, primarily related to computer system to computer system upgrades and furniture and fixture purchases at various Company locations. Whereas the company made investments in
its title plant in 1996 and 1994 of $52,622 and $36,985, respectively to support its ongoing business, no such commitment was made during the 1995 year based on management's operating philosophy.
As of December 31, 1996, the Company had no material purchase commitments. In the past, the company has acquired other businesses for cash, notes and common stock. Additional acquisitions may be made in the future. These acquisitions may be made, in part or in whole, for cash.
Cash Flow from Financing Activities. Primary cash flows from financing activities relate to changes in financing under lines-of-credit, notes payable and advances by principal stockholders. On December 13, 1995, the amount outstanding on the note payable to a bank of $133,333, and $185,000 of the amount borrowed under its line-of-credit agreement were refinanced with the same bank.
As of December 31, 1996, the note payable and line-of-credit have been classified in accordance with the new agreement. The terms of the bank note require the Company to meet certain financial covenants at December 31, 1996. These ratios are adjusted on a quarterly or semi-annual basis during 1996 and thereafter. The covenants, ratios and terms of the agreement can be found in note #5 of the accompanying financial statements. The agreement also limits the Company's ability to make acquisitions, pay dividends, and make capital expenditures. In addition, the company is required to submit certain financial information on a periodic basis.
At December 31, 1996, the Company was not in compliance with the dollar amount of working capital, current ratio, minimum tangible net worth, liabilities to tangible net worth, net income requirement and debt service ratio. Subsequent to year end, the Company obtained a waiver from the bank for these covenants as of December 31, 1996.
Future maturities of the debt described above are as follows:
1997..............................$ 97,050 1998.............................. 95,100 1999.............................. 45,071 -------- $237,221 ========
The Company may borrow up to $50,000 under the terms of a line-of-credit agreement with a bank through October 31, 1997. Amounts borrowed bear interest at the bank's prime interest rate plus 1% and are collateralized by substantially all assets of the Company. At December 31, 1996 and 1995, there was $50,000 and $35,000, respectively, outstanding under the terms of this line-of-credit.
The Company also has available an unsecured line of credit of $100,000 with a bank with interest an amounts borrowed at the bank's prime rate plus 1%.
There were no borrowings as of the years ended December 31, 1994, 1995 and 1996. Borrowings under this line of credit are personally guaranteed by the Company's principal officers/stockholders.
The company repaid $149,456, $150,599, and $164,033 under its long-term debt agreements in 1996, 1995 and 1994, respectively. While long-term borrowings were $8,361 in 1994, no borrowing activity existed for the 1995 year. At December 31, 1996, additional borrowing activity in the amount of $10,232 was incurred. At December 31, 1996, the Company owed $234,500 to a principal stockholder/director. For the years ended 1995 and 1994, this indebtedness amounted to $227,500 and $200,000, respectively. This debt bears interest at the prime rate plus three percent (3%) and the repayment of these advances is subordinated to the amounts outstanding under all other bank debt agreements. Principal repayment is scheduled for $18,000 per year.
The Company expects the cash flow generated from operations and bank lines-of-credit currently available to be sufficient to meet its anticipated working capital and fixed capital expenditure needs for the next twelve months.
The Company believes that the impact of inflation on its results from operations has been and will continue to be minimal due to the recent stability of the economy.
2. Results of Operations
(a) Percentage Comparison
The following table presents certain financial data derived from the consolidated statements of operations of the Company for the years ended December 31, 1996, 1995 and 1994, expressed as a percentage of total revenues.
Percentage of Total Revenues Years Ended December 31 ----------------------------------- 1996 1995 1994 ------- ------- ------- Title insurance premiums 35.15% 42.13% 41.15% Abstract/appraisal fees 64.85 57.87 58.85 ------- ------- ------- Total revenues 100.00 100.00 100.00 Direct costs of revenue (20.80) (20.90) (21.87) ------- ------- ------- Gross profit 79.20 79.10 78.13 Operating expenses: Personnel costs (50.09) (51.18) (61.77) Other operating expenses 25.10 22.18 27.01 ------- ------- ------- Operating income/(loss) 4.01 5.54 (10.65) Other expenses (1.64) (2.94) (.14) Income tax expense (.06) (.05) .98
------- ------- ------- Net income/loss 2.31% 2.55% (9.81)% ======= ======= =======
(b) Operating Revenues
Combined revenues of the Company decreased 20.03% from $4,779,546 for the year ended December 31, 1994 to $3,822,215 for the year ended December 31, 1995. The combined revenues further decreased approximately 3.02% to $3,706,778 for the year ended December 31, 1996.
The company experienced a revenue decrease in 1994 due to strong competition within the abstract and title insurance industry, a weaker demand for home equity (second mortgage) loans, and the continuance of a sluggish real estate market in the northeast. This trend continued in a slightly less dramatic fashion in 1995 and 1996 as the housing market began to rebound in the areas where the Company does business. The Company expects total revenues to increase during 1997 as consumer confidence continues to increase and as the volume of orders increases from those customers lost to lower-priced non-performing competitors.
Specifically, revenue from title insurance premiums decreased by 19.08% during 1996 to $1,302,970 versus $1,610,147 in 1995. A similar decrease occurred in 1995 of 18.13% from $1,966,849 realized in 1994. Despite the decrease in title sales for 1996, an increase in title searches and appraisal sales have offset these amounts resulting in a minimal decrease in combined revenues. During 1996, revenues from abstract and appraisal services increased to $2,403,808. These abstract and appraisal service revenues declined from $2,812,697 in 1994 to $2,212,068 in 1995. These fluctuations represented a 21.35% reduction in abstract and appraisal revenues from 1994 to 1995 and a corresponding increase of 8.67% from 1995 to 1996. As stated earlier, the decline in this segment of the Company's revenues from the years ended 1994 to 1996 resulted from more intense competition within the industry in addition to a lower volume of home equity (second mortgages) loans. The Company is able to provide appraisals on real properties under an exclusive arrangement with a local appraisal company.
(c) Direct Costs of Revenue
Direct costs of revenue consist to commissions paid to underwriters of title insurance and subcontractor costs paid to other title companies and to appraisers. As a result of a decrease in the volume of title search and appraisal orders in the geographic areas where the company does not have a direct operation, as well as the positive aspect of producing a higher percentage of orders using its own work force, direct costs of revenue have decreased slightly by 3.51% from $798,897 in 1995 to $770,834 in 1996. From 1994 to 1995, these same costs decreased in a more dramatic fashion by 23.57% from $1,045,319 in 1994.
(d) Operating Expenses
Direct and indirect personnel costs and other operating expenses are incurred in connection with producing title searches and title examinations, maintaining the Company's title plant, and providing real estate appraisals. Total operating expenses decreased from $4,228,331 for the year ended December 31, 1994 to $2,811,810 for the same period in 1995. Operating expenses further declined in 1995 to $2,786,219. These decreases were primarily attributable to declining payroll costs associated with a reduction in staffing requirements as the demand for the Company's services decreased.
In 1995, gross payroll and benefits amounted to $1,956,156 as compared to $2,952,187 in 1994. Office supplies, including postage, decreased from $173,122 to $97,612 for the same period. The decrease in operating expenses experienced by the Company in 1995 and 1996 was attributable to a cost containment and downsizing program implemented as a result of a lower than anticipated sales volume. The significant variances in expenses for 1996 are shown in the table below.
Expense Item 1996 1995 ------------ ---- ----
Gross payroll & benefits $1,856,772 $1,956,156
Depreciation & Amortization 79,995 110,302
Office supplies & postage 119,249 97,612
Bad Debt 114,175 75,675
As with any service company, the major item of expense and corresponding increase in expense level associated with the Company's operations is gross payroll and employee benefits. As a percentage of revenues, personnel costs and other operating expenses represented 75% in 1996, 74% in 1995, and 89% in 1994. Decreases in payroll and personnel costs were incurred in order to enhance profits during a time when the overall revenue base was decreasing. This diminishing revenue base was attributable to a period of increasing interest rates for mortgage loans during the second half of 1994 and an increased level of competitiveness within the industry. Whereas the revenue base remained fairly stable following more traditional trends, through the 1995 calendar year, the Company was able to control payroll expenditures in a much more effective manner. The Company is continuing a strategic emphasis on productivity, geographic full service, and total quality standards. The Company's work force has decreased significantly from 94 in 1994 to 66 in both 1995 and 1996.
Based on a decrease in sales order volume, income from operations for 1996
was $149,725 versus $211,508 in 1995. Net income was $85,718 for the 1996 calendar year whereas a corresponding net profit in the amount of $97,384 was recognized for 1995. In 1994, the Company suffered a significant decrease in income from operations and net income due to the economic downturn of the real estate market caused by increasing interest rates. The loss from normal operations of $534,030 was reduced from a $65,000 gain relating to the early extinguishment of debt from a related party to arrive at the net loss mentioned above for 1994. In 1995, the Company fully implemented cost cutting measures to ensure the profitability of the business. As a result, income from normal operations and net income represented sizable improvements from the previous years figures. Throughout 1996, similar business strategies and operating philosophies were used to contain payroll costs, direct costs and other overhead costs, thereby creating similar revenue, cost and profit levels.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated herein by reference to pages 33 to 51 of this Form 10-K and are indexed under Item 14(a)(1). See also the Financial Statement Schedules appearing herein, as indexed under Item 14(a)(2).
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure
There have been no disagreements on accounting and financial disclosure matters.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The following table names the directors and indicates their age, their position with the Company or their principal occupation or employment, and the approximate number of shares of Common Stock beneficially owned by each director and all directors and officers as a group as of December 31, 1996.
Shares of Position with the Common Stock Percent Company or Princi- Director Beneficially of Name Age pal Occupation Since Owned Class - ---- --- ------------------ -------- ------------- ------- Frank B. 57 President and 1987 1,366,339 (3) 40.92% Iacovangelo Treasurer (1)
Bernard J. 49 Vice President 1987 1,376,339 (4) 41.22% Iacovangelo Secretary (1)
William S. 47 Executive Vice 1992 140,758 (5) 4.22% Gagliano President and Director (1)
Anthony M. 56 President, director 1987 87,913 (6) 2.64% Iacovangelo and principal share- holder of Faber Construction Co., Inc. Rochester, NY (2)
All Directors and Officers of the 2,971,349 88.99% Company as a group (four persons) (3)(4)(5)(6)
(1) From 1987 until June 1989, Frank B. Iacovangelo was a director, and on an interim basis for a period of approximately 11 months was Chairman of the Board of Charlie Bubbles, Ltd. food service business which filed a petition under Chapter 11 of the U.S. Bankruptcy Code on November 20, 1989.
(2) During the past five years, Anthony Iacovangelo has also been an owner of numerous real estate projects.
(3) Includes 300,000 shares owned by children of Frank B. Iacovangelo, beneficial ownership of which is disclaimed. Also includes 40% of the 368,879 shares owned by Wegman Building Associates, a partnership in which Frank Iacovangelo owns a 40% interest.
(4) Includes 500,000 shares owned by a Trust for the benefit of Bernard J. Iacovangelo's children, the Trustees of which are Mr. Iacovangelo's wife, Patricia, and his brother, Frank. Mr. Iacovangelo disclaims beneficial ownership of these shares. Also includes 40% of the 368,879 shares owned by Wegman Building Associates, a partnership in which Bernard Iacovangelo has a 40% interest.
(5) Includes an option to purchase 125,000 shares of Common Stock.
(6) Includes 10% of the 368,869 shares owned by Wegman Building Associates, a partnership in which Anthony Iacovangelo has a 10% interest. Also includes options to purchase 1,000 shares of Common Stock.
Messrs. Frank, Bernard and Anthony Iacovangelo are brothers.
Item 11.
Item 11. Executive Compensation
Executive Compensation
The following table sets forth the cash compensation for each of the last three financial years awarded to or earned by the Chief Executive Officer of the Company. No other executive officer of the Company received a total salary and bonus in excess of $100,000 and accordingly no reporting is required under the regulations of the Securities and Exchange Commission.
Name and Annual Compensation (1) Principal Position ----------------------- ------------------ Yearly Salary -------------
Frank B. Iacovangelo 1996 -- - 0 - President, Chief 1995 -- - 0 - Executive Officer 1994 -- $61,800 and Treasurer
- ------------------------------------------------
(1) Mr. Iacovangelo receives no other compensation or benefits from the Company. He neither received nor exercised any options during 1996 and he held no options at December 31, 1996.
Remuneration of Directors
During 1996, directors of the Company received no cash remuneration for serving as directors or as members of committees.
The Company's 1992 Stock Option Plan (the "Option Plan") provides for automatic grants of stock options to each member of the Board of Directors who is not also an employee of the Company. Messr. Anthony Iacovangelo is a non-employee director.
Pursuant to the Option Plan, a Non-Employee Director Stock Option ("NEDSO") for 500 shares is granted to each non-employee director automatically every year on the date of the Annual Meeting of Stockholders. The first such grants were made on the date of the 1992 Annual meeting of Stockholders (July 29, 1992), and each non-employee director received a NEDSO for 500 shares at an exercise price of $.75 per share, the fair market value of the Company's Common Stock on the date of grant.
Each NEDSO is immediately exercisable in full. Each NEDSO terminated upon the expiration of ten years from the date upon which such NEDSO was granted. A NEDSO is not transferable other than by will or by the laws of dissent and distribution.
In the event a non-employee director terminates services on the Board other than by reason of death or disability, such person's NEDSO (to the extent exercisable upon such termination) will expire three months from the date of termination of service, provided that in no event may a NEDSO be exercised beyond its original expiration date.
In the event of death or disability of a non-employee director, any outstanding NEDSOs will expire one year from the date of death or disability, provided that in no event may a NEDSO be exercised beyond its original expiration date.
Employment Agreements
Employment agreements between the Company and each of Messrs. Frank B. Iacovangelo, Bernard J. Iacovangelo and William S. Gagliano provide for employment terms which commenced January 1, 1992, year to year indefinite renewal terms subject to either the Company or the employee electing not to renew, as amended, minimum base salaries of $60,000 per year in the case of Frank Iacovangelo, $52,000 per year in the case of Bernard J. Iacovangelo and $75,000 in the case of Mr. Gagliano, additional salary and bonus compensation to be determined by the Board of Directors of the Company in its sole discretion, and restrictions against competition with the Company. Messrs. Frank B. Iacovangelo, Bernard J. Iacovangelo and William S. Gagliano received $ -0-, $ -0- and $73,424 respectively during 1996.
Item 12.
Item 12. Security Ownership of Certain Beneficial owners and Management
On December 31, 1996, the Company had outstanding and entitled to vote with respect to all matters to be acted upon at the Annual Meeting of Stockholders, 3,293,733 shares of Common Stock ($.04 par value). Each share of Common Stock is entitled to one vote. The Company currently has no other outstanding class of equity securities.
In September, 1996, the Company purchased 50,000 shares of its common stock from a former director.
The following table sets forth information as of December 31, 1996 showing all persons who, to the Company's knowledge, were beneficial owners of 5% or more of any class of its shares. All persons listed below have sole voting and investment power with respect to their shares unless otherwise indicated.
Amount and Nature of Percent of Name and Address Beneficial Ownership Class - ------------------------------------------------------------------------ Frank B. Iacovangelo 1,366,339 (1) (3) 40.92% 39 State Street Rochester, NY 14614
Bernard J. Iacovangelo 1,376,339 (2) (3) 41.22% 39 State Street Rochester, NY 14614
Wegman Building 368,879 (3) 11.05% Associates 39 State Street Rochester, NY 14614
(1) Includes 300,000 shares owned by children of Frank B. Iacovangelo, beneficial ownership of which is disclaimed. Also includes 40% of the 368,879 shares owned by Wegman Building Associates, a partnership in
which Mr. Iacovangelo has a 40% interest.
(2) Includes 500,000 shares owned by a Trust for the benefit of Bernard J. Iacovangelo's children, the Trustees of which are Mr. Iacovangelo's wife, Patricia, and his brother, Frank. Mr. Iacovangelo disclaims beneficial ownership of these shares. Also includes 40% of the 368,879 shares owned by Wegman Building Associates, a partnership in which Bernard Iacovangelo has a 40% interest.
(3) Wegman Building Associates is a general partnership in which Messrs. Frank, Bernard and Anthony Iacovangelo have a 40%, 40% and 10% interest, respectively. They have shared voting and investment power with respect to the shares owned by the partnership.
Item 13.
Item 13. Certain Relationships and Related Transactions
The principal offices of the Company are located at 370 East Avenue, Rochester, New York. These facilities are leased from Fitch Building Associates, a partnership in which Messrs. Frank B., Bernard J., and Anthony M. Iacovangelo, directors and/or officers of the Company, are partners. Four Corners Abstract Corporation ("FCAC"), a subsidiary of the Company, currently leases approximately 9,000 square feet of such space, pursuant to a lease expiring on June 30, 2000. Effective July 1, 1995, the lease agreement requires annual rental payments of $72,000.
Annual rental payments, pursuant to the lease, including common area charges, were approximately $72,000, $72,000 and $58,000 in 1996, 1995, and 1994, respectively. During 1994, total unpaid rent of $109,000 was forgiven by the related partners. The Company owed approximately $18,100 and $20,000 at December 31, 1996 and 1995, respectively.
Messrs. Frank and Bernard Iacovangelo, officers and directors of the Company, are members of the law firm of Gallo & Iacovangelo, general counsel to the Company.
During 1996, 1995 and 1994, Frank Iacovangelo, President of the Company, made advances to the Company. These advances bear interest at the prime rate plus 3% and repayment is subordinated to the amounts outstanding under the Company's line of credit agreements. Mr. Iacovangelo has agreed not to require payment of these advances through January 1, 1998. At December 31, 1996, 1995 and 1994, this indebtedness amounted to $234,500, $227,500 and $200,000, respectively. In 1996, the Company paid Mr. Iacovangelo $21,292 in interest.
In 1996, 1995 and 1994, approximately 4% of the Company's revenue was derived from the law firm of Gallo and Iacovangelo, a related party. At December 31, 1996, 1995, and 1994, the Company was owed $44,878, $36,742 and $59,284 respectively, from Gallo and Iacovangelo. Rates charged were comparable to those charged similar customers.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report and as response to Item 8:
(1) Financial Statements
- Auditors' Report dated February 13, 1997
- Consolidated Balance Sheets - December 31, 1996 and 1995
- Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994
- Consolidated Statements of Changes in Stockholders' Investment for the Years Ended December 31, 1996, 1995 and 1994
- Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994
- Notes to Consolidated Financial Statements (1) through (9)
(2) Financial Statement Schedules
- Auditors' Report Dated February 13, 1997
- Schedule II - Amounts Receivable From Related Parties for the Years Ended December 31, 1996, 1995 and 1994
- Schedule VIII - Valuation and Qualifying Accounts for the Years Ended December 31, 1996, 1995 and 1994
- Schedule IX - Short-Term Borrowings for the Years Ended December 31, 1996, 1995 and 1994
(3) Exhibits
(a)
10.1 Waiver of Covenant(s) Letter from Marine Midland Bank dated March 21, 1997.
22 Subsidiaries of Registrant
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the fourth quarter of the year ended December 31, 1996.
(c) Exhibits
See (a)(3) above.
(d) Financial Statement Schedules
See (a)(2) above.
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 28, 1997 FOUR CORNERS FINANCIAL CORPORATION
By: /s/ Frank B. Iacovangelo -------------------------------------------------- Frank B. Iacovangelo, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capabilities on the dates indicated.
/s/ Frank B. Iacovangelo March 28, 1997 - ------------------------------------------------------ Frank B. Iacovangelo President, Treasurer and Director (Chief Executive Officer and Chief Financial Officer
/s/ William S. Gagliano March 28, 1997 - ------------------------------------------------------- William S. Gagliano Executive Vice President, Chief Accounting Officer and Director
/s/ Bernard J. Iacovangelo March 28, 1997 - ------------------------------------------------------- Bernard J. Iacovangelo Vice President, Secretary and Director
/s/ Anthony M. Iacovangelo March 28, 1997 - ------------------------------------------------------- Anthony M. Iacovangelo Director
FOUR CORNERS FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH
INDEPENDENT AUDITORS' REPORT
March 27, 1997 (08:44am)
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Four Corners Financial Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Four Corners Financial Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' investment, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 financial statements referred to above present fairly, in all material respects, the financial position of Four Corners Financial Corporation and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
Bonadio & Co. LLP
February 13, 1997 Except Note 5, which is dated March 26, 1997 Rochester, New York
FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
The accompanying notes are an integral part of these consolidated statements.
FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these consolidated statements.
FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these consolidated statements.
FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these consolidated statements.
FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) The Company
Four Corners Financial Corporation (FCFC) and its Subsidiaries, Four Corners Abstract Corporation (FCAC) and Proper Appraisal Specialists, Inc. provide services and products including real estate title searching, preparation of abstracts of title, issuance of title insurance as an agent for certain national underwriting companies primarily in Western and Central New York State. All of these services and products are required in connection with the mortgaging, sale or purchase of real property.
Unless otherwise indicated, the term "Company" refers to Four Corners Financial Corporation and its subsidiaries. The Company operates in one business segment.
(2) Summary of Significant Accounting Policies
Principles of Consolidation -
The consolidated financial statements include the accounts of FCFC and all subsidiaries. All significant intercompany transactions and balances have been eliminated.
Cash -
The Company maintains its cash in demand deposit and money market accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk with respect to these accounts.
Escrow Deposits -
As a service to its customers, administers escrow deposits representing undisbursed amounts received for settlements of mortgage loans or property sales and indemnities against specific title risks. These funds are recorded as both a current asset and a current liability in the accompanying consolidated balance sheets.
Property and Equipment -
Property and equipment is stated at cost and is depreciated using accelerated and straight-line methods over the following useful lives:
Furniture and equipment 3 - 10 years Vehicles 5 years Leasehold improvements Term of lease
(2) Summary of Significant Accounting Policies (Continued)
Property and Equipment - (Continued)
At the time of retirement or other disposition of property, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statement of operations. Repairs and maintenance costs are charged to expense when incurred.
Title Plant -
Title plant consists of copies of public records, maps and other relevant historical documents which facilitate the preparation of title abstract reports without the necessity of manually searching official public records.
The Company has incurred identifiable costs related to the activities necessary to construct a title plant which are reflected as assets. A title plant is regarded as a tangible asset having an indefinite economic life; accordingly, title plant costs are not depreciated.
Revenue Recognition -
Title insurance is provided to purchasers or financers of real property. The related revenue is recognized when policies become effective, generally at the property or mortgage loan closing. Under terms of the Company's agreements with its title insurance underwriters, a commission of 15 - 20% is paid to its underwriter on all title insurance policies written. Pricing is based on a rate schedule established by the Insurance Department of the State of New York which provides for varying rates for services rendered. Commission expense is reflected as a direct cost of title insurance revenue in the statements of operations.
The Company also performs title abstract research and prepares appraisals on real properties. Abstract and appraisal revenue is recognized as earned. Direct costs of abstract and appraisal revenue include the cost of work performed by subcontractors in geographical areas where the Company does not maintain an office, among other direct costs.
Estimates -
In preparing financial statements in conformity with generally accepted accounting principles, management is required 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 revenue and expenses during the reporting period. Actual results could differ from these estimates.
(2) Summary of Significant Accounting Policies (Continued)
Net Income Per Share -
Net income per share is computed on the basis of the weighted average number of common and common equivalent shares outstanding during the periods. The weighted average number of shares outstanding is as follows:
1996 1995 1994 ---- ---- ----
Weighted average number of common shares outstanding:
Common shares 3,331,233 3,343,733 3,343,733 ========== ========= ==========
Fully diluted earnings per share did not differ materially from primary earnings per share in any of these three years. Common equivalent shares have not been considered in the calculation of weighted average number of common shares outstanding for 1996 and 1995 as the effect is anti-dilutive.
Reclassifications -
Certain reclassifications have been made to the 1995 statements to conform to the current year presentation.
(3) Property and Equipment
Property and equipment consisted of the following at December 31:
1996 1995
Furniture and equipment $ 899,925 $ 888,641 Vehicles 97,627 96,734 Leasehold improvements 49,564 44,502 --------- ----------
1,047,116 1,029,877
Less: Accumulated depreciation and amortization (904,593) (833,937) --------- ----------
$ 142,523 $ 195,940 ========= ==========
During 1994, the Company entered into capital lease obligations totalling $24,107. The assets related to these obligations are included as part of
property and equipment.
Depreciation and amortization expense for 1996, 1995 and 1994 was $79,995, $110,302 and $124,442, respectively.
(4) Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of property and certain expenses for financial and income tax reporting purposes. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
The (benefit from) provision for income taxes consisted of the following at December 31:
1996 1995 1994 ---- ---- ---- Federal:
Current $ - $ - $ (4,200) Deferred - - (37,400)
State:
Current 3,346 1,500 1,349 Deferred - - (6,600) ---------- --------- ----------
$ 3,346 $ 1,500 $ (46,851) ========== ========= ==========
Income tax expense for 1996, 1995 and 1994 differs from the expected tax expense, computed by applying the U.S. Federal corporate income tax rate of 34% to income before income taxes as follows:
1996 1995 1994 ---- ---- ----
Expected tax expense (benefit) $ 30,300 $ 33,000 $(139,000)
Effect of graduated Federal rate (3,400) (3,100) -
State income taxes, net of Federal income tax benefit 5,300 1,000 (23,000)
Change of valuation allowance (27,800) (25,900) 123,000
Other, net (1,054) (3,500) (7,851) --------- --------- ---------
$ 3,346 $ 1,500 $ (46,851) ========= ========= =========
At December 31, 1996, the Company has available a net operating loss carryforward of approximately $202,000. This net operating loss carryforward will begin to expire in 2002. The Company has recorded a valuation allowance equal to the deferred tax asset related to the carryforward.
Taxes paid in 1996, 1995 and 1994 were $3,346, $1,102, and $3,425, respectively.
(5) Financing Arrangements
Notes Payable -
Notes payable consisted of the following at December 31:
1996 1995 ----------- --------- Note payable to a bank with monthly principal payments of $7,674 through October, 1997 and $6,230 through October, 1999, plus interest at the bank's prime rate plus 1.25%. This note is guaranteed by the officers/stockholders of the Company and is collateralized by substantially all of the Company's assets. $ 226,250 $ 318,333
Various notes payable with aggregate monthly installments of $835, including interest at rates ranging from 8% to 9.5%. These notes mature through November, 1999 and are collateralized by the related equipment. 10,971 14,552 ----------- ---------
237,221 332,885 ----------- ---------
Less: Current portion (97,050) (331,211) ----------- ---------
$ 140,171 $ 1,674 =========== =========
The note payable to the bank requires the Company to meet certain financial covenants at December 31, 1996 as follows:
a. Working capital of at least $20,000. b. Current ratio of at least 1.1 to 1, c. Minimum tangible net worth of at least $400,000 d. Total liabilities to tangible net worth of not more than 1.9 to 1, e. Net income before taxes of $110,000, and f. Debt service ratio of not less than 1.75 to 1.
The agreement also limits the Company's ability to make acquisitions, pay dividends and make capital expenditures, and requires the Company to submit certain financial information.
At December 31, 1996 and 1995, the Company was not in compliance with the required amount of working capital, current ratio, minimum tangible net worth, liabilities to tangible net worth, net income requirement and debt service ratio. Subsequent to year end, the Company obtained a waiver from the bank for these covenants as of December 31, 1996 and 1995.
(5) Financing Arrangements (Continued)
Notes Payable - (Continued)
Future maturities of long-term debt are as follows:
1997....................................... 97,050 1998....................................... 95,100 1999....................................... 45,071 ---------
$ 237,221 =========
Obligations Under Capital Leases -
The Company has entered into capital lease agreements for certain of its equipment. These obligations consisted of the following at December 31:
1996 1995 --------- ---------- Various leases payable with aggregate monthly installments of $4,257, in- cluding interest at rates ranging from 8.4% to 13.1%. These leases were paid in
full in 1996. $ - $ 33,328
Less: Current portion - (32,738) --------- ----------
$ - $ 590 ========= ==========
Lines-of-Credit -
The Company may borrow up to $50,000 under the terms of a line-of-credit agreement with a bank through October 31, 1997. Amounts borrowed bear interest at the bank's prime interest rate plus 1% and are collateralized by substantially all assets of the Company and are guaranteed by the officers/stockholders of the Company. At December 31, 1996 and 1995, there was $50,000 and $35,000, respectively, outstanding under the terms of this line-of-credit.
The Company may also borrow up to $100,000 under the terms of an unsecured line-of-credit with another bank. Amounts borrowed bear interest at the bank's prime interest rate plus 1%. Borrowings under this line-of-credit are personally guaranteed by the Company's principal officers/stockholders. There were no borrowings under the terms of this line-of-credit at December 31, 1996 and 1995.
Interest -
Interest paid in 1996, 1995 and 1994 on all notes payable, obligations under capital leases and lines-of-credit was $58,394, $76,337, and $67,536, respectively.
(6) Stockholders' Investment
Stock Options -
In July, 1992, the Company's Board of Directors adopted and the stockholders approved the 1992 Stock Option Plan (1992 Plan) which replaced the 1988 Stock Incentive Plan (1988 Plan).
Under the 1992 Plan, the Company may issue incentive stock options, non-statutory options, non-employee director options and reload options. The exercise price of incentive, non-statutory and reload options will not be less than fair market value at date of grant. Incentive and non-statutory options will generally expire ten years from date of grant. Reload options will have a term equal to the remaining option term of the underlying option.
The 1992 Plan also provides for annual grants of stock options to purchase 500 shares of the Company's common stock to non-employee directors of the Company with an exercise price not less than fair market value at date of
grant. These options will expire ten years from date of grant.
Options issued under the 1992 and 1988 Plans expired in 1995. No further options will be granted under the 1988 Plan.
The Company has reserved 647,500 common shares for issuance under the 1992 plan.
Following is a summary of option activity under the 1992 and 1988 Plans:
--- Shares Under Option ---
1996 1995
Outstanding, beginning of year - 271,000 Expired during the year - (271,000) --------- ----------
Outstanding, end of year - - ========= ==========
(7) Related Party Transactions
Subordinated Debt Due to Officer/Principal Stockholder -
During 1996, 1995 and 1994 one of the Company's officers/principal stockholders made advances to the Company. These advances were $234,500, $227,500, and $200,000 at December 31, 1996, 1995 and 1994, respectively. Amounts borrowed bear interest at the prime rate plus 3%. Repayment of these advances is subordinated to the amounts outstanding under all other bank debt agreements. Principal repayment is scheduled for $18,000 per year.
(7) Related Party Transactions (Continued)
Notes Payable to Officers/Principal Stockholders -
At December 31, 1996, the Company owed approximately $3,300 to a law firm in which the Company's principal stockholder is a partner for legal fees paid on behalf of the Company. This amount was included in accounts payable at December 31, 1996.
Office Lease Commitment -
The Company leases its Rochester facility through June 2000 from a company controlled by FCAS's principal stockholder at an annual rental of $72,000. Rent and common area charges were approximately $72,000, $72,000, and $58,000 in 1996, 1995 and 1994, respectively. The Company owed
approximately $18,100 and $20,000 for unpaid rent at December 31, 1996 and 1995, respectively.
During 1994, total unpaid rent of $109,000 was forgiven by the related party. The forgiveness of unpaid rent occurred in connection with the restructuring of the Company's lease. The Company relinquished a portion of its existing space and reduced the future term of the lease. The overall terms of the lease restructure are believed to be similar to those which would have been obtained from an unrelated third-party. This amount has been reflected as an extraordinary item - gain on extinguishment of debt, net of income taxes of $44,000, in the accompanying consolidated statement of operations.
Revenue and Accounts Receivable -
In each of 1996, 1995 and 1994, approximately 4% of revenue was derived from a related party. At December 31, 1996, 1995 and 1994, the Company was owed $44,878, $36,742, and $59,284, respectively, related to these sales.
(8) Lease Commitments
The Company leases other office facilities under operating lease agreements expiring through December, 2000.
Minimum future lease payments under non-cancelable lease agreements with unrelated parties are as follows at December 31:
1997.......................................$ 71,313 1998....................................... 55,564 1999....................................... 11,036 2000....................................... 5,903 ---------
$ 143,816
Rent expense related to these operating leases was approximately $121,000, $124,000, and $135,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
(9) Sale of Appraisal Operations
During 1995, the Company sold the assets of its real estate appraisal operations for $125,000, allocated as follows:
Fixed assets $ 12,500 Customer lists and goodwill 100,000 Covenant not-to-compete 12,500 --------- $ 125,000 =========
In exchange for the fixed assets, the Company received a non-contingent $12,500 non-interest bearing note receivable in ten quarterly installments of $1,250 beginning May 1, 1996. The quarterly payment of the $1,250 on the non-contingent note receivable is not dependent on the purchaser's operating results. The quarterly payments of $1,250 due May 1, August 1, and November 1, 1996 were received by the Company. The Company recorded the $12,500 non-contingent note receivable as income in 1995.
In exchange for the customer lists and goodwill and covenant not-to-compete the Company received a $112,500 contingent note receivable in quarterly installments, plus interest at 9%, beginning May 1, 1996. Payment on the $112,500 contingent note receivable is required only by the amount that 19% of the purchaser's gross margin on sales to the Company's former customers exceeds $1,250 on a quarterly basis. No portion of the contingent note receivable was recorded as income. The Company intends to record income from the collection of interest and/or principal on the contingent note receivable as it is received.
(10) Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts and notes receivable, accounts payable and debt. The carrying amounts approximate their fair value, or in this case of debt, it is impracticable to estimate the fair value.
INDEPENDENT AUDITORS' REPORT ON
FINANCIAL STATEMENT SCHEDULES
To the Stockholders of
Four Corners Financial Corporation and Subsidiaries:
Our report on our audit of the basic financial statements of Four Corners Financial Corporation and Subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, appears elsewhere in this Registration Statement. Those audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplemental schedules are presented for the purpose of complying with the Securities and Exchange Commission's rules and regulations and are not a required part of the basic financial statements. The supplemental schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
February 13, 1997 Except Note 5, which is dated March 26, 1997 Rochester, New York
FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE IV - INDEBTEDNESS TO RELATED PARTIES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(1) All additions to indebtedness to related parties were used for general working capital purposes and for repurchases of treasury stock.
FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Notes:
(1) Calculated as the average of month-end balances outstanding.
(2) Calculated as actual interest expense divided by the average amount outstanding during the year.