-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JMhutFVsL5nxKPRn2HqSZEASzJ7bOE149h68OfXSlRsyEYq1c5zWhh+k9bA4cxwI UeFCUva3yPdGNDT6K8T8RA== 0000914317-98-000414.txt : 20010123 0000914317-98-000414.hdr.sgml : 20010123 ACCESSION NUMBER: 0000914317-98-000414 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980624 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST CONNECTICUT CAPITAL CORP/NEW/ CENTRAL INDEX KEY: 0000730669 STANDARD INDUSTRIAL CLASSIFICATION: 6159 STATE OF INCORPORATION: CT FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-31080 FILM NUMBER: 98653393 BUSINESS ADDRESS: STREET 1: 1000 LAFAYETTE BLVD STE 805 CITY: BRIDGEPORT STATE: CT ZIP: 06604 BUSINESS PHONE: 2033664726 MAIL ADDRESS: STREET 1: 1000 LAFAYETTE BLVD STREET 2: SUITE 805 CITY: BRIDGEPORT STATE: CT ZIP: 06604 10KSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Fiscal Year ended March 31, 1998. Commission File number: 811-0969 The First Connecticut Capital Corporation - - - - - - - - - - - - - - -------------------------------------------------------------------------------- (Exact name of Registrant as Specified in its Charter) Connecticut 06-0759497 - - - - - - - - - - - - - - -------------------------------------------------------------------------------- (State of Incorporation) (IRS Employer Identification No.) 1000 Bridgeport Avenue, Shelton, Connecticut 06484 - - - - - - - - - - - - - - -------------------------------------------------------------------------------- (Address of principal executive offices) Zip Code Registrant's telephone number (203) 944-5400 Securities registered under Section 12(b) of the Exchange Act: NONE Name of each exchange on which registered: NONE Securities registered pursuant to Section 12(g) of the Exchange Act: Title of Class COMMON Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X ] No [ ] Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Registrant's revenues for its most recent fiscal year: $660,000 The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 3, 1998 based on the closing sales price of such stock on such date was approximately $804,000 Check whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] The number of shares outstanding of the registrant's common stock as of June 3, 1998 was 1,173,382. DOCUMENTS INCORPORATED BY REFERENCE: The following documents are hereby incorporated by reference into the following Parts of this Form 10-KSB: (1) financial statements and Independent Auditors' Report for the fiscal years ended March 31, 1998 and 1997 is incorporated by reference into Part II Item 7. PART I ITEM 1. DESCRIPTION OF BUSINESS General The First Connecticut Capital Corporation (the "Corporation") is engaged in the mortgage banking business, which involves the origination, purchase, sale and servicing of mortgage loans secured by residential or commercial real estate. The Corporation's revenues consist of loan servicing fees, loan origination fees, interest on mortgage loans held prior to sale and gains from the sale of loans and mortgage servicing rights. Mortgage loans which are originated or purchased by the Corporation may be resold. The Corporation also engages in mortgage servicing, of its own Portfolio Loan Program, which includes the processing and administration of mortgage loan payments and remitting principal and interest to purchasers. The Corporation also monitors delinquencies, collects late fees, manages foreclosures, processes prepayments and loan assumption fees, provides purchasers with required reports, and answers borrowers' inquiries. Although the Corporation plans, from time to time, to sell a portion of its mortgage servicing rights, it intends to build the size of its mortgage servicing portfolio by retaining the servicing rights from a large share of its mortgage loan originations. As of June 1, 1998, the Corporation services a total portfolio of approximately $12,302,000, consisting, in part, of mortgage loans which were sold by the Corporation to GF Mortgage Corporation, a subsidiary of Gruntal Financial Corporation, a subsidiary of The Home Insurance Corporation, on December 15, 1993 as described below. On April 19, 1996, GF Mortgage Corporation was sold to Walsh Acquisition Company, also known as Walsh Securities. In October 27, 1997 the balance of that portfolio was sold to Greenwich Capital Financial Corporation. First Connecticut continues to service the remaining balance which is $4,955,000 as of June 1, 1998, under a new service agreement. At June 1, 1998 the Company also services its Portfolio Loan Program, which has an outstanding balance of $5,444,000, representing an increase of 37% from the prior period. In addition the Corporation as General partner also services loans for First Connecticut Capital Mortgage Fund A, Limited Partnership, which has a mortgage loan balance of $1,903,000 at June 1, 1998. History The Corporation (formerly The First Connecticut Small Business Investment Company) was incorporated on May 6, 1960 as a federally licensed small business investment company under the Small Business Investment Act of 1958 and was registered as an investment company under the Investment Company Act of 1940. The Corporation's business consisted of providing long-term loans to finance the growth, expansion and development of small business concerns. On August 15, 1990, the Corporation filed a petition for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court. On October 18, 1991, the Corporation filed a plan of reorganization (the "Plan") with the United States Bankruptcy Court. The Plan was confirmed as of January 9, 1992. Under the Plan, the Corporation was required to surrender its license to operate as a small business investment company. On June 29, 1993, the Corporation's application for deregistration under the Investment Company Act of 1940 was approved by the Securities and Exchange Commission. On December 15, 1993, the Corporation sold substantially all of its outstanding investment portfolio to GF Mortgage Corporation for an amount sufficient to settle substantially all of the Company's liabilities under the Plan. As part of this transaction, restrictions under the Plan regarding the Corporation's lending activities were waived. The Corporation was granted a license by the State of Connecticut Department of Banking to engage in business as a First Mortgage Loan-Lender-Broker on April 8, 1994. The Corporation is also licensed by the State of Connecticut as a Second Mortgage Lender/Broker. On December 28, 1994 the United States Bankruptcy Court issued a final decree closing the Chapter 11 case of the Company. On August 3, 1995 the Corporation was granted a license by the State of Massachusetts, Department of Banking, to engage in business as a Mortgage Lender. Seasonality The Corporation's business and the mortgage banking industry as a whole is generally subject to seasonal trends which reflect a pattern of home sales and resales. Loan originations typically peak during the spring and summer seasons and decline from mid-November through January. Prior to January 1996 the Corporation focused its efforts on refinances of mortgages on residential properties which was generally the case throughout the industry. Since January 1996, the Corporation has expanded its Portfolio Loan Program to include short-term mortgages for construction, remodeling and additions. These loans are predominately secured by first mortgage liens on residential properties and are sold to qualified investors with fees retained for servicing. Competition The Corporation competes with other mortgage bankers, mortgage brokers, state and national banks, thrift institutions and insurance companies for loan originations and purchases. Many of its competitors have substantially greater financial resources than the Corporation. The Corporation competes for loan originations, in part, based on price, through print and electronic media advertising campaigns, by telemarketing to potential borrowers, and by maintaining close relationships with mortgage brokers, real estate brokers and builder-developers. Regulation The Corporation is not presently an approved seller/servicer for the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC"), nor is the Corporation an approved issuer and servicer under GNMA, FNMA or FHLMC mortgage-backed securities programs. The Corporation is not qualified to originate mortgage loans insured by the Federal Housing Administration (the "FHA") or partially guaranteed by the Veterans Administration (the "VA"). The Corporation does not presently intend to apply for such approvals or qualifications. Accordingly, the Corporation is not currently subject to the rules and regulations of these agencies with respect to originating, processing, selling and servicing mortgage loans, but may become subject to such rules and regulations should the Corporation become an approved issuer, seller or servicer for any of these agencies. Such rules and regulations would, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for inspections and appraisals and require credit reports on prospective borrowers, and with respect to VA loans, fix maximum interest rates. The Corporation's mortgage loan origination activities are subject to the Equal Credit Opportunity Act, the Federal Truth-In-Lending Act, the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which prohibit discrimination and require the disclosure of certain information to borrowers concerning credit and settlement costs. Additionally, the sale of mortgage loans by the Corporation to purchasers may be subject to applicable federal and state securities laws. There are various state laws affecting the Corporation's mortgage banking operations, including licensing requirements and substantive limitations on the interest and fees that may be charged. The Corporation is in possession of all required licenses in those states in which it does business that require such licenses, except where the absence of such licenses are not material to the business and operations as a whole. States have the right to conduct financial and regulatory audits of the loans under their jurisdiction. Personnel As of June 1, 1998, the Corporation had 5 employees, all of whom were employed at the Corporation's headquarters in Shelton, Connecticut. The Corporation believes that its relations with its employees are good. Investment Policies (i) Investments in real estate - The Corporation does not invest in real estate or interests in real estate but may acquire real estate by foreclosure of mortgage loans owned by the Corporation or by deed in lieu of foreclosure. Primarily such properties would consist of 1-4 family dwellings or undeveloped acreage. The Corporation does not intend to own or operate properties for an extended period of time but rather its policy is to sell such properties at fair market value as soon as possible. (ii) Investments in real estate mortgages - The Corporation intends to originate first or second real estate mortgages and sell certain of these mortgages immediately to interested purchasers, retaining the application fees and servicing rights. Maturities of mortgages not sold will range from one to five years. (iii) The Corporation currently does not intend to invest in the securities of, or interests in, persons or entities which are primarily engaged in real estate activities. ITEM 2. DESCRIPTION OF PROPERTY During the prior year the Corporation relocated to 1000 Bridgeport Avenue, Shelton, Connecticut. The office contains 1,772 square feet of space which the Corporation currently leases from an unaffiliated party pursuant to a 5 year lease expiring December 31, 2002. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Corporation's common stock is traded over the counter, and the high (bid) and low (asked) prices of the Corporation's stock are quoted in the "pink sheets" published by the National Quotation Bureau, Inc. Following are the high and low bid prices for the Corporation's common stock during the fiscal years ended March 31, 1998 and 1997 according to the "pink sheets" published by the National Quotation Bureau, Inc. High Low ---- --- 1997 ---- First Quarter $.5625 $.5000 Second Quarter .5625 .4375 Third Quarter .4375 .3125 Fourth Quarter .3125 .2500 1998 ---- First Quarter $.2500 $.20000 Second Quarter .4375 .15000 Third Quarter .3200 .21875 Fourth Quarter .2600 .22000 The approximate number of stockholders of record on June 3, 1998 was 1,244 and the Corporation estimates that it has approximately 1,650 shareholders. The closing bid quotation of the Corporation's Common Stock on that date was approximately 78 cents. The Corporation has not paid any dividends on its Common Stock since April 27, 1990. The Corporation currently intends to retain earnings, for use in its business and does not anticipate paying cash dividends in the foreseeable future. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION Results of Operations The Corporation had net income of $288,000 for the year ended March 31, 1998 compared to a net loss of $230,000 for the year ended March 31, 1997. The increase of $518,000 is due primarily to a non-recurring recovery of a note payable of $268,000. Included in net income is a loss of $52,000 resulting from the assignment of the loan portfolio serviced by First Connecticut under the Asset Management Loan Servicing Agreement Dated December 15, 1993 (the "Agreement") from Walsh Securities to Greenwich Capital Financial Products, Inc. The Corporation exchanged the unamortized balance of mortgage servicing rights for the Walsh Portfolio and related receivable for certain collection costs for a $560,000 non interest bearing note (the "Note"). The Note was discounted approximately $78,000 to reflect a market rate of interest. Total interest income for 1998 was $107,000 as compared to total interest income for 1997 of $103,000 an increase of $4,000 or 4%. This increase was a result of unaccrued interest collected on non performing loans. Other operating expenses for 1998 was $468,000 as compared to $814,000 in 1997, a decrease of 346,000 or 43%. This decrease was primarily due to the decrease in officer and other salaries and employee and general insurance. In addition, in 1997 there was a non-recurring collection expense of $150,000 representing taxes on sold loans. During 1998, the Corporation has continued to reduce overall operating expenses. The amortization of servicing rights has stopped in 1998 due to the aforementioned assignment of the Walsh loan portfolio to Greenwich Capital Financial Products. The Corporation continues to service the portfolio for Greenwich Capital under a new agreement. Professional services increased $16,000 or 50% from $16,000 in 1997 to $32,000 in 1998 primarily as a result of an increase in accounting and legal costs. Total loan origination fees for 1998 were $163,000 as compared to $198,000 in 1997, a decrease of $35,000 or 18%. Loan origination fees for 1998 reflect a decrease of $120,000 for origination fees on loans funded by outside parties and are partially offset by an increase of $85,000 in origination fees on loans funded by the Corporation. Recorded in other fees for the year ended 1997 was a non-recurring management fee of $150,000. After considering this one time fee, other fee income increased by $14,000 due to interest earned on idle funds and loan inspection fees. During the year ended 1997 the Corporation recorded a provision for investment losses of $215,000 to adjust the allowance for investment losses to adequately absorb decreases in investment values based on re-appraisals and evaluations. No such valuation adjustment were required in 1998. In 1998, the Corporation recorded a recovery of $49,000 attributable to the liquidation of an impaired loan which was over-reserved. Plan of Operation The Corporation is engaged in the mortgage banking business, which involves the origination, purchase, sale and servicing of mortgage loans secured by residential or commercial real estate. Liquidity and Capital Resources At March 31, 1998 and 1997, the Corporation had cash and cash equivalents of $214,000 and $211,000, respectively. The Corporation currently anticipates that during the year ending March 31, 1999, its principal financing needs will consist of funding its mortgage loans held for sale (see Note 10 of Financial Statements) and the ongoing net cost of mortgage loan originations. Future cash flow requirements will depend primarily on the level of the Corporation's activities in originating and selling mortgage loans, as well as cash flow required by its operations. Although the Corporation anticipates increased activities in originating mortgage loans, the difficulties experienced within the relevant economic markets still exist and there are no assurances that increased activity will occur. Consequently, as a means to provide further cash flow, the Corporation has expressed a willingness to liquidate certain current assets in its portfolio and believes that a market exists for those assets. The Corporation continues to investigate and pursue alternative and supplementary methods to financing its operations and to support the growth of the Corporation. The Corporation believes that cash on hand and internally generated funds will be sufficient to meet its corporate, general and administrative working capital and other cash requirements during the year ending March 31, 1999. The Corporation took certain steps during the year ended March 31, 1997 to decrease its cash flow requirements for the years ended March 31, 1998 and 1997. Those steps included a management salary reduction and a restatement and termination of the pension plan. The Corporation also continues to decrease its cash flow requirements, by monitoring all expenses. As a result of the Note with Walsh Securities the Corporation's cash flow will increase by $120,000 a year. Management also believes additional steps can be taken if necessary. The Corporation did not have any material capital commitments at March 31, 1998. Inflation Inflation will affect the Corporation most significantly in the area of loan originations. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Accounting Pronouncements New Accounting Pronouncements - In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income and its components and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes standards for the way public companies report information about operating segments in both interim and annual financial statements and related disclosures. The adoption of these standards is not expected to have a material impact on the Corporation's financial statements. The standards will be effective for the Corporation's financial statements in fiscal year 1999. Partnership - The Corporation has formed a Limited Partnership known as First Connecticut Capital Mortgage Fund A, Limited Partnership as to which the Corporation is the General Partner. The intent of this new entity is to sell units in the Limited Partnership to investors in a private placement, up to a maximum of $5 million in $50,000 units, for the purpose of funding a short-term Portfolio Loan Program for the Limited Partnership. The limited partners will be limited to investors who qualify as "Accredited Investors" as defined in Regulation D, promulgated under the Securities Act of 1933. This program would generate income to the Corporation in the form of loan origination fees and servicing fees in excess of a guaranteed income return to the limited partners in connection with mortgage loans that would be purchased by the Limited Partnership from the funds invested by the limited partner. As of June 1, 1998 the Corporation has sold 33 units. A copy of the offering memo is available upon request. ITEM 7. FINANCIAL STATEMENTS The following report and financial statements of the Corporation are contained on the pages indicated. Independent Auditors' Report - Page 1 Balance Sheets as of March 31, 1998 and 1997 - Page 2 Statements of Operations for the years ended March 31, 1998 and 1997 - Page 3 Statements of Changes in Stockholders' Equity for the years ended March 31, 1998 and 1997 - Page 4 Statements of Cash Flows for the years ended March 31, 1998 and 1997 - Page 5 Notes to Financial Statements - Page 6 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Corporation has not changed accountants in the twenty-four month period prior to March 31, 1998. No disagreements on accounting or financial disclosure practices occurred during the fiscal year ended March 31, 1998. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Directors and Executive Officers of the Registrant The directors and executive officers of the Corporation as of May 1, 1998 are as follows: Names Age Present Position ----- --- ---------------- James M. Breiner 79 Chairman of the Board of Directors and Treasurer David Engelson 77 President and Director Louis I. Cohen 77 Director Edward Ardolino 77 Director Mario D'Addario 78 Director Edward M. Freda 74 Director Allan J. Rosen 62 Director Lawrence R. Yurdin 58 Vice President and Director Priscilla E. Ottowell 51 Secretary and Controller James M. Breiner, Director of the Corporation since 1960. Chairman of the Board and Treasurer of the Corporation; Director of State Street Mortgage Company. David Engelson, Director of the Corporation since 1960. President of the Corporation; Director of State Street Mortgage Company. Louis I. Cohen, Director of the Corporation since 1968. Director of State Street Mortgage Company. Edward Ardolino, Director of the Corporation since 1960. President and CEO of Aerospace Coating Systems, Inc. Mario D'Addario, Director of the Corporation since 1976. President of Mario D'Addario Buick, Inc. Edward M. Freda, Director of the Corporation since 1979. Retired Executive Vice President of People's Bank, Bridgeport, Connecticut. Allan J. Rosen, elected to the Board of Directors on September 16, 1997. Shareholder, Kleban & Samor, P.C., act as legal counsel to the Corporation. Lawrence R. Yurdin, Director of the Corporation since 1986. Vice-President of the Corporation; employed by the Corporation in various capacities since 1970; Director of State Street Mortgage Company. Priscilla E. Ottowell, elected Secretary of the Corporation on April 12, 1995. Employed by the Corporation as Controller since 1985. Each of the directors holds office for a term of one year, and until a successor has been chosen and qualified. Directors, except Messrs. J. Breiner, D. Engelson and L. Yurdin, receive a fee of $300 per Board meeting. Mr. Lawrence R. Yurdin is the son-in-law of Mr. David Engelson, President and a Director of the Corporation. ITEM 10. EXECUTIVE COMPENSATION The following summary compensation table sets forth certain information regarding the annual and long-term compensation of James M. Breiner and David Engelson, who together perform the function of Chief Executive Officer, for each of the last three fiscal years. No officers of the Corporation received salary and bonus in excess of $100,000.
SUMMARY COMPENSATION TABLE Annual Compensation Long Term Compensation ------------------------------- -------------------------------- Other Awards Payouts Annual Restricted All Other Name and Compen- Stock Options LTIP Compen- Principal Year Salary Bonus sation Awards SARs Payouts sation Position Ended ($) ($) ($) ($) (#) ($) ($) -------- -------- ------- ----- ------- ------ ------- ------- ------ James M. Breiner 03/31/98 $12,000 0 0 None 0 None 0 Chairman of the 03/31/97 $38,493 0 0 None 0 None 0 Board & Treasurer 03/31/96 $39,233 0 0 None 0 None 0 David Engelson 03/31/98 $12,000 0 0 None 0 None 0 President 03/31/97 $38,493 0 0 None 0 None 0 03/31/96 $39,233 0 0 None 0 None 0
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners The following tables list the beneficial owners of more than five percent of the Corporation's Common Stock and the shares beneficially owned by all directors and executive officers of the Corporation as of March 31, 1998. Name and Address of Amount and Nature of Beneficial Owner Beneficial Owner Percent - - - - - - - - - - - - - - ---------------- ---------------- ------- Robert E. Humphreys 114,900 9.792 64 Alcott Street Acton, MA 01720 Security Ownership of Management Name and Address of Amount and Nature of Beneficial Owner Beneficial Owner Percent - - - - - - - - - - - - - - ---------------- ---------------- ------- James M. Breiner 53,172(i) 4.530 David Engelson 43,605 3.716 Louis I. Cohen 8,351 .712 Edward Ardolino 3,741 .319 Mario D'Addario 3,860 .329 Edward M. Freda 131 - Alan J. Rosen 4,000 .341 Lawrence R. Yurdin 21,707 1.850 Priscilla E. Ottowell 4,389 .374 All directors and executive officers as a group (nine persons) 142,956 12.183 (i) Includes 2,272 shares owned by the Estate of William Breiner, of which Mr. Breiner is the administrator. Mr. Breiner has sole voting and investment power with respect to these shares. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH MANAGEMENT Five (5) directors and officers of the Corporation are also directors and officers of State Street Mortgage Company, which makes first and second mortgage loans to commercial and residential borrowers. State Street Mortgage Company is in the process of liquidation and does not compete with the Corporation. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (10.2) Asset Management and Loan Servicing Agreement with GF Mortgage Corp. now known as Walsh Securities (incorporated by reference to Exhibit 7(c)(l) to the Current Report on Form 8-K filed by the Corporation with the Securities and Exchange Commission on December 29, 1993). (99) Independent Auditors' Report and Financial Statements (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended March 31, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE FIRST CONNECTICUT CAPITAL CORPORATION Date: June 29, 1998 By: /s/ David Engelson ------------------ David Engelson President Date: June 29, 1998 By: /s/ Priscilla E. Ottowell ------------------------- Priscilla E. Ottowell Secretary and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: June 29, 1998 /s/ James M. Breiner --------------------- James M. Breiner Chairman and Treasurer Date: June 29, 1998 /s/ David Engelson ------------------- David Engelson President and Director Date: June 29, 1998 /s/ Louis I. Cohen ------------------- Louis I. Cohen Director Date: June 29, 1998 /s/ Edward Ardolino -------------------- Edward Ardolino Director Date: June 29, 1998 /s/ Mario D'Addario ------------------- Mario D'Addario Director Date: June 29, 1998 /s/ Edward M. Freda ------------------- Edward M. Freda Director Date: June 29, 1998 /s/ Allan J. Rosen ------------------ Allan J. Rosen Director Date: June 29, 1998 /s/ Lawrence R. Yurdin ---------------------- Lawrence R. Yurdin Vice-President and Director Date: June 29, 1998 /s/ Priscilla E. Ottowell ------------------------- Priscilla E. Ottowell Secretary and Controller THE FIRST CONNECTICUT CAPITAL CORPORATION Financial Statements for the Years Ended March 31, 1998 and 1997 and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of The First Connecticut Capital Corporation: We have audited the accompanying balance sheets of The First Connecticut Capital Corporation (the "Corporation") as of March 31, 1998 and 1997 and the related statements of operations, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Corporation at March 31, 1998 and 1997 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. June 12, 1998 -1-
THE FIRST CONNECTICUT CAPITAL CORPORATION BALANCE SHEETS, MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share data) NOTES 1998 1997 ----- ---- ---- ASSETS Investments: Loans - net of allowance for investment losses 6 $ 466 $ 481 of $300 in 1998 and $695 in 1997 Cash and cash equivalents 214 211 Restricted cash 3 49 45 Loans held for sale 94 380 Partnership loans 91 0 Accrued interest 21 41 Note receivable 450 0 Servicing rights 3 14 347 Fixed assets 7 37 47 Other assets 35 245 ------ ------ TOTAL ASSETS $1,471 $1,797 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Warehouse line of credit 10 $ - $ 317 Accounts payable and other accrued expenses 142 439 ------ ------ TOTAL LIABILITIES 142 756 ------ ------ Commitments and contingencies 12 STOCKHOLDERS' EQUITY: Common stock, no par value, stated value $.50 per share, authorized 3,000,000 shares, issued and outstanding 1,173,382 shares 587 587 Paid-in surplus 9,253 9,253 Accumulated deficit (8,511) (8,799) ------ ------ TOTAL STOCKHOLDERS' EQUITY 1,329 1,041 ------ ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,471 $1,797 ====== ======
See notes to financial statements. -2-
THE FIRST CONNECTICUT CAPITAL CORPORATION STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share data) Year Ended Year Ended NOTES 1998 1997 ----- ---- ---- INTEREST INCOME: Interest and fees on loans $ 107 $103 INTEREST EXPENSE: Interest expense 4 9 ---------- ----------- NET INTEREST INCOME 103 94 ---------- ----------- RECOVERY OF (PROVISION FOR) INVESTMENT LOSSES 49 (215) ---------- ----------- NET INTEREST INCOME (EXPENSE) AFTER RECOVERY OF (PROVISION FOR) INVESTMENT LOSSES 152 (121) ---------- ----------- OTHER OPERATING INCOME: Servicing fees 4 132 166 Loan Origination fees 163 198 Other fees 32 164 Recovery on note payable 12 268 - Recovery on legal settlement - 24 Gain on sale of loans 3 14 22 Other income - 136 ---------- ----------- Total Other Operating Income 609 710 ---------- ----------- TOTAL INCOME 761 589 ---------- ----------- OTHER OPERATING EXPENSES: Amortization of servicing rights 3 27 17 Collection expenses - 151 Officers' salaries 138 224 Other salaries 37 81 Directors' fees 9 18 Professional services 32 16 Miscellaneous taxes 21 36 Employee and general insurance 38 88 Loss on note receivable 5 52 - Rent 31 33 Communications 11 19 Advertising and promotions 5 4 Stock record and other financial expenses 5 5 Depreciation expense 10 15 Other 52 107 ---------- ----------- Total Other Operating Expenses 468 814 ---------- -----------
THE FIRST CONNECTICUT CAPITAL CORPORATION STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share data) (continued) Year Ended Year Ended NOTES 1998 1997 ----- ---- ---- INCOME (LOSS) BEFORE INCOME TAXES 293 (225) INCOME TAX EXPENSE 5 5 ---------- ----------- NET INCOME (LOSS) $ 288 ($230) ========== =========== INCOME (LOSS) PER COMMON SHARE (BASIC AND DILUTED) 3 $ 0.25 ($0.20) ========== =========== Weighted average number of common shares outstanding (Basic and Diluted) 1,173,382 1,173,382 ========== ===========
See notes to financial statements. -3-
THE FIRST CONNECTICUT CAPITAL CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share data) Common Stock --------------------- Total Number Of Paid-In Accumulated Stockholders' Shares Amount Surplus Deficit Equity ------ ------ ------- ------- ------ BALANCE, MARCH 31,1996 1,173,382 $587 $9,253 ($8,569) $1,271 Net Loss (230) (230) --------- ---- ------ ------- ------ BALANCE, MARCH 31,1997 1,173,382 $587 $9,253 ($8,799) $1,041 Net Income 288 288 --------- ---- ------ ------- ------ BALANCE, MARCH 31,1998 1,173,382 $587 $9,253 ($8,511) $1,329 ========= ==== ====== ======= ======
See notes to financial statements. -4-
THE FIRST CONNECTICUT CAPITAL CORPORATION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands) 1998 1997 ------- ------- OPERATING ACTIVITIES Net income (loss) .......................................... $ 288 ($ 230) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss on disposal of furniture and equipment ............ -- 15 Net Gain on sale of loans held for sale ................ (14) (22) (Recovery of) provision for investment losses .......... (49) 215 Loss on note receivable ................................ 52 -- Principal collected on note receivable ................. 40 -- Recovery on note payable ............................... (268) -- Depreciation ........................................... 10 15 Amortization of servicing rights ....................... 27 17 Origination of loans held for sale ..................... (7,033) (3,256) Proceeds from sales of loans held for sale ............. 7,333 2,876 Increase in Partnership loans .......................... (91) -- Decrease (Increase) in accrued interest receivable ..... 20 (6) Decrease in other assets ............................... (4) 20 Decrease in accounts payable and other accrued expenses (29) (130) Decrease in deferred income taxes ...................... -- (76) Increase in restricted cash ............................ (4) -- ------- ------- Net cash provided by (used in) operating activities 278 (562) ------- ------- INVESTING ACTIVITIES Proceeds from sales of investments ...................... -- 250 Principal collected on investments ...................... 42 2 ------- ------- Net cash provided by investing activities ......... 42 252 ------- ------- FINANCING ACTIVITIES (Decrease) increase in warehouse line of credit .......... (317) 91 ------- ------- Net cash (used in) provided by financing activities (317) 91 ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............. 3 (219) CASH AND CASH EQUIVALENTS, BEGINNING .......................... 211 430 ------- ------- CASH AND CASH EQUIVALENTS, ENDING ............................. $ 214 $ 211 ======= =======
See notes to financial statements. -5- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) 1. MANAGEMENT'S PLAN On August 15, 1990, the Corporation, formerly The First Connecticut Small Business Investment Company, filed a petition for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court. On October 18, 1991, the Corporation filed a plan of reorganization (the "Plan") with the United States Bankruptcy Court. The Plan was confirmed as of January 9, 1992, and generally provided for payment in full of all creditors except the U.S. Small Business Administration (the "SBA"). The Corporation filed an application to close the Chapter 11 bankruptcy proceedings. That application was approved and the Corporation emerged from bankruptcy on December 24, 1994. During 1998, the Corporation generated net income of $288. The Corporation currently anticipates that during the year ending March 31, 1999, its principal financing needs will consist of funding its mortgage loans held for sale (see Note 10 - Warehouse Line of Credit) and the ongoing net cost of mortgage loan originations. Future cash flow requirements will depend primarily on the level of the Corporation's activities in originating and selling mortgage loans, as well as cash flow required by its operations. Although the Corporation anticipates increased activities in originating mortgage loans, the difficulties experienced within the relevant economic markets still exist and there are no assurances that increased activity will occur. Consequently, as a means to provide further cash flow, the Corporation has expressed a willingness to liquidate certain current assets in its portfolio and that a market exists for those assets. The Corporation continues to investigate and pursue alternative and supplementary methods of financing its operations and to support the growth of the Corporation. The Corporation believes that cash on hand and internally generated funds will be sufficient to meet its corporate, general and administrative working capital and other cash requirements during the year ending March 31, 1999. The Corporation took certain action steps during the year ended March 31, 1997 to decrease its cash flow requirements for the years ended March 31, 1998 and 1997. Those steps included an overall salary reduction and a restatement and termination of the pension plan. As a result of the note receivable from Walsh Securities (see Note 4 ) the Corporation's cash flow will increase by $120 a year. Management also believes additional steps can be taken if necessary. -6- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) 2. PARTNERSHIP The Corporation has formed a Limited Partnership (the "Partnership") known as First Connecticut Capital Mortgage Fund A, Limited Partnership as to which the Corporation is the General Partner. The intent of this new entity is to sell units in the Limited Partnership to investors in a private placement, up to a maximum of $5 million in $50 units, for the purpose of funding a short-term Portfolio Loan Program for the Limited Partnership. The limited partners will be limited to investors who qualify as "Accredited Investors" as defined in regulation D, promulgated under the Securities act of 1933. This program would generate income to the Corporation in the form of loan origination fees and service fees in excess of a guaranteed income return to the limited partners in connection with, mortgage loans that would be purchased by the Limited Partnership from the funds invested by the limited partner. As of June 1, 1998 the Corporation has sold 33 units. As of March 31, 1998, the Corporation had a one percent interest in the Partnership with a recorded balance of $13 which is accounted for on the equity method of accounting. The following presents summarized financial information for the Partnership as of and for the year ended December 31, 1997, the Partnership's fiscal year end: Total Assets (principally consisting of mortgages receivable) $1,279 Total Liabilities 11 Total Partnership Capital 1,269 Total Revenues 40 Net loss $ 1 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Loans - Loans are generally recorded at the principal amount outstanding. Interest rates on loans are fixed at the time of issuance and are based upon current market rates at the time. As of March 31, 1998, outstanding loans are payable in a variety of methods over a term of less than five years, all are collateralized by liens on real properties; a few of such properties are subject to prior liens. Interest income on loans is recognized based on rates applied to principal amounts outstanding. In connection with most loans, the borrower also pays a nonrefundable fee to the Corporation. Loans are generally placed on nonaccrual status when they become 180 days past due or earlier, if the loan is considered impaired. Any unpaid amounts previously accrued on these loans are reversed from income. Subsequent cash receipts are applied to the outstanding principal balance or to interest income if, in the judgment of management, collection of the outstanding principal is not in question. Loans are removed from non-accrual status when they become current as to both principal and interest and when subsequent performance reduces the concern as to the collectibility of principal and interest. Loans held for sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance charged to income. -7- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) Allowance for Investment Losses - The allowance for investment losses is determined by management on an investment by investment basis. The allowance is an amount that management believes will be adequate to absorb losses on existing investments that may become uncollectible, based on evaluations of the collectibility of the investments. The evaluations take into consideration such factors as geographic location, assessment of collateral quality, appraisals of significant collateral and other conditions that may affect the borrower's ability to repay. Certain impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Concentration of Credit Risks - The nature of the Corporation's business is to fund and service mortgages to qualified borrowers within the northeastern United States , and more localized in the state of Connecticut where management has the most experience. The mortgage loans are predominately collateralized with residential properties, however, there are a few smaller commercial properties as well as some vacant land. The Corporation maintains a strict real estate appraisal policy as well as underwriting guidelines. Pension Plan - The Corporation had a non-contributory defined benefit pension plan covering all employees meeting certain eligibility requirements. The Corporation's policy was to fund accrued pension cost. This plan was terminated on March 31, 1997 (See Note 14). Cash and Cash Equivalents - For the purpose of the statements of cash flows, the Corporation has defined cash as including cash on hand and cash in interest bearing and noninterest bearing operating bank accounts. Highly liquid investments such as time deposits with an original maturity of three months or less are considered to be cash equivalents. Restricted Cash - Restricted cash is composed of a certificate of deposit which is being maintained as collateral for the Corporation's standby letter of credit. Income Taxes - The Corporation follows the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Servicing Rights - In connection with the sale of substantially all of the Corporation's investments as discussed in Note 4, the Corporation stopped the amortization of certain servicing rights due to the assignment of the loan portfolio serviced by the Corporation under the Asset Management Loan Servicing agreement dated December 15,1993 (the "Agreement") to Greenwich Capital Financial Products, Inc.(Note 5). Servicing rights amortized using the interest method were $27 and $17 during the years ended March 31, 1998 and 1997, respectively. -8- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) Fixed Assets - Fixed assets are carried at original cost. Depreciation is provided for primarily by using accelerated depreciation methods over the estimated service lives as follows: Improvements 31 years Furniture and fixtures 3-5 years Equipment 3-5 years Automobiles 3 years Loan Servicing - As of April 1, 1996, the Corporation adopted Statement of Financial Accounting Standard (SFAS) No. 122, "Accounting for Mortgage Servicing Rights." This Statement required allocation of the total cost of mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. Effective January 1, 1997, SFAS No. 122 was superseded by SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," the effective provisions of which were adopted by the Corporation as of the above mentioned effective date. This statement specifies accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities and for distinguishing whether a transfer of a financial asset in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing. The Corporation recorded an asset of $14 and $27, related to servicing of loans as of March 31, 1998 and 1997, respectively. This asset is affected by the predominant risk characteristics of the underlying financial assets and, accordingly, the Corporation periodically assesses the asset for impairment. Since the underlying financial assets primarily represent loans collateralized by first mortgages, the servicing rights asset encompasses risks commonly associated with mortgage loans. Estimation of a valuation allowance to reduce the servicing rights asset to fair value involves evaluating the characteristics of the underling assets including interest rates, estimated remaining lives, dates of origination, terms, and geographic location. No valuation allowance was recorded at March 31, 1998 and 1997, based on the characteristics of the underlying financial assets. Income (Loss) Per Common Share - As of March 31, 1998, the Corporation adopted Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share," which establishes new standards for the computation and disclosure of earning per share ("EPS"). The new statement requires dual presentation of "basic" EPS and "diluted" EPS. Basic EPS is based on the weighted average number of common shares outstanding for the period, excluding the effects of any potentially dilutive securities. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. The Corporation's outstanding options are excluded from the computation due to their antidilutive effect. -9- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) Stock Options - During 1997, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based Compensation." This statement encourages, but does not require, employers to adopt a fair value method of accounting for employee stock-based compensation. The Corporation continues to account for stock-based compensation using the intrinsic value under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Regardless of the method used for employee stock-based arrangements, SFAS No. 123 requires increased disclosures of stock-based compensation arrangements with employees. The Corporation has adopted SFAS No. 123 through a separate disclosure to the financial statements. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. New Accounting Standards - In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income and its components and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes standards for the way public companies report information about operating segments in both interim and annual financial statements and related disclosures. The adoption of these standards is not expected to have a material impact on the Corporation's financial statements. The standards will be effective for the Corporation's financial statements in fiscal year 1999. 4. SALE OF INVESTMENTS On December 15, 1993, the Corporation sold outstanding investments including accrued interest with a net book value of $30,025 pursuant to a Loan and Real Property Purchase Agreement (the "Purchase Agreement") dated as of June 29, 1993 (and as amended on October 29, 1993). The portfolio was sold to GF Mortgage Corporation, an unrelated purchaser which is a subsidiary of Gruntal Financial Corporation, a subsidiary of The Home Insurance Company, in exchange for satisfaction of outstanding liabilities to the Participants' Trust and the SBA with carrying values at December 15, 1993 of $17,359 and $5,275, respectively, and options to purchase 60,000 shares of the Corporation's common stock (see Note 15). The Corporation recognized a loss of $6,412 in connection with the sale. The Corporation also received a participation under certain conditions in the recovery of non-accrued interest or principal in excess of the book value of the loans and entered into an Asset Management and Loan Servicing -10- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) Agreement (the "Agreement") dated December 15, 1993 with GF Mortgage Corporation whereby the Corporation continued to service the portfolio for an amount equal to 1/12th of one percent of the principal balance outstanding each month and received 2.5% of the principal outstanding or the sales price as defined in the Agreement upon subsequent sale of these investments to an outside party. During the years ended March 31, 1998 and 1997, the Corporation realized $41 and $126, respectively, in accordance with this Agreement. See Note 5 for a discussion of the termination of the Agreement. 5. TERMINATION OF SERVICING RIGHTS On October 27, 1997, Walsh Securities assigned the balance of the loan portfolio serviced by the Corporation under the Agreement to Greenwich Capital Financial Products, Inc. ("Greenwich Capital") As a result of this transaction, the Agreement was terminated. Walsh Securities issued a promissory note (the "Note") dated November 12, 1997 in the amount of $560 to fulfill their obligation to the Corporation under the Agreement. Since the Note is not interest bearing, interest has been imputed at 8.5% resulting in an original issue discount ("OID") of $78. This OID will be amortized to interest income over the life of the Note. The discounted value of the Note of $482 was exchanged for the unamortized balance of the servicing rights of $320 and a receivable of $214 for certain reimbursable fees and expenses resulting in a $52 loss on the transaction. The Note requires monthly payments of $10 beginning December 1, 1997 through December 1, 2000 with a lump sum payment of $200 on December 31, 2000. The Corporation will continue to service the remaining loan portfolio for Greenwich Capital under a new servicing agreement. 6. INVESTMENTS AND ALLOWANCE FOR INVESTMENT LOSSES Investments by type at March 31, are as follows: 1998 1997 ----- ------ Loans ......................... $ 766 $1,176 Allowance for investment losses (300) (695) ----- ----- Total ......................... $ 466 $ 481 ===== ===== -11- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) Changes in the allowance for investment losses are summarized as follows for the years ended March 31: 1998 1997 -------- -------- Beginning balance $ 695 $ 636 (Recovery of) Provision for losses (49) 215 Investment write-offs (346) (156) -------- -------- Ending balance $ 300 $ 695 ======== ======== At March 31, 1998, the Corporation has a recorded investment in impaired loans of $735 and a related allowance for investment losses of $300, as compared to $1,176 of impaired loans and a related allowance for investment losses of $695 at March 31, 1997. The average recorded investment in impaired loans for the year ended March 31, 1998 and 1997 was $1,042 and $1,120, respectively, and the income recorded on these loans identified as impaired totaled $107 and $103, respectively. Loans on which the accrual of interest has been discontinued amounted to approximately $94 and $491 at March 31, 1998 and 1997, respectively. If those loans had been current throughout their terms, interest income would have increased $12 and $95 for the years ended March 31, 1998 and 1997, respectively. 7. FIXED ASSETS At March 31, 1998 and 1997, the costs and related accumulated depreciation of the Corporation's fixed assets were as follows: 1998 1997 ----- ------ Improvements ............................ $ 7 $ 7 Equipment ............................... 234 237 ----- ----- Fixed assets at cost .................... 241 244 Less accumulated depreciation............ (204) (197) ----- ----- Fixed assets-net ........................ $ 37 $ 47 ===== ===== 8. PARI PASU LOAN PARTICIPATIONS Certain participation agreements provide for the participant and the Corporation to share, pari pasu in the rights and risks of payment in certain loan accounts. Investments are shown net of the pari pasu participation amount. The outstanding participant balance under these agreements is $44 and $253 as of March 31, 1998 and 1997, respectively. -12- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) 9. INCOME TAXES The income tax provision consisted solely of current state income taxes for the years ended March 31, 1998 and 1997. A reconciliation of the income tax provision (benefit) computed by applying the Federal statutory rate to income before income taxes to the actual provisions for income taxes for the years ended March 31, 1998 and 1997 is as follows: 1998 1997 ----- ----- Income tax provision (benefit) at statutory rate ...................... $ 103 $ (79) Primarily loss for which no benefit can be realized ........................ 0 84 Benefit of net operating loss carryforward for which no asset was previously recognized ............................. (98) 0 ----- ----- Total .................................... $ 5 $ 5 ===== ===== The components of the net deferred tax asset are as follows: 1998 1997 ------- ------- Deferred tax asset: Net operating loss carryforward $ 3,295 $ 3,746 Valuation allowance ........... (3,295) (3,746) ------- ------- Net deferred tax asset .......... $ 0 $ 0 ======= ======= The Corporation has elected, for income tax purposes, to report certain capital gains on an installment basis, whereas the total amount of such gains is reported for financial statement purposes as of the transaction date. Deferred income taxes are provided for the difference between the gains reported for book and tax purposes, and becomes currently payable as the gains are realized for tax purposes. There was no deferred tax liability at March 31, 1998 or 1997. In addition, deferred tax assets result from net operating loss carryforwards (NOLS). Due to the uncertainty of realizing the benefits of these NOLS a valuation allowance has been established. The valuation allowance was reduced by $451 and increased by $22 for the years ending March 31, 1998 and 1997, respectively. -13- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) At March 31, 1998, the Corporation had available federal and state net operating loss carryforwards of $9,293 and $5,344, respectively, for income tax purposes which expire as follows: Federal State ------- ----- 1999 - $4,087 2000 - 678 2001 - 483 2002 - 69 2003 - 27 2008 $3,914 - 2009 4,087 - 2010 679 - 2011 497 - 2012 81 - 2013 35 - ------ ------ $9,293 $5,344 ====== ====== 10. WAREHOUSE LINE OF CREDIT The Corporation had a $1 million warehouse line of credit with Walsh Securities to fund mortgages before they were sold. This line of credit was collateralized by mortgage loans originated with the proceeds. This line of credit expired on December 31, 1997 and, accordingly, there were no outstanding advances at March 31, 1998. At March 31, 1997 there was $317 of outstanding advances under the line of credit. 11. TRANSACTIONS WITH AFFILIATES Affiliates include directors and officers of the Corporation and members of their immediate families and companies which have a 5% or more ownership in the Corporation. Legal services, including representation of the Corporation on the closing of all new loans, foreclosure proceedings on delinquent loans and general corporate and security matters, are provided by a firm in which a director is a principal. Fees for these services were $17 and $31 for the years ended March 31, 1998 and 1997, respectively, of which $15 of legal expenses accrued at March 31, 1996 had been negotiated and forgiven by the law firm in the year ended March 31, 1997. -14- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) Certain officers and directors of the Corporation are principals of a mortgage company. The Corporation extended second mortgages to borrowers secured by collateral which had also been pledged to the mortgage company on first mortgages. The mortgage company is in the process of liquidation and does not compete with the Corporation. 12. COMMITMENTS AND CONTINGENCIES The Corporation had made certain guarantees with a contractual balance of $368 at March 31, 1997. The guarantees were for small business concerns from whom collateralized loans were outstanding and were previously sold (see Note 4). During the year ended March 31, 1995, $368 of these guarantees had been called by the bank. The Corporation had fully accrued for the guaranteed amounts called at March 31, 1997. On March 31, 1998 this guarantee had been negotiated, forgiven and released for a cash payment of $100, resulting in income of $268 included in the recovery of notes payable in the statement of operations for 1998. Additionally, the Corporation has made no payments on prior mortgages to other financial institutions in order to secure the Corporation's position during the years ended March 31, 1998 or 1997. As of March 31, 1998 and 1997, the Corporation had outstanding loan commitments of $2,447 and $1,132, respectively. 13. LETTER OF CREDIT The Corporation has a $40 letter of credit outstanding as of March 31, 1998 at a stated interest rate of 2.00% per annum related to obtaining its license as a First Mortgage Loan-Lender Broker. The letter of credit expires February 9, 2000. At March 31, 1998, restricted cash includes a $49 certificate of deposit which is being maintained as collateral for the letter of credit. 14. EMPLOYEE BENEFITS The Corporation had a non-contributory defined benefit pension plan covering substantially all of its employees. The benefits were based on years of service and the average of the highest consecutive five years compensation. Plan assets consisted primarily of cash equivalents and debt securities. The Plan, as restated on March 31, 1995, froze benefits for the "Highly Compensated Employees" at the March 31, 1989 level and provided the "Non-Highly Compensated Employees" with pre-1986 level of benefits. Furthermore, an amendment adopted March 31, 1995 ceased benefits accruals for all participants effective April 14, 1995. Finally on March 31, 1997, the Plan was terminated. Accordingly, the projected benefit obligation became fully vested and Plan assets of $293 were distributed to participants on November 24, 1997. -15- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) Net periodic pension cost for the year ended March 31, 1997 included the following components: Service cost-benefits earned during the year $ 11 Interest cost on projected benefit obligation 20 Actual return on assets 0 Net amortization of transition obligation (21) ----- Net periodic pension cost $ 10 ===== The following table sets forth the benefit obligations and net assets of the plan at March 31, 1997: Vested benefit obligation $293 Accumulated benefit obligation 293 Projected benefit obligation 293 Plan assets at fair value 293 ---- Excess of plan asset over projected benefit obligation 0 Unrecognized net gain 0 ----- Accrued pension costs included in accrued expenses $ 0 ===== The following are rates and assumptions used in determining the actuarial present value of the projected benefit obligations for fiscal 1997: Weighted average discount rate 7.25% Expected long-term rate of return on assets 7.50% -16- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) 15. STOCK OPTIONS The Corporation has a compensatory stock option plan which enables the granting of options to officers to purchase shares of the Corporation's common stock at prices equal to fair market value at the date of grant. As the grant date coincides with the measurement date, and the option price is equal to the quoted market price at the measurement date, there is no related compensation expense. At March 31, 1998, no options were outstanding under this plan and options for 40,000 shares were available for future grants. Options generally become exerciseable two years after grant and expire within five years of grant. In connection with the Purchase Agreement (see Note 4) and pursuant to a stock option agreement dated December 15, 1993, the Corporation granted GF Mortgage Corporation the right and option to purchase 60,000 shares of the Corporation's common stock expiring on December 15, 1998 at an exercise price of $1.50 per share which was less than market value at the date of grant. The difference between the quoted market value of the shares at the date of grant and the option price for the grant was charged to the loss on sale of investments at the date of grant. As of March 31, 1998, 60,000 options are excercisable and no such options have been exercised. 16. DIVIDEND REINVESTMENT PLAN Previously, the Corporation had established a Dividend Reinvestment Plan whereby holders of the Corporation's common stock may automatically invest cash dividend payments in additional shares of common stock at a price equal to 90% of the then market value, as defined, without payment of any brokerage commissions or service charge. No shares of common stock were issued under this plan during 1998 or 1997. 17. LEASES The Corporation leases office space and equipment for use in operations. The leases generally provide that the Corporation pay taxes, insurance and maintenance expenses. Some leases contain renewal options, and rent payments change in accordance with changes in the Consumer Price Index. Rental expense relating to cancelable and noncancelable operating leases amounted to $31 and $33 for the years ended March 31, 1998 and 1997, respectively. -17- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) As of March 31, 1998, future minimum rental payments required under noncancelable operating leases were as follows: Year Ending Minimum March 31, Rental Payments --------- --------------- 1999 $ 36 2000 35 2001 32 2002 23 TOTAL $ 126 ----- 18. FAIR VALUE OF FINANCIAL INSTRUMENTS Methods and assumptions for estimating the fair value of the Company's financial instruments are set forth below. Fair values are calculated based on the value without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications or estimated transaction costs. Loans - As substantially all of the Corporation's loans fall within the scope of SFAS No. 114, the estimated fair value for such loans is based on the present value of expected future cash flows discounted at the loan's effective interest rate or on recent external appraisals or other available market information if the loan is collateral dependent. Assumptions regarding credit risk, cash flow, and discount rates are judgmentally determined using available market information and specific borrower information. Servicing Rights - The Corporation estimates fair value for its servicing rights by discounting expected net cash flows through maturity from servicing activities at market discount rates that reflect the credit and interest rate risk inherent in the servicing rights. Note Receivable - The fair value of the note receivable is estimated by discounting future cash flows at a current market rate of interest. Other On-Balance Sheet Financial Instruments - Other on-balance sheet financial instruments include cash and cash equivalents, restricted cash, accrued interest and a warehouse line of credit. The carrying value of each of these financial instruments is a reasonable estimation of fair value. Loans held for sale - For loans held for sale fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs. -18- THE FIRST CONNECTICUT CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - continued FOR THE YEARS ENDED MARCH 31, 1998 AND 1997 (Dollars in thousands, except share and per share amounts) The carrying values were equal to the estimated fair values of cash and cash equivalents, restricted cash, net investments, loans held for resale, note receivable, accrued interest, warehouse line of credit and net servicing rights as of March 31, 1998 and 1997. Limitations - Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. * * * * * -19- EX-27 2
5 1,000 YEAR MAR-31-1998 MAR-31-1998 263 0 1,471 (300) 0 0 241 (204) 1,471 142 0 0 0 587 742 1,471 716 716 0 99 369 (49) 4 293 5 0 0 0 0 288 0.25 0.25
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