-----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, L+mRXbBhAHyLfTMCNfCNq7jSUTB1gvZxgTn6niOut3m1CQltJk4di1fmSc7Y4ISZ ZBZDwQGXnD7S2DhEMqkFMQ== 0000889812-99-001826.txt : 19990615 0000889812-99-001826.hdr.sgml : 19990615 ACCESSION NUMBER: 0000889812-99-001826 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990611 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOUR CORNERS FINANCIAL CORP CENTRAL INDEX KEY: 0000230014 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 222044086 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-08628 FILM NUMBER: 99645018 BUSINESS ADDRESS: STREET 1: 370 EAST AVENUE CITY: ROCHESTER STATE: NY ZIP: 14604 BUSINESS PHONE: 7164542263 MAIL ADDRESS: STREET 1: 370 EAST AVE CITY: ROCHESTER STATE: NY ZIP: 14604 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN MANAGEMENT ENERGY CORP DATE OF NAME CHANGE: 19880317 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN MANAGEMENT EDUCATION CORP DATE OF NAME CHANGE: 19820413 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998. [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------------- ------------------------ Commission file number 0-8628 ------ FOUR CORNERS FINANCIAL CORPORATION ------------------------------------------------------ (Exact Name of Registrant as specified in its charter) Delaware 22-2044086 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 370 East Avenue, Rochester, New York 14604 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (716) 454-2263 ---------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.04 par value - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ----- ----- -2- Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and to the best of registrant's knowledge, will not be contained in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 31, 1999, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $24,652. As of March 31, 1999, the number of shares outstanding of the registrant's common stock was 32,937. Documents Incorporated By Reference - ----------------------------------- None. -3- TABLE OF CONTENTS PART I PAGE Item 1: Business 4 Item 2: Properties 14 Item 3: Legal Proceedings 15 Item 4: Submission of Matters to a Vote of Security Holders 15 Executive Officers of Registrant 15 PART II Item 5: Market for Registrant's Common Equity and Related 17 Security Holder Matters Item 6: Selected Financial Data 18 Item 7: Management's Discussion and Analysis of Financial 19 Condition and Results of Operations Item 8: Financial Statements and Supplementary Data 23 Item 9: Changes in and Disagreements with Accountants on 23 Accounting and Financial Disclosure Part III Item 10: Directors and Executive Officers of Registrant 24 Item 11: Executive Compensation 25 Item 12: Security Ownership of Certain Beneficial Owners 26 and Management Item 13: Certain Relationships and Related Transactions 27 PART IV Item 14: Exhibits, Financial Statement Schedules, and 29 Reports on Form 8-K -4- PART I 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. -5- 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. It is anticipated that Proper Appraisal Specialists, Inc., a New York Corporation, will be dissolved by proclamation during 1998. 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. The Company opened a satellite office in September, 1996 in Oswego, New York which was moved to a new location in Oswego as of October 9, 1997, and closed its Lockport satellite office in February, 1997. On March 5, 1999 a Proxy Statement was mailed to all shareholders of the Company's common stock as of February 24, 1999 for a special meeting which was held on March 26, 1999 for the purpose of voting on the following: 1. To approve the Board of Directors adoption of an Amendment to the Company's restated Certificate of Incorporation which provides for: (a) a reduction of the number of authorized shares of the Company's common stock from 15,000,000 authorized shares with a par value of $.04 per share to 150,000 authorized shares with a par value of $4.00 per share and (b) a 1 for 100 reverse stock split of the Company's currently issued and outstanding common stock. 2. To approve a cash payment in the amount of $12.00 times each fraction of a share resulting from such reverse stock split in lieu of the issuance of any resulting fractional shares. -6- 3. To approve the payment by the Company of the indebtedness owed to Shareholders owning fractional shares resulting from the 1 for 4 reverse stock split effective July 29, 1992, together with the payment of simple interest on the amount of such indebtedness. The text of the proxy statement is set forth as Exhibit 99.1 to this Form 10-K. All three propositions set forth above were voted on and approved by the shareholders of the Company at the Special Meeting on March 26, 1999. Following this vote, the Company filed its Certificate of Amendment to its restated Certificate of Incorporation with the Delaware Secretary of State on April 1, 1999, a copy of which is set forth as Exhibit 99.2 to this Form 10-K. As a consequence of the shareholder vote of March 26, 1999 approving the 1 for 100 reversal of the Company's common stock and the filing of a Certificate of Amendment to the Company's restated Certificate of Incorporation with the State of Delaware, the Company's number of shareholders has been reduced to 174. Therefore, on April 9, 1999, the Company filed Form 15 (Exhibit 99.3) with the Securities and Exchange Commission requesting de-registration of its common stock. Effectively, the Company has been privatized as of that date. Consequently, no future Annual Report on Form 10-K will be required. Four Corners Financial Corporation and its subsidiary, Four Corners Abstract Corporation ("Abstract"), 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 and Four Corners Abstract unless the context otherwise requires. These services and products are offered through offices in Buffalo, Rochester, Syracuse, Utica, Binghamton, Albany and Oswego, 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 abstract storage and settlement/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. 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 -7- 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 -8- 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 amount to approximately $25,000 annually. 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 1998, escrow closing services generated approximately $255,000 as compared to $75,000 and $31,000 in 1997 and 1996, 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. Due to the increasing number of residential bank foreclosures, the Company has seen a significant increase in revenues from the sale of foreclosure related title search products during 1998 and 1997. The Company's ability to provide these services on a statewide basis has enhanced its market penetration in the foreclosure area. During 1998, the Company generated approximately $821,053 in revenues from foreclosure related products, representing 16% of total revenues as compared to $725,000 or 19% of revenues for 1997. -9- 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 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 1998 increased by 27.3% to $5,214,743 as compared to $3,789,864 in 1997. Revenue from title insurance increased significantly by 51.5% during 1998 to $1,997,540, representing 38% of total revenues, compared to 35% 1997 and 1996, respectively. Revenues from abstract and escrow related services also increased significantly to $3,217,203 as compared to $2,471,421 and $2,403,808 in 1997 and 1996 respectively. -10- 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. 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. -11- 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 two employees, in addition to the Company's five Branch Managers, under the direction of the Company's Director of Sales and Marketing. Assistance and technical support is provided by all of the Company's branch office managers. Other 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 1998, there were two 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, namely prevailing interest rates. 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. This was 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. Real estate activity in New York State during 1997 was comparable to 1996 levels. Recorded deeds and mortgages grew slightly by 2.2%. Company revenues increased comparably by slightly more than 1% to $3,789,864. During 1998 as interest rates began to fall once again, real estate mortgage activity in terms of loan -12- originations began to heat up once again. Accordingly recorded deeds and mortgages in New York State increased by 12% as compared to 1997 levels. As a result of the increase in settlement/escrow closings performed by the Company during 1998, where the Company is in control of all the title services necessary to close a loan transaction for various lenders, all segments of Company revenues increased substantially over 1997 levels. Total Company revenues increased by more than $1,400,000 or 27% during 1998 as a result of these factors. 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, 1996 and 1997 (see Note 5 of the Accompanying Consolidated Financial Statements as of December 31, 1997 and 1996). At December 31, 1998 the Company's total indebtedness to this bank decreased to $-0- as compared to $164,167 and $276,250 at December 31, 1997 and December 31, 1996 respectively. The Company may borrow up to $100,000 under the terms of an unsecured line-of-credit. Amounts borrowed bear interest at the bank's prime interest rate plus 1%. The bank's prime rate was 7.75% at December 26, 1998. Borrowings under this line-of-credit are personally guaranteed by the Company's principal officers/stockholders. At December 26, 1998 and December 27, 1997, there was $82,500 and $100,000, respectively, outstanding under the terms of this line-of-credit. 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 -13- 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 80 persons at December 31, 1998, as compared to 70 in 1997 and 66 in 1996. 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 -14- 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. Year 2000 Compliance The Company is working to resolve the potential impact of the year 2000 on the ability of the Company's computerized information systems to accurately process information that may be date-sensitive. Any of the Company's programs that recognize a date using "00" as the year 1900 rather than the year 2000 could result in errors or system failures. The Company utilizes a number of computer programs across its entire operation. The Company has not completed its assessment, but currently believes that costs of addressing this issue will not have a material financial risk to the Company. In order to assure that this does not occur, the Company plans to devote all resources required to resolve any significant year 2000 issues in a timely manner. 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. -15- 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 party. Rent and common charges were approximately $72,000 in 1998, 1997 and 1996, respectively. At December 31, 1998 there were no outstanding rental payments under this lease agreement. The Company owed approximately $15,000 and $18,100 for unpaid rent at December 31, 1997 and 1996, 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), Binghamton (760 square feet), Utica (1,611 square feet) and Oswego (350 square feet). 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. 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. 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 59 Chairman, Treasurer and Director William S. Gagliano 49 President and Director Bernard J. Iacovangelo 51 Vice President, Secretary and Director -16- 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 from May, 1987 to January, 1999 when he was elected Chairman of the Board of Directors. He remains Treasurer of the Company. 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. from June, 1990 to January, 1999. In January, 1999 he was named President of the Company. He was elected Director of the Company in July, 1992. As 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. -17- PART II 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 1995, 1996 and 1997 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 1995 BID ASKED ---- --- ----- 1st Quarter *Unpriced *Unpriced 2nd Quarter *Unpriced *Unpriced 3rd Quarter *Unpriced *Unpriced 4th Quarter *Unpriced *Unpriced 1996 ---- 1st Quarter *Unpriced *Unpriced 2nd Quarter *Unpriced *Unpriced 3rd Quarter *Unpriced *Unpriced 4th Quarter *Unpriced *Unpriced 1997 ---- 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 1995, 1996 or 1997. On May 25, 1999, the Company had 174 holders of record of its common stock. -18- 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".
(In Thousands, Except Per Share Data) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Revenue $ 5,214 $ 3,790 $ 3,707 $ 3,822 $ 4,780 Income (loss) before taxes 307 189 89 99 (581) Net income (loss) 172 189 86 97 (469) Net income (loss) per share $ 6.37 $ 5.71 $ 2.57 $ 3.00 $ (14) BALANCE SHEET DATA: Total assets $ 1,503 $ 1,455 $ 1,225 $ 1,240 $ 1,315 Long-term obligations 101 100 357 202 564 Stockholders' investment 491 319 116 56 (42)
-19- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 1. Liquidity and Capital Resources The Company's cash flow was generated from operations, bank loans and advances made by principal stockholders. In 1998, the operations of the Company generated cash of $192,957. This cash flow, along with cash reserves from 1997 of $92,623, was sufficient to fund investments in assets of $25,316 and a net debt reduction of $126,131. In 1997, the cash flow from operations of $197,437 funded investments in assets of $10,906 and a net debt reduction of $130,520. In 1996, an operating cash flow of $174,519 funded an investment in assets and a corresponding decrease in debt financing of $58,474 and $142,224, respectively. Cash Flow From Operations. The cash provided by operations was slightly lower in 1998, being $192,957 versus $197,437 in 1997. This change was primarily due to the utilization of net operating losses in previous years resulting in significant cash outlays for income in 1998. The positive impact arose primarily from increased income from operations as a result of a significant revenue increase. The cash provided by operations in 1997 of $197,437 was greater than the 1996 amount of $174,519. This was a result of a smaller amount of net income in 1996. Cash Flow from Investing Activities. The Company made capital expenditures of $29,616, $35,407, and $16,346 in 1998, 1997 and 1996 respectively, primarily related to computer system upgrades, furniture and fixture purchases and vehicle purchases at various Company locations. Whereas the company made investments in its title plant of $52,622 in 1996 to support its ongoing business, no such commitment was made during 1997 or 1998. As of December 31, 1998, the Company had no material purchase commitments pending. In the past, the company has acquired other businesses for cash, notes and common stock. 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. The Company has placed an emphasis on debt reduction during 1998 and 1997 given the improved cash flows from operations. The Company had various other notes payable outstanding at December 31, 1998 which totalled $109,380 primarily relating to the purchase of Company vehicles and other office equipment. -20- The Company may borrow up to $100,000 under the terms of an unsecured line-of-credit. 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. At December 31, 1998 and 1997, there was $82,500 and $100,000, respectively, outstanding under the terms of this line-of-credit. The company repaid $189,131, $43,020 and $149,456 under its long-term debt agreements in 1998, 1997 and 1996, respectively. At December 31, 1996, additional borrowing activity in the amount of $10,232 was incurred. At December 31, 1998, the Company owed $177,500 to two of its principal stockholders/directors. For the years ended 1997 and 1996, this indebtedness amounted to $97,000 and $234,500, respectively. As of December 31, 1998, this outstanding debt bears interest at the rate of 10.5% per annum and the repayment of these advances is subordinated to the amounts outstanding under all other bank debt agreements. 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, 1998, 1997 and 1996, expressed as a percentage of total revenues. Percentage of Total Revenues Years Ended December 31 ------------------------------- 1998 1997 1996 ------- ------- ------- Title insurance premiums 38.31% 34.79% 35.15% Abstract/appraisal fees 61.69 65.21 64.85 ------- ------- ------- Total revenues 100.00 100.00 100.00 Direct costs of revenue (20.00) (21.48) (20.80) ------- ------- ------- Gross profit 80.00 78.52 79.20 Operating expenses: Personnel costs (43.61) (48.31) (50.09) Other operating expenses (29.85) (23.82) (25.10) ------- ------- ------- -21- Operating income 6.54 6.39 4.01 Other expenses (.65) (1.41) (1.64) Income tax expense (1.87) -- (.06) Extraordinary Item (.72) -- -- ------- ------- ------- Net income 3.30% 4.98% 2.31% ======= ======= ======= (b) Operating Revenues Combined revenues of the Company increased 37.59% from $3,789,864 for the year ended December 31, 1997 to $5,214,743 for the year ended December 31, 1998. The Company experienced an increase in total revenues of $83,086 or 2.24% from 1996 to 1997. The revenue increase over the past three years has been a result of positive economic conditions and a robust real estate market in the northeast. This trend began in 1996 as the housing market rebounded from previously poor conditions within the geographic areas where the Company does business. Whereas a slight upturn in the industry led to a minor increase in total revenues in 1997, a significant impact was recognized in 1998. The Company expects total revenues to increase during 1999 as consumer confidence continues and as the volume of orders increases from those customers lost to lower-priced non-performing competitors. Specifically, revenue from title insurance premiums increased by 51.50% during 1998 to $1,997,540 versus $1,318,443 in 1997. This increase in title insurance revenue for 1998 combined with a larger increase in revenue from abstract and other related services were the determining factors for the increase in total revenues for the year. These revenues from abstract services amounted to $3,217,203 in 1998 as compared to $2,471,421 in 1997. This difference represents an increase of $745,782 or 30.18%. A similar increase occurred when the same revenues increased by $67,613 or 2.81% from $2,403,808 in 1996. The Company experienced an increase in title insurance revenue during 1997 of 2.81% from $2,403,808 realized in 1996. (c) Direct Costs of Revenue Direct costs of revenue consist of commissions paid to underwriters of title insurance and subcontractor costs paid to other title companies and/or independent contractors. Direct costs of revenue have increased by 28.19% from $814,035 in 1997 to $1,043,507 in 1998. From 1996 to 1997, these same costs increased in a slightly less dramatic fashion to $814,035 or 5.60% from $770,834 in 1996. As a result of the positive aspect of producing a higher percentage of orders using its own work force, the percentage increase in direct costs has been slightly lower than the percentage increase in revenue. -22- (d) Operating Expenses Direct and indirect personnel costs and other operating expenses are incurred in connection with producing title searches and title examinations, title insurance policies and maintaining the Company's title plant. Total operating expenses decreased from $2,786,219 for the year ended December 31, 1996 to $2,733,595 for the same period in 1997. Due to significantly higher sales volumes in 1998, operating expenses increased dramatically in 1998 to $3,829,983. These increases were primarily attributable to payroll and other variable costs associated with the changing volume of abstract and title orders, as well as bonuses paid to the Company's management. In 1997, gross payroll and benefits amounted to $1,830,769 as compared to $1,856,772 in 1996. Office supplies, especially postage, increased from $119,249 to $142,713 during the same period. However, the Company experienced sizeable increases in operating expenses, office supplies, postage, gross payroll and benefits in 1998. These increases are directly attributable to the significantly higher sales volume in 1998. The significant variances in expenses for 1998 are shown in the table below. Expense Item 1998 1997 1996 ------------ ---- ---- ---- Gross Payroll & Benefits 2,292,543 1,830,769 1,856,772 Office supplies & postage 208,685 142,713 119,249 Interest Expense 32,691 45,456 60,661 As with any service company, the major item of expense associated with the Company's operations is gross payroll and employee benefits. As a percentage of revenues, personnel costs and fringe benefits represented 43% in 1998, 48% in 1997, and 50% in 1996. As a result of a continuing stabilization of company revenues following more traditional trends during 1997 and 1996, 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 increased slightly from 66 in 1996, 70 in 1997 to 85 in 1998. Based on enhanced sales order volume and reduced operating expenses, income from operations for 1998 was $341,253 versus $242,234 in 1997. Net income was $172,165 for the 1998 calendar year whereas a corresponding net income in the amount of $188,138 was realized for 1997. The decrease is the result of income tax expense of $97,395 in 1998. In 1996, the Company experienced income from operations and net income to the extent of $149,725 and $89,064, respectively. -23- 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. Disagreements on Accounting and Financial Disclosure There have been no disagreements on accounting and financial disclosure matters. -24- PART III 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, 1998.
Shares of Position with the Common Stock Percent Company or Princi- Director Beneficially of Name Age pal Occupation Since Owned Class - --------------------------------------------- -------- -------------- ------- Frank B. 59 Chairman and 1987 1,366,939 (3) 41.50% Iacovangelo Treasurer (1) Bernard J. 51 Vice President 1987 1,376,339 (4) 41.80% Iacovangelo Secretary (1) William S. 49 President and 1992 15,758 .48% Gagliano Director (1) Anthony M. 58 President, director 1987 87,913 (5) 2.66% Iacovangelo and principal share- holder of Faber Construction Co., Inc. Rochester, NY (2) All Directors and Officers of the 2,846,949 86.44% Company as a group (four persons) (3)(4)(5)
(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 369,129 shares owned by Wegman Building Associates, a partnership in which Frank Iacovangelo owns a 40% interest. -25- (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 369,129 shares owned by Wegman Building Associates, a partnership in which Bernard Iacovangelo has a 40% interest. (5) Includes 10% of the 369,129 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. 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 1998 -- $30,000 President, Chief 1997 -- - 0 - Executive Officer 1996 -- - 0 - and Treasurer - ---------- (1) Mr. Iacovangelo receives no other compensation or benefits from the Company. He neither received nor exercised any options during 1998 and he held no options at December 31, 1998. Remuneration of Directors During 1998, three directors of the Company received $20,000 in 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. Mr. Anthony Iacovangelo is a non-employee director. -26- 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 $75,000 in the case of Mr. Gagliano, additional salary and bonus compensation to be determined by the Board of Directors of the Company in its sole discretion, and restrictions against competition with the Company. Item 12. Security Ownership of Certain Beneficial owners and Management On December 31, 1998, the Company had outstanding and entitled to vote with respect to all matters to be acted upon at the Annual Meeting of Stockholders, 3,293,733 shares of Common Stock ($.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. -27- The following table sets forth information as of December 31, 1998 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 1,366,939 (1) (3) 41.50% 39 State Street Rochester, NY 14614 Bernard J. Iacovangelo 1,376,339 (2) (3) 41.80% 39 State Street Rochester, NY 14614 Wegman Building 369,129 (3) 11.21% 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 369,129 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 369,129 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. 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 11,500 square feet of such space, pursuant to a lease expiring on June 30, 2000 at a monthly rent of $6,000 through January, 1999 and $7,665 through June, 2000. -28- The Company also leases storage space in Rochester, New York from another company controlled by one of its principal stockholders/ directors at an annual rent of $45,000 through December, 1999. Annual rental payments, pursuant to the lease, including common area charges, were approximately $117,000, in 1998 and $72,000 in 1997 and 1996, respectively. During 1997, total unpaid rent of $18,100 was forgiven by the related party. At December 31, 1998 there were no outstanding rental payments. The company owed approximately $15,000 for unpaid rent at December 31, 1997. 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 1997 and 1996, Frank Iacovangelo, President of the Company, made advances to the Company. As of December 26, 1998, these advances bear interest at the rate of 10.5% per annum 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, 2000. At December 31, 1998, 1997 and 1996, this indebtedness amounted to $47,500, $97,000, and $234,500, respectively. In 1998, the Company paid Mr. Iacovangelo $7,948 in interest. In 1999, 1997 and 1996, approximately 12%, 8%, and 4%, respectively, of the Company's revenue was derived from the law firm of Gallo and Iacovangelo, a related party. At December 31, 1998, 1997, and 1996, the Company was owed $76,346, $79,125, and $44,878 respectively, from Gallo and Iacovangelo. Rates charged were comparable to those charged similar customers. -29- PART IV 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 March 16, 1999 - Consolidated Balance Sheets - December 31, 1998 and 1997 - Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 - Consolidated Statements of Changes in Stockholders' Investment for the Years Ended December 31, 1998, 1997 and 1996 - Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 - Notes to Consolidated Financial Statements (1) through (11) (2) Financial Statement Schedules - Auditors' Report Dated March 16, 1999 - Schedule VII - Valuation and Qualifying Accounts for the Years Ended December 31, 1998, 1997 and 1996 (3) Exhibits (a) 22 Subsidiaries of Registrant 27 Financial Data Schedule 99.1 Proxy Statement 99.2 Certificate of Amendment to Restated Certificate of Incorporation 99.3 Form 15 -30- (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, 1997. (c) Exhibits See (a) (3) above. (d) Financial Statement Schedules See (a) (2) above. -31- 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: FOUR CORNERS FINANCIAL CORPORATION By: /s/ Frank B. Iacovangelo --------------------------------------- Frank B. Iacovangelo, Chairman 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 June 11, 1999 - --------------------------------------- Frank B. Iacovangelo Chairman, Treasurer and Director (Chief Executive Officer and Chief Financial Officer /s/ William S. Gagliano June 11, 1999 - --------------------------------------- William S. Gagliano President, Chief Accounting Officer and Director /s/ Bernard J. Iacovangelo June 11, 1999 - --------------------------------------- Bernard J. Iacovangelo Vice President, Secretary and Director /s/ Anthony M. Iacovangelo June 11, 1999 - --------------------------------------- Anthony M. Iacovangelo Director FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 26, 1998 AND DECEMBER 27, 1997 TOGETHER WITH INDEPENDENT AUDITORS' REPORT INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Independent Auditors' Reports Consolidated Balance Sheets as of December 26, 1998 and December 27, 1997 1 Consolidated Statements of Income for the years ended December 26, 1998, December 27, 1997 and December 28, 1996 2 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 26, 1998, December 27, 1997 and December 28, 1996 3 Consolidated Statements of Cash Flows for the years ended December 26, 1998, December 27, 1997 and December 28, 1996 4 Notes to Consolidated Financial Statements 5 to 13
INDEPENDENT AUDITOR'S REPORT To the Board of Directors Four Corners Financial Corporation and Subsidiary We have audited the accompanying consolidated balance sheet of Four Corners Financial Corporation and Subsidiary as of December 26, 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Four Corners Financial Corporation and Subsidiary as of December 26, 1998, and the results of their operations, and their cash flows for the year then ended, in conformity with generally accepted accounting principles. FREED MAXICK SACHS & MURPHY, P.C. March 16, 1999 Buffalo, New York INDEPENDENT AUDITORS' REPORT To the Stockholders of Four Corners Financial Corporation and Subsidiary: We have audited the accompanying consolidated balance sheets of Four Corners Financial Corporation and Subsidiary as of December 27, 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the two years in the period then ended. 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 Subsidiary as of December 27, 1997, and the results of their operations and their cash flows for each of the two years in the period then ended in conformity with generally accepted accounting principles. BONADIO & CO., LLP November 30, 1998 Rochester, New York FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 26, 1998 AND DECEMBER 27, 1997 ASSETS 1998 1997 ---- ---- CURRENT ASSETS: Cash $ 134,133 $ 92,623 Cash restricted- escrow deposits 150,971 240,465 Accounts receivable, net of allowance for doubtful accounts of $174,000 and $90,000 in 1998 and 1997, respectively 535,747 573,623 Prepaid expenses 5,890 7,819 Deferred tax asset 65,000 - Current portion of note receivable - 3,750 ------------- ------------- Total current assets 891,741 918,280 PROPERTY AND EQUIPMENT, net 185,776 110,240 TITLE PLANT 419,905 419,905 OTHER ASSETS: Security deposits 6,077 6,627 ------------- ------------- $ 1,503,499 $ 1,455,052 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 ---- ---- CURRENT LIABILITIES: Demand note payable $ 82,500 $ 100,000 Current portion of notes payable 37,550 173,462 Current portion of subordinated debt due to officers/stockholders 148,000 18,000 Accounts payable and other accrued expenses 320,206 373,843 Accounts payable - related parties - 19,907 Escrow deposits 150,971 240,465 Accrued income taxes 28,927 3,296 Accrued payroll and related taxes 143,289 107,779 ------------- ------------- Total current liabilities 911,443 1,036,752 LONG-TERM LIABILITIES, net of current portion: Notes payable 71,830 20,739 Subordinated debt due to officers/ stockholders 29,500 79,000 ------------- ------------- Total long-term liabilities 101,330 99,739 ------------- ------------- Total liabilities 1,012,773 1,136,491 ------------- ------------- STOCKHOLDERS' EQUITY: Common stock, $4.00 par value, 150,000 shares authorized, 33,487 issued and 32,937 outstanding in 1998 and 1997 133,752 133,752 Additional paid-in capital 849,502 849,502 Accumulated deficit (461,903) (634,068) ------------- ------------- 521,351 349,186 Less: Treasury stock; at cost 550 shares (30,625) (30,625) ------------- ------------- Total stockholders' equity 490,726 318,561 ------------- ------------- $ 1,503,499 $ 1,455,052 ============= ============= The accompanying notes are an integral part of these consolidated statements. - 1 - FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 26, 1998, DECEMBER 27, 1997 AND DECEMBER 28, 1996
1998 1997 1996 ---- ---- ---- REVENUE: Abstract and appraisal services $ 3,217,203 $ 2,471,421 $ 2,403,808 Title insurance premiums 1,997,540 1,318,443 1,302,970 ------------- ------------- ------------- 5,214,743 3,789,864 3,706,778 ------------- ------------- ------------- DIRECT COSTS OF REVENUE: Abstract and appraisal services (611,330) (503,421) (400,328) Title insurance premiums (432,177) (310,614) (370,506) ------------- ------------- -------------- (1,043,507) (814,035) (770,834) ------------- ------------- ------------- Gross profit 4,171,236 2,975,829 2,935,944 OPERATING EXPENSES (3,829,983) (2,733,595) (2,786,219) ------------- ------------- ------------- Income from operations 341,253 242,234 149,725 ------------- ------------- ------------- OTHER EXPENSES: Interest (32,691) (45,560) (60,661) Loss on disposal of property (1,462) (7,836) - ------------- ------------- ------------- (34,153) (53,396) (60,661) ------------- ------------- ------------- Income before income taxes and extraordinary 307,100 188,838 89,064 item PROVISION FOR INCOME TAXES (97,395) (700) (3,346) ------------- ------------- ------------- INCOME BEFORE EXTRAORDINARY ITEM 209,705 188,138 85,718 EXTRAORDINARY ITEM (NOTE 8) (37,540) - - ------------- ------------- ------------- NET INCOME $ 172,165 $ 188,138 $ 85,718 ============= ============= ============= PER SHARE DATA - BASIC : NET INCOME BEFORE EXTRAORDINARY ITEM $ 6.37 $ 5.71 $ 2.57 ============= ============= ============= EXTRAORDINARY ITEM $ (1.14) $ - $ - ============= ============= =============
The accompanying notes are an integral part of these consolidated statements. - 2 - FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 26, 1998, DECEMBER 27, 1997 AND DECEMBER 28, 1996
Common Stock ----------- Additional Shares Paid-in Accumulated Treasury Outstanding Amount Capital Deficit Stock ----------- ------ --------- ----------- -------- BALANCE - December 25, 1995 3,343,733 $ 133,752 $ 835,402 $ (907,924) $ (5,625) Retroactive effect of reverse stock split (3,310,296) - - - - Net income - - - 85,718 - Purchase of treasury stock (500) - - - (25,000) ------------- ------------- ------------- ------------- ------------- BALANCE - December 28, 1996 32,937 133,752 835,402 (822,206) (30,625) Net income - - - 188,138 - Forgiveness of rent due to related party, net of income taxes of $4,000 - - 14,100 - - ------------- ------------- ------------- ------------- ------------- BALANCE - December 27, 1997 32,937 133,752 849,502 (634,068) (30,625) Net income - - - 172,165 - ------------- ------------- ------------- ------------- ------------- BALANCE - December 26, 1998 32,937 $ 133,752 $ 849,502 $ (461,903) $ (30,625) ============= ============= ============= ============== ============== Total Stockholders' Equity ------------- BALANCE - December 25, 1995 $ 55,605 Retroactive effect of reverse stock split - Net income 85,718 Purchase of treasury stock (25,000) ------------- BALANCE - December 28, 1996 116,323 Net income 188,138 Forgiveness of rent due to related party, net of income taxes of $4,000 14,100 ------------- BALANCE - December 27, 1997 318,561 Net income 172,165 ------------- BALANCE - December 26, 1998 $ 490,726 =============
The accompanying notes are an integral part of these consolidated statements. - 3 - FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 26, 1998, DECEMBER 27, 1997 AND DECEMBER 28, 1996
1998 1997 1996 ---- ---- ---- CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 172,165 $ 188,138 $ 85,718 Adjustments to reconcile net income to cash flow from operating activities: Provision for bad debts 84,000 6,000 - Loss on disposal of property and equipment 1,462 7,836 - Depreciation and amortization 56,928 59,854 79,995 Deferred tax benefit (65,000) - - Other - (4,000) - Changes in: Accounts receivable (46,124) (68,861) (45,581) Prepaid expenses 1,929 (1,905) 7,402 Accounts payable and other accrued expenses (73,544) (35,247) 33,918 Accrued income taxes 25,631 1,796 - Accrued payroll and related taxes 35,510 43,826 13,067 ------------- ------------- ------------- Net cash flow from operating activities 192,957 197,437 174,519 ------------- ------------- ------------- CASH FLOW FROM INVESTING ACTIVITIES: Purchases of property and equipment (29,616) (35,407) (16,346) Payments received on note receivable 3,750 3,750 5,000 Change in security deposits 550 2,133 6,496 Change in cash value of officer life insurance - 18,618 (1,002) Investment in title plant - - (52,622) ------------- ------------- ------------- Net cash flow from investing activities (25,316) (10,906) (58,474) ------------- ------------- ------------- CASH FLOW FROM FINANCING ACTIVITIES: Change in demand note payable (17,500) 50,000 15,000 Borrowings on notes payable - - 10,232 Repayment of notes payable (189,131) (43,020) (149,456) Borrowings on subordinated debt due to officers/stockholders 130,000 - 7,000 Repayment of subordinated debt due to officers/stockholders (49,500) (137,500) - Purchase of treasury stock - - (25,000) ------------- ------------- ------------- Net cash flow from financing activities (126,131) (130,520) (142,224) ------------- ------------- ------------- NET CHANGE IN CASH 41,510 56,011 (26,179) CASH - beginning of year 92,623 36,612 62,791 ------------- ------------- ------------- CASH - end of year $ 134,133 $ 92,623 $ 36,612 ============= ============= =============
The accompanying notes are an integral part of these consolidated statements. - 4 - FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1998, DECEMBER 27, 1997, AND DECEMBER 28, 1996 (1) The Company Four Corners Financial Corporation (FCFC) and its subsidiary, Four Corners Abstract Corporation (FCAC) provide services and products including real estate title searching, preparation of abstracts of title and 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 subsidiary. 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 FCAC. All significant intercompany transactions and balances have been eliminated. Fiscal Year - The Company uses a 52-53 week fiscal year ending on the last Saturday of December. There were 52 weeks in fiscal 1998, 1997 and 1996. Cash - The Company maintains its cash in accounts at financial institutions 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, the Company administers escrow deposits representing undisbursed amounts received for settlements of mortgage loans or property sales and indemnities against specific title risks. These funds are restricted for this purpose and recorded as both a current asset and a current liability in the accompanying consolidated balance sheet. 5 (2) Summary of Significant Accounting Policies (Continued) 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 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 income. Repairs and maintenance costs are charged to expense when incurred. Long-lived assets to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. In performing the review for recoverability, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. An impairment loss is recognized if the sum of the undiscounted future cash flows is less than the carrying amount of the asset. As of December 26, 1998, the Company believes that no impairment exists. 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. The Company periodically evaluates the carrying value of the title plant to determine if there has been an impairment in the value due to effects of obsolescence, demand, competitive actions and abandonment. At December 26, 1998, no impairment in value has been recognized. Revenue Recognition - Title insurance is provided to purchasers or financiers 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 income. The Company also performs title abstract research on real properties. Abstract revenue is recognized as earned when the services are performed. Direct costs of abstract revenue include the cost of work performed by subcontractors in geographical areas where the Company does not maintain an office, among other direct costs. 6 (2) Summary of Significant Accounting Policies (Continued) Concentration of Credit Risk - The Company received approximately 11% of its revenue from one customer during 1998. Accounts receivable from this customer amounted to approximately $115,000 at December 26, 1998. The loss of this customer may have an adverse effect on the future results of operations. Advertising Costs - The Company expenses advertising costs in the year incurred. Advertising expense was $26,466, $21,370 and $17,248 for the fiscal years ended in 1998, 1997 and 1996, respectively. Net Income Per Share - The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" (EPS), which is effective for both interim and annual periods ending after December 15, 1997. SFAS No. 128 requires dual presentation of basic EPS and diluted EPS. Basic EPS is computed as net income divided by the weighted-average number of common shares outstanding for the period. The weighted average number of common shares outstanding was 32,937 for 1998 and 1997 and 33,312 for 1996. The Company had no outstanding options, warrants or other potential common stock equivalents in any of the three years ended December 26, 1998. Reported EPS in prior periods have been restated to conform to the provisions of SFAS 128. Statement of Cash Flows - Cash paid for interest in 1998, 1997 and 1996 was $32,691, $45,560 and $58,394 respectively. Cash paid for income taxes in 1998, 1997 and 1996 were $136,764, $1,404 and $3,346, respectively. During 1998, the Company entered into direct financing transactions for the acquisition of vehicles and equipment in the amount of $104,308. 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. 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 due to their short term maturity, or in the case of long term debt, such amounts bear rates of interest which approximate the Company's current borrowing rate for instruments with similar terms. 7 (3) Property and Equipment Property and equipment consisted of the following at December 26, 1998 and December 27, 1997:
1998 1997 ---- ---- Furniture and equipment $ 971,407 $ 900,979 Vehicles 129,795 87,685 Leasehold improvements 49,564 49,564 ------------- ------------- 1,150,766 1,038,228 Less: Accumulated depreciation and amortization (964,990) (927,988) ------------- ------------- $ 185,776 $ 110,240 ============= =============
Depreciation and amortization expense for 1998, 1997 and 1996 was $56,928, $59,854 and $79,995, respectively. (4) 401(k) Plan The Company sponsors a 401(k) plan for its employees. Under the plan, each eligible participant may contribute a percentage, up to 15% of compensation, to the plan. Participants' accounts are credited for their contributions upon disbursement of payroll. Discretionary employer matching contributions are provided for in the plan. The 401(k) plan discretionary matching expense was $8,832, $7,665 and $7,348 for the fiscal years ended in 1998, 1997 and 1996, respectively. (5) 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 provision for income taxes consisted of the following for the fiscal years ended in 1998, 1997 and 1996:
1998 1997 1996 ---- ---- ---- Federal: Current $ 120,951 $ - $ - Deferred (48,000) - - State: Current 41,444 700 3,346 Deferred (17,000) - - -------------- ------------- ------------- $ 97,395 $ 700 $ 3,346 ============= ============= =============
8 (5) Income Taxes (Continued) Income tax expense for 1998, 1997 and 1996 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:
1998 1997 1996 ---- ---- ---- Expected tax expense $ 91,800 $ 68,400 $ 30,300 Effect of graduated Federal rates (3,100) (6,100) (3,400) State income taxes, net of Federal income tax benefit 23,600 11,200 5,300 Change of valuation allowance related to loss carryforwards (27,000) (74,300) (27,800) Other, net 12,095 1,500 (1,054) ------------- ------------- -------------- $ 97,395 $ 700 $ 3,346 ============= ============= ============= The tax effects of temporary differences that give rise to deferred taxes are as follows at December 26, 1998, December 27, 1997 and December 28, 1996: 1998 1997 1996 ---- ---- ---- Deferred tax asset: Accounts receivable allowance $ 52,200 $ 27,000 $ 25,200 Accrued liabilities 12,800 - - Net operating loss carryforward - - 76,100 Valuation allowance - (27,000) (101,300) ------------- -------------- -------------- $ 65,000 $ - $ - ============= ============= =============
A valuation allowance was provided for the deferred tax asset in 1997 and 1996 due to the uncertainty of realization. (6) Demand Note Payable The Company may borrow up to $100,000 under the terms of an unsecured line-of-credit. Amounts borrowed bear interest at the bank's prime interest rate plus 1%. The bank's prime rate was 7.75% at December 26, 1998. Borrowings under this line-of-credit are personally guaranteed by the Company's principal officers/stockholders. At December 26, 1998 and December 27, 1997, there was $82,500 and $100,000, respectively, outstanding under the terms of this line-of-credit. 9 (7) Notes Payable Notes payable consisted of the following at December 26, 1998 and December 27, 1997:
1998 1997 ---- ---- Various notes payable with aggregate monthly installments of $3,737 ($1,116 - 1997), including interest at rates ranging from .9% to 12.2%. These notes mature through October, 2002 and are collateralized by the related equipment. $ 109,380 $ 30,034 Note payable to a bank with monthly principal payments of $6,230 through October, 1999, plus interest at the bank's prime rate plus 1.25%. This note was guaranteed by the officers/stockholders of the Company and was collateralized by substantially all of the Company's assets. The note was paid in full in 1998. - 134,167 Term note payable to a bank with monthly principal payments of $1,542 through October, 1999, plus interest at the bank's prime rate plus 1%. This note was also guaranteed by the officers/stockholders of the Company and was collateralized by substantially all of the Company's assets. The note was paid in full in 1998. - 30,000 ------------- ------------- 109,380 194,201 Less: Current portion (37,550) (173,462) ------------- ------------- $ 71,830 $ 20,739 ============= =============
The notes payable to a bank required the Company to meet certain financial covenants. At December 27, 1997 and December 28, 1996, the Company was not in compliance with all of the financial covenants. The Company obtained a waiver from the bank for these covenants through December, 1997 and 1996. At December 27, 1997, $70,903 of long-term notes payable had been classified as current due to the covenant violation. Future maturities of long-term debt are as follows at December 26, 1998: 1999.............................................$ 32,586 2000............................................. 29,428 2001............................................. 20,438 2002............................................. 8,461 ------------- $ 90,913 ============= 10 (8) Stockholders' Investment Reverse Stock Split - On March 26, 1999 the Company's Board of Directors authorized a 1-for-100 reverse stock split. In conjunction with the reverse stock split, the number of authorized shares will be reduced from 15,000,000 to 150,000 and the par value increased from $.04 to $4.00 per share. This transaction was given retroactive effect in the accompanying financial statements and related footnotes. The Board intends to have the Company purchase the stock of all fractional shareholders after the reverse split. The purchase price per share after the reverse stock split will be $12. The total amount to be paid to fractional shareholders to purchase their fractional shares is approximately $2,500. The costs incurred relating to this transaction during the year ended December 26, 1998 amounted to $37,540 and have been reported as an extraordinary item in the accompanying statement of income. The Company also intends to pay shareholders who hold fractional shares as a result of a 1992 1-for-4 reverse stock split. The total amount to be paid to these shareholders is approximately $1,700. 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 Company has reserved 6,475 common shares for issuance under the 1992 plan. 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 5 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. The Company did not have any outstanding options under the 1992 plan as of December 26, 1998, December 27, 1997 and December 28, 1996. There were no options issued during the three years ended December 26, 1998. (9) Related Party Transactions Subordinated Debt Due to Officers/Principal Stockholders - During 1997 and 1996, one of the Company's officers/stockholders made advances to the Company. The outstanding amount of these advances was $177,500 and $97,000 at December 26, 1998 and December 27, 1997, respectively. Amounts borrowed bear interest at the prime rate plus 3%. The prime rate was 7.75% at December 26, 1998. Interest expense was $7,948, $18,149 and $21,292 during 1998, 1997 and 1996, respectively. Repayment of these advances is subordinated to the amounts outstanding under all other bank debt agreements. Principal repayment in future years is scheduled for $18,000 per year. 11 (9) Related Party Transactions (Continued) On December 26, 1998, two of the Company's officers/stockholders made additional advances to the Company for $65,000 each. Amounts borrowed bear interest at 10.5% due monthly. These advances are due and payable on December 25, 1999. Future maturities of total debt due to officers/principal stockholders are as follows at December 26, 1998: 1999...............................................$ 148,000 2000............................................... 18,000 2001............................................... 11,500 ------------ $ 177,500 ============ Office Lease Commitment - The Company leases its Rochester facility through June 2000 from a company controlled by FCAC's principal stockholder at a monthly rent of $6,000 through January, 1999, and $7,665 through June, 2000. The Company also leases storage space in Rochester from another company controlled by FCAC's principal stockholder at an annual rent of $45,000 through December, 1999. Rent and common area charges were approximately $117,000 in 1998 and $72,000 in 1997 and 1996. At December 26, 1998, there were no outstanding rental payments. The Company owed approximately $15,000 for unpaid rent at December 27, 1997, which is included in accounts payable to related parties in the accompanying balance sheet. Minimum future lease payments under lease agreements with related parties are as follows at December 26, 1998: 1999...............................................$ 135,315 2000............................................... 45,990 ------------ $ 181,305 ============ During 1997, total unpaid rent of $18,100 was forgiven by another related party. This amount has been reflected as a capital contribution, net of income taxes of $4,000 in the financial statements for the year ended December 27, 1997. Revenue and Accounts Receivable - In each of 1998, 1997 and 1996, approximately 12%, 8%, and 4%, respectively, of abstract revenue was derived from a law firm in which an officer/stockholder is a partner in. At December 26, 1998, December 27, 1997 and December 28, 1996, the Company was owed $76,346, $79,125 and $44,878, respectively, related to this revenue. 12 (10) Lease Commitments The Company leases other office facilities under operating lease agreements with unrelated parties expiring through June, 2003. Minimum future lease payments under non-cancelable lease agreements with unrelated parties are as follows at December 26, 1998: 1999...............................................$ 76,502 2000............................................... 33,732 2001............................................... 30,482 2002............................................... 25,932 2003............................................... 12,966 ------------ $ 179,614 ============ Rent expense related to these operating leases was approximately $113,000, $126,000 and $121,000 for the fiscal years ended in 1998, 1997 and 1996, respectively. (12) Litigation The Company is involved in various legal actions in the normal course of its business. In the opinion of management, the eventual outcome of these actions will not have a material adverse effect on the financial statements of the Company. 13 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES To the Stockholders of Four Corners Financial Corporation and Subsidiary: Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidated supplemental schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. FREED MAXICK SACHS & MURPHY, P.C. March 16, 1999 Buffalo, New York INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES To the Stockholders of Four Corners Financial Corporation and Subsidiary: Our report on our audit of the basic financial statements of Four Corners Financial Corporation and Subsidiary as of December 27, 1997 and December 28, 1996, and for each of the two years in the period ended December 31, 1997, 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. BONADIO & CO., LLP November 30, 1998 Rochester, New York FOUR CORNERS FINANCIAL CORPORATION AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 26, 1998, DECEMBER 27, 1997 AND DECEMBER 28, 1996
Additions --------- Balance at Charges to Balance at Beginning Charges to Other End of of Period Expenses Accounts Deductions Period --------- ---------- -------- ---------- ---------- FOR THE YEAR ENDED DECEMBER 26, 1998: Allowance for doubtful accounts $ 90,000 $ 274,547 $ - $ (190,547) $ 174,000 ========== =========== ========== ============ =========== FOR THE YEAR ENDED DECEMBER 27, 1997: Allowance for doubtful accounts $ 84,000 $ 112,329 $ - $ (106,329) $ 90,000 ========== =========== ========== ============ =========== FOR THE YEAR ENDED DECEMBER 28, 1996: Allowance for doubtful accounts $ 84,000 $ 114,175 $ - $ (114,175) $ 84,000 ========== =========== ========= ============ ===========
EX-22 2 SUBSIDIARIES OF REGISTRANT EXHIBIT 22 Subsidiaries of Registrant -------------------------- Name State Incorporated - ---- ------------------ Four Corners Abstract Corporation New York EX-27 3 ARTICLE 5 FDS FOR 10-K
5 1 YEAR DEC-31-1998 DEC-31-1998 134,133 0 709,747 174,000 0 891,741 1,150,766 964,990 1,503,499 911,443 0 133,752 0 0 356,974 1,503,499 5,214,743 5,214,743 1,043,507 3,829,983 0 0 34,153 307,100 97,395 209,705 0 37,540 0 172,165 .05 .05
EX-99.1 4 PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS EXHIBIT 99.1 ------------ PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS FOUR CORNERS FINANCIAL CORPORATION 370 East Avenue Rochester, New York 14604 Date of Proxy Statement: February 24, 1999 Date of Mailing: March 5, 1999 Special Meeting of Shareholders: March 26, 1999 The enclosed Proxy is solicited by The Board of Directors of Four Corners Financial Corporation (hereinafter the "Company"). Any Proxy given pursuant to this solicitation may be revoked by the Shareholder at any time prior to its exercise at the Special Meeting by (i) giving written notice of revocation to the Executive Vice President of the Company, (ii) properly submitting to the Company a duly executed Proxy bearing a later date, or (iii) attending the Special Meeting and voting in person. Attendance at the Special Meeting will not in and of itself revoke a Proxy. All written notices of revocation and other communications with respect to revocation of Proxies should be addressed as follows: William S. Gagliano, Executive Vice President, 370 East Avenue, Rochester, New York 14604. Shares of common stock represented by properly executed Proxies received at or prior to the Special Meeting and which have not been revoked will be voted in accordance with the instructions indicated thereon. If no instructions are indicated on a properly executed Proxy, such Proxies will be voted FOR each of the proposals set forth in this Proxy Statement. All of the expenses involved in preparing and mailing this Proxy Statement and the material enclosed herewith will be paid by the Company. The Company will reimburse banks, brokerage firms and other custodians, nominees and fiduciaries for expenses reasonably incurred by them in sending Proxy material to beneficial owners of stock. Holders of a majority of the issued and outstanding common stock of the Company must be present in person or by Proxy in order to establish a quorum for conducting business at the Special Meeting. Only record holders of the common stock at the close of business on February 24, 1999 are entitled to vote at the Special Meeting. On that day, 3,293,403 shares of the $.04 par value common stock of the Company were issued and outstanding. Each share is entitled to one vote at the Special Meeting. SHAREHOLDERS ARE ENCOURAGED TO READ AND REVIEW CAREFULLY THIS PROXY STATEMENT AND THE FINANCIAL INFORMATION AND EXHIBITS INCLUDED HEREWITH. NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THE SPECIAL MEETING - ------------------- At the Special Meeting, the record holders of the Company's common stock on February 24, 1999 (the record date for the Special Meeting) will be asked to consider, vote upon and approve the following proposals: 1. To approve the Board of Directors adoption of an Amendment to the Company's restated Certificate of Incorporation which provides for: (a) a reduction of the number of authorized shares of the Company's Common Stock from 15,000,000 authorized shares with a par value of $.04 per share to 150,000 authorized shares with a par value of $4.00 per share and (b) a 1 for 100 reverse stock split of the Company's currently issued and outstanding common stock; 2. To approve a cash payment in the amount of $12.00 times each fraction of a share resulting from such reverse stock split in lieu of the issuance of any resulting fractional shares; 3. To approve the payment by the Company of the indebtedness owed to Shareholders owing fractional shares resulting from the 1 for 4 reverse stock split effective July 31, 1992, together with the payment of simple interest on the amount of such indebtedness. The text of the proposed Certificate of Amendment to the Company's restated Certificate of Incorporation is set forth in Exhibit A to this Proxy Statement. The adoption of Proposals One and Two is conditioned upon the adoption of each other. Consequently, a vote against Proposal One will have the effect of a vote against Proposal Two. Proposals One and Two are referred to in this Proxy Statement together as the "Reverse Stock Split". Proposal Three is not related to or in any way conditioned upon the adoption of Proposals One and Two and a vote for or against Proposals One and Two will have no effect upon Proposal Three and a vote for or against Proposal Three will have no effect upon Proposals One and Two. -2- OVERVIEW OF THE REVERSE STOCK SPLIT - ----------------------------------- The following is a brief overview of certain information regarding Proposals One and Two which, together, are referred to as the "Reverse Stock Split" throughout this Proxy Statement. This overview is not intended to be a complete description of the matters covered in this Proxy Statement regarding the Reverse Stock Split and is subject to and qualified in its entirety by reference to the more detailed information contained elsewhere in this Proxy Statement, including the Exhibits hereto and the documents incorporated by reference herein. Purpose of the Reverse Stock Split - ---------------------------------- The purpose of the Reverse Stock Split is to cause the Company to become a privately owned corporation and to afford approximately 1,138 Shareholders to receive cash consideration for all or a portion of their equity position in the Company which is, in the reasonable belief of the Board of Directors, a fair price for such equity position, without such persons incurring the attendant costs of sale. See "The Reverse Stock Split Purpose; The Reverse Stock Split - Fairness." The Reverse Stock Split - Structure and Payment of Cash Consideration - --------------------------------------------------------------------- If the Reverse Stock Split is approved by the Shareholders at the Special Meeting, the Company expects to file a Certificate of Amendment to the Company's Restated Certificate of Incorporation with the Secretary of State of the State of Delaware. The form of the Certificate of Amendment is attached as Exhibit A to this Proxy Statement. Pursuant to the terms of the Certificate of Amendment, on the Effective Date of filing, the authorized shares of the Company's common stock will be reduced from 15,000,000 authorized shares with a par value of $.04 per share to 150,000 authorized shares with a par value of $4.00 per share. On the Effective Date, each 100 shares of the Company's common stock, $.04 par value per share, issued and outstanding immediately prior to the Effective Date will be automatically converted into 1 share of the Company's common stock, with a par value of $4.00 per share. The Board of Directors has determined, as is permitted under Delaware corporate law, to make a cash payment in lieu of the issuance of fractional shares. Consequently, a cash payment of $12.00 times each fraction of a share resulting from such 1 to 100 Reverse Stock Split will be made, in lieu of the issuance of any fractional shares, to those Shareholders who, after the Reverse Stock Split, own a fractional share of common stock. SHAREHOLDERS HOLDING COMPLETE SHARES, RATHER THAN FRACTIONS, AFTER THE CONSUMMATION OF THE REVERSE STOCK SPLIT WILL NOT BE ENTITLED TO RECEIVE CASH IN LIEU OF THOSE COMPLETE SHARES. See "The Reverse Stock Split - Structure and Payment of Cash Consideration." The Reverse Stock Split - Certain Effects - ----------------------------------------- -3- As of the record date, 1,008 Shareholders own, in the aggregate 15,275 shares or .46% of the Company's issued and outstanding common stock. Each of these Shareholders owns fewer than 100 shares so that, if the Reverse Stock Split is approved, each of these Shareholders will cease being Shareholders of the Company. Any Shareholder owning fewer than 100 shares may continue as a Shareholder, even if the Reverse Stock Split is approved, if he or she were to increase his or her ownership to 100 or more shares prior to the filing of the Certificate of Amendment with the Secretary of State of the State of Delaware. If the Reverse Stock Split is approved, 186 Shareholders owning, in the aggregate 3,278,128 shares or 99.54% of the Company's issued and outstanding common stock, will continue as Shareholders since each of these Shareholders owns 100 or more shares. Certain Potential Detriments of the Reverse Stock Split - ------------------------------------------------------- o If the Reverse Stock Split is approved, 1,008 nonaffiliated Shareholders, owning in the aggregate 15,275 shares, would cease being Shareholders of the Company. o If the Reverse Stock Split is approved, 174 nonaffiliated Shareholders, owning in the aggregate 395,267 shares, will continue as minority Shareholders and consequently will not, either singly or by aggregating their shares, be able to elect any members of the Company's Board of Directors, thereby affecting decisions regarding the Company's management and policies, including but not limited to compensation policy, dividend policy, merger and/or acquisition strategies, sale of the Company and/or its assets as well as decisions taken with respect to the ultimate liquidation of the Company and the distribution of its net assets to Shareholders; o If the Reverse Stock Split is approved, the Company will elect to become a private company by applying for termination of the registration of its shares of common stock under the Securities Exchange Act of 1934. Consequently, management believes that the ability of post-Reverse Stock Split Shareholders to locate broker/dealers willing to enter quotations for the Company's common stock and/or effectuate trades therein may be severely curtailed. As a result, it is management's belief that the only realistic way for continuing Shareholders to realize upon their equity ownership in the Company would be privately-negotiated transactions, a corporate redemption and/or liquidation or management's ability to locate one or more third-party purchasers for the Company's assets or common stock; o The Company estimates that it will save between $40,000-$50,000 annually in costs associated with its periodic reporting obligations under the Securities Exchange Act. If the Reverse Stock Split is approved, 1,008 nonaffiliated Shareholders, owning in the aggregate 15,275 shares for which they will receive an aggregate $1,833, will cease to be Shareholders and thereby will not participate in such future savings; -4- o The receipt by a Shareholder of cash in lieu of fractional shares of common stock pursuant to the Reverse Stock Split will be a taxable transaction for Federal income tax purposes. See "Material Federal Income Tax Consequences;" o The Board of Directors did not obtain a report or opinion with respect to the fairness of the Reverse Stock Split solely from the standpoint of the Company's nonaffiliated Shareholders; o The Board of Directors did not obtain a nonaffiliated representative to act solely on behalf of nonaffiliated Shareholders for purposes of negotiating the terms of the Reverse Stock Split or preparing a report with respect to the fairness of the Reverse Stock Split; o The Board of Directors did not structure the Reverse Stock Split to require the approval of at least a majority of the Company's nonaffiliated Shareholders. In this regard, the Company's affiliated Shareholders have stated that they will vote their shares for the Reverse Stock Split. Consequently, approximately 87.5% of the total issued and outstanding common stock of the Company entitled to vote for the Reverse Stock Split will be cast in favor and thus the Reverse Stock Split will be approved even if all of the nonaffiliated Shareholders of the Company vote their shares against the Reverse Stock Split; o Under the Delaware General Corporation Law, no appraisal rights exist with respect to the Reverse Stock Split and the Company is not voluntarily according dissenting Shareholders such rights. o SHAREHOLDERS OWNING COMPLETE SHARES, RATHER THAN FRACTIONS OF A SHARE AFTER THE REVERSE STOCK SPLIT WILL NOT BE ENTITLED TO RECEIVE ANY CASH PAYMENT. o The 12 cents per share price being offered is 24% of the price paid by the Company to purchase a former director's stock in September, 1996, and 4% of the price per share paid with respect to the 1992 Reverse Stock Split. Conflicts of Interest - --------------------- The Company's Affiliated Shareholders own, as of the record date, 2,882,861 shares of the Company's issued and outstanding common stock representing 87.5% of such stock. If the Reverse Stock Split is approved, 1,008 Shareholders of record, owning 15,275 shares or .46% of such stock, will cease being Shareholders of the Company. Consequently, the percentage of the Company owned by the Company's Affiliated Shareholders would increase by .59%, from 87.5% to 88.09%. If the Reverse Stock Split is approved, therefore, the Affiliated Shareholders' share of any dividends and/or other corporate distribution, including net proceeds of any liquidating distribution or the net proceeds generated by the sale of the Company's assets or common stock would increase by such percentage. -5- The Reverse Stock Split - Background - ------------------------------------ On July 28, 1998, the Board of Directors of the Company met to consider a proposal to convert the Company to private ownership. In reviewing the proposal, the Board considered that there has not been an active trading market for the Company's common stock since February, 1989, none has developed over the past decade despite management's efforts to stimulate market activity (including the 1992 reverse stock split) and management's belief that no significant trading in the Company's common stock is likely to develop in the foreseeable future. The Board considered that the Company has not qualified and will not likely qualify in the foreseeable future to have its common stock eligible for listing on any national securities exchange or for registration on an inter-dealer quotation system of a registered national securities association, such as the National Association of Securities Dealers, Inc. ("NASD"). The Board considered that a significant number of the Company's Shareholders hold less than 100 shares. Of approximately 1,194 Shareholders of record, 1,008 (approximately 85% of the Company's Shareholders) own fewer than 100 shares of common stock, aggregating 15,275 out of 3,293,403 issued and outstanding shares (.46%). The Board noted that none of these Shareholders had taken an active interest in the Company in over a decade and, due to each individual Shareholder's small equity position, would likely not take an active interest (including trading his or her shares) in the foreseeable future. The Board further noted that of the 1,008 Shareholders, 891 owned 25 or fewer shares. Thus, even if for any reason, an active market were to develop for the Company's common stock, at prices of, for example, $.50 or $1.00 per share (which had not occurred in almost a decade) these Shareholders would nonetheless have limited opportunities to realize commensurate value for their shares. Any sales of such Shareholders' shares at such prices would ordinarily involve disproportionately high brokerage commissions unless the minimum brokerage commission typically payable on any sale transaction were to be waived and/or reduced. The Board further considered that the Company has incurred, and, if the Company were to remain a public company, would continue to incur, substantial costs as the result of its registered status under the Securities Exchange Act of 1934 (the "Exchange Act"). The Board concluded that the fact that no Shareholder of the Company, whether large or small, whether affiliated or nonaffiliated, had taken advantage of the Company's public status for close to a decade weighed heavily against continuing to incur substantial costs associated with continued maintenance of a public market for the Company's common stock. Moreover, the Board considered that the sale of the Company (involving the sale of all or substantially all of the Company's assets, the merger of the Company into or with another corporation, or another form of business combination) was not a feasible option at this time. The Board noted that no third party had expressed any interest in purchasing the assets of the Company, in merging with the Company, or otherwise in entering into any business combination with the Company. The Board considered that over the past number of years, informal discussions with prospective purchasers from time to time had generated no genuine interest in pursuing formal negotiations for the purchase of the Company. -6- Based upon these considerations, the Board concluded that neither the Company itself nor the Company's Shareholders were deriving any material benefit from the continued registration of the Company's common stock under the Exchange Act and that a conversion of the Company to private ownership was both appropriate and desirable. Dissenting Shareholders Rights Under the Delaware General Corporation Law, the existing holders of the Company's common stock are not entitled to dissenters' rights of appraisal in connection with the consummation of the Reverse Stock Split. Appraisal The Board of Directors determined that it would commission the accounting firm of Bonadio & Co., LLP ("Bonadio"), to conduct an appraisal of the Company's common stock in order to determine the cash consideration to be paid to Shareholders owning fractions of shares after the effectiveness of the Reverse Stock Split ("Fractional Shareholders"). Bonadio submitted its initial appraisal report to the Board on July 28, 1998 and its final appraisal report to the Board on September 30, 1998. Based upon the Bonadio appraisal report, the Board determined that $12.00 times each fraction of a share was a fair price to pay the Fractional Shareholders. The appraisal report of Bonadio is found as Exhibit B to this Proxy Statement. Voting The proposed Reverse Stock Split must be approved by a vote of not less than a majority of the total number of votes cast at the Special Meeting (including abstentions) in person or by Proxy. Broker non-votes will not be treated as votes cast or shares entitled to vote on matters as to which the applicable rules of the National Association of Securities Dealers, Inc. withhold the broker's authority to vote in the absence of direction from the beneficial owner. Non-broker Shareholders who are present in person or by Proxy and have the legal authority to vote their shares but who abstain from voting will adversely affect the outcome of this Proposal. The Company's affiliated Shareholders, owning 87.5% of the Company's issued and outstanding common stock as of the record date, have indicated their intention to vote for the approval of the Reverse Stock Split and consequently, it will be approved even if all of the Company's nonaffiliated Shareholders vote against approval. -7- THE REVERSE STOCK SPLIT - BACKGROUND - ------------------------------------ On July 29, 1992, the Company's Board of Directors recommended and the Shareholders approved a 1 for 4 reverse stock split which became effective on July 31, 1992. The purpose of the 1992 reverse stock split was to stimulate interest in the Company's common stock which, prior to the split, had not been actively traded since February, 1989. The Board of Directors has concluded that the 1992 reverse stock split has not accomplished its purpose of generating an active market for the Company's common stock. As reported in the Company's Annual Report (Form 10-K) filed with the Securities and Exchange Commission for the Company's fiscal year ended December 31, 1997, there is no trading in the Company's common stock, such stock being listed in the pink sheets by the National Quotations Bureau, Inc. without bid and/or asked prices for all quarters in 1995, 1996 and 1997 respectively. This pattern has continued during the first, second and third quarters of fiscal 1998 and management believes that this trend will continue for the foreseeable future. See "Market Prices for Shares of Common Stock; Dividends." In light of the above circumstances, the Board, at its meeting held July 28, 1998, considered a proposal to convert the Company to private ownership. In reviewing the proposal, the Board considered the fact that, as indicated above, there has not been an active trading market for the Company's common stock since February, 1989, none has developed over the past decade despite management's efforts to stimulate market activity (including the 1992 reverse stock split) and management's belief that no significant trading in the Company's common stock is likely to develop in the foreseeable future. The Board also noted that management is unaware of any market trades in the Company's common stock since February, 1989. The Board further considered that the Company has not qualified and will not likely qualify in the foreseeable future to have its common stock eligible for listing on any national securities exchange or for registration on an inter-dealer quotation system of a registered national securities association, such as the National Association of Securities Dealers, Inc. ("NASD"). The Board next considered that only 186 of the Company's 1,194 Shareholders own 100 or more shares, with 891 Shareholders owning 25 or fewer shares. The Board noted that the only transaction since February, 1989 of which it was aware, that of a Company repurchase in September, 1996 of 50,000 shares from a former director in a private transaction, was for $.50 a share. Consequently, even if, for some reason, an active market for the Company's shares did develop (at, perhaps, $.50 or even $1.00 per share) a significant number of Shareholders would not be able to realize commensurate value for their shares unless a waiver of the normal, minimum brokerage commission were obtained in each case. Consequently, a considerable number of the Company's Shareholders would face considerable difficulties in order to effectuate a sale of their shares and thus, realize any commensurate value on their holdings. -8- The Board further considered that 1,008 Shareholders own 15,275 shares, representing a .46% ownership interest in the Company. None of these Shareholders had taken an active interest in the Company and have not communicated with the Company (including communications regarding the exchange of shares and payment of cash consideration as a result of the 1992 reverse stock split) in over a decade. Consequently, the Board concluded, that based upon the small amount of such Shareholders' holdings and historical experience, it was quite unlikely that such Shareholders would take an active interest in the Company (including trading of their shares) in the foreseeable future. At the same time, the Company has incurred, and, if the Company were to remain public, would continue to incur, substantial costs as the result of its registered status under the Securities Exchange Act of 1934 (the "Exchange Act"). The Company annually incurs approximately $40,000 - $50,000 in costs associated with Exchange Act compliance, including legal, auditing, printing and computer related expenses, to prepare and file its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, reports and schedules required to be filed by the Company's officers, directors and largest Shareholders, as well as proxy solicitation materials. The Company's management is also required to devote substantial time and attention to prepare and review these filings. The Board next considered that the sale of the Company (involving the sale of all or substantially all of the Company's assets, the merger of the Company into or with another corporation, or other form of business combination) was not a feasible option at this time. The Board noted that no third party had expressed any interest in purchasing the assets of the Company, in merging with the Company, or otherwise in entering into a business combination with the Company. The Board considered that over the past number of years, informal discussions with prospective purchasers from time to time had generated no genuine interest in pursuing formal negotiations for the purchase of the Company. More specifically, no contacts and/or negotiations concerning a merger, consolidation or acquisition have been entered into or occurred since the commencement of the Company's fiscal year beginning January 1, 1996. Based upon the above considerations, the Board concluded that neither the Company itself nor the Company's Shareholders are deriving any material benefit from the continued registration of the Company's common stock under the Exchange Act and that a conversion of the Company to private ownership was both appropriate and desirable. -9- GOING PRIVATE; CONSIDERATION OF - ------------------------------- ALTERNATIVES TO REVERSE STOCK SPLIT - ----------------------------------- At its July 28, 1998 meeting, the Board considered that, under rules promulgated by the Securities and Exchange Commission, it was necessary to reduce the number of record holders of the Company's common stock to less than 300 in order to "go private" and deregister its common stock under the Exchange Act. As the result of such deregistration, management believes that the ability of post-Reverse Stock Split Shareholders to locate broker/dealers willing to enter quotations or effectuate trades in the Company's common stock would be severely curtailed since the Company would no longer be required to furnish such broker/dealers with current information concerning the Company's operations and financial condition. Unless the Company was to voluntarily furnish such information (it has made no commitment to do so), management believes that the ability of broker/dealers to effectuate trades in the Company's common stock would be virtually eliminated. See "The Reverse Stock Split Certain Effects." The Board reviewed a number of alternatives to the Reverse Stock Split in order to convert the Company to private ownership. The Board determined that the first alternative considered, that of privately negotiated or open market purchases, would be cumbersome and in all likelihood, would not enable the Company, in any reasonable period of time, to purchase a significant number of shares of the Company's common stock to ensure the reduction of the number of the holders of the shares of its common stock to less than 300. The Board noted that over the past decade the Company has had virtually no meaningful contact with its numerous but small Shareholders. The Board also determined that the legal and other transaction costs to implement this alternative would be substantially greater than the costs to implement the Reverse Stock Split. Similarly, the Board concluded that a Company tender offer on a shareholder-wide basis would not be feasible for the same reasons that the alternative of privately negotiated or open market purchases would not be feasible. As discussed above, the Board considered the possibility of a sale of the Company but concluded that the absence of genuine, prospective purchasers foreclosed this alternative. The Board also considered the alternative of additional public or private equity financing to enhance the marketability of the Company's common stock and concluded that this alternative would not be feasible. The Company would be required, given the current value of its shares, to sell a substantial number of additional shares of its common stock in order to create a larger "public float" in its common stock, resulting in the dilution of all of the current Shareholders' interest in the Company. There would be no guarantee that such an alternative would create a more active market in the Company's common stock; however, the Company would remain subject to the regulatory and reporting requirements of the Exchange Act. At its July 28, 1998 meeting, therefore, the Board concluded that the Reverse Stock Split, including the payment of cash consideration in lieu of issuing fractional shares, was the most expeditious, efficient and cost effective method of converting the Company to private ownership. In this regard, the Board noted that, while the Reverse Stock Split, if approved, would eliminate a -10- large percentage of existing Shareholders of record (1,008 out of 1,194 or approximately 85%), such Shareholders own only 15,275 of 3,293,403 (.46%) outstanding shares. The holders of the Company's equity, represented by 186 Shareholders, would retain and, proportionately, increase their equitable position in the Company. THE REVERSE STOCK SPLIT - PURPOSE - --------------------------------- The purpose of the proposed Reverse Stock Split is to cause the Company to become a privately-owned corporation in a manner that is both fair to the Company and to its Shareholders. As discussed above, management believes that the Company and its Shareholders do not derive significant benefit from the Company's status as a public company, including the development of a market of consequence for its shares of common stock and the appreciation in value as the result of the public trading of such stock. On the other hand, the conversion of the Company from a public, reporting company to a private, non-reporting company will result in substantial benefits to the Company, including elimination of the substantial costs it incurs each year as the result of its reporting obligations. Management proposes to pay cash consideration to Shareholders in lieu of the issuance to them of fractions of a share resulting from the Reverse Stock Split. The amount of the cash consideration, $12.00 times each fraction of a share, was arrived at based upon an appraisal of the Company undertaken by the Company's independent accounting firm, Bonadio, specifically to arrive at the amount of such cash consideration. See the "Reverse Stock Split - Fairness." The proposed Reverse Stock Split will afford approximately 1,138 of the Company's 1,194 Shareholders ("Fractional Shareholders") to receive cash consideration for all or a portion of their equity position in the Company which is, in the reasonable belief of the Board of Directors, a fair price for such equity position. The Board considered its payment of cash consideration to be significant, given the fact that there is not now and will not likely in the future develop a market of consequence for the shares of the Company's common stock to permit any significant trading of such shares. Moreover, the Company's operational and financial constraints, as reported in the Company's 10-K for the Company's fiscal year ended December 31, 1997, now prevent and likely in the foreseeable future will prevent the payment of any dividends from earnings of the Company to its Shareholders. -11- Management believes that these Fractional Shareholders will not receive anything of value for their shares in the foreseeable future. First, no market has existed for the Company's common stock for almost a decade. There has been no interest in the Company for over 10 years, whether expressed by prospective purchasers of the Company as a whole (there have been none) or by investors placing an offer or bid for shares of the Company in the open market. There is no current interest in the Company's stock, and management believes none is likely to develop. Based upon the Company's past history and current financial condition, it is highly unlikely that any investor would purchase a minority position in the Company. In other words, management believes such Fractional Shareholders have no realistic opportunity to sell their shares since appear to be no buyers for their shares. THE REVERSE STOCK SPLIT - STRUCTURE AND - --------------------------------------- PAYMENT OF CASH CONSIDERATION - ----------------------------- If the Reverse Stock Split is approved by the Shareholders at the Special Meeting, the Company expects to file a Certificate of Amendment to the Company's Restated Certificate of Incorporation with the Secretary of State of the State of Delaware on or around December 10, 1998 (the "Effective Date") in order to effectuate the Reverse Stock Split. The form of the Certificate of Amendment is attached as Exhibit A to this Proxy Statement. Pursuant to the terms of the Certificate of Amendment, on the Effective Date, the authorized shares of the Company's common stock will be reduced from 15,000,000 authorized shares with a par value of $.04 per share to 150,000 authorized shares with a par value of $4.00 per share. On the Effective Date, each 100 shares of the Company's common stock, $.04 par value per share, issued and outstanding immediately prior to the Effective Date will be automatically converted into 1 share of the Company's common stock, with a par value of $4.00 per share. As of the record date, there are 3,293,403 common shares issued and outstanding owned by 1,194 Shareholders. If the Reverse Stock Split is approved, on the Effective Date, the 3,293,403 common shares will be converted into 32,723 common shares (after the elimination of fractional shares), owned by 186 Shareholders. 1,008 Shareholders of record owning, prior to the Reverse Stock Split, 15,275 shares would be eliminated. The Board determined, as is permitted under Delaware law, to make a cash payment in lieu of the issuance of fractional shares. It commissioned the accounting firm of Bonadio to conduct an appraisal of the Company for the specific purpose of arriving at a price to pay for each fractional share. Bonadio submitted its initial appraisal report to the Board on July 28, 1998 and its final appraisal report to the Board on September 30, 1998. Based upon the Bonadio appraisal report, the Board determined that $12.00 times each fraction of a share was a fair price to pay the Fractional Shareholders. The appraisal report of Bonadio is found as Exhibit B to this Proxy Statement. Within 10 days after the Effective Date, the Company will mail to each Shareholder a notice of the filing of the Certificate of Amendment (the "Notice of Filing") and a Letter of -12- Transmittal (the "Letter of Transmittal") containing instructions with respect to the submission of stock certificate(s) to be exchanged for new stock certificate(s) representative of the number of whole shares owned by each Shareholder after the effectiveness of the Reverse Stock Split. The Letter of Transmittal will also contain instructions with respect to the submission of stock certificate(s) in exchange for the cash consideration to be paid by the Company in lieu of the issuance of a certificate representing fractional shares of common stock. THE NOTICE OF FILING AND THE LETTER OF TRANSMITTAL WILL BE TRANSMITTED BY THE COMPANY TO THE SHAREHOLDERS AT A DATE SUBSEQUENT TO THE EFFECTIVE DATE. SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THE NOTICE OF FILING AND LETTER OF TRANSMITTAL ARE RECEIVED AND SHOULD SURRENDER THEIR CERTIFICATES ONLY WITH THE RETURN OF THE LETTER OF TRANSMITTAL TO THE COMPANY'S TRANSFER AGENT AND ONLY IN ACCORDANCE WITH THE INSTRUCTIONS SET FORTH IN THE LETTER OF TRANSMITTAL. There will be no service charges payable by the Shareholders in connection with the exchange of stock certificates or with the payment of cash consideration in lieu of the issuance of fractional shares of common stock upon the effectiveness of the Reverse Stock Split. These costs, if any, will be borne by the Company. THE REVERSE STOCK SPLIT - FAIRNESS - ---------------------------------- The Board of Directors, at its meeting held July 28, 1998, considered the fairness of the proposed Reverse Stock Split. At the same meeting, Messrs. Frank B., Bernard J., Anthony M. Iacovangelo, in their capacity as affiliated shareholders of the Company and as controlling partners of Wegman Building Associates (the "Affiliated Shareholders") also considered the fairness of the proposed Reverse Stock Split. The Board of Directors and Affiliated Shareholders, unanimously concluded that, for the reasons set forth herein, the Reverse Stock Split, is fair to, and in the best interests of, both the Company and its nonaffiliated Shareholders. In making this determination, the Board of Directors and Affiliated Shareholders, considered the following factors: (i) current market prices of the Company's common stock; (ii) historical market prices of the Company's common stock; (iii) net book value of the Company; (iv) going concern value of the Company; (v) liquidation value of the Company; (vi) purchase price paid by the Company or its affiliates within the Company's last two fiscal years; (vii) the appraisal submitted to the Company's Board and its Affiliated Shareholders by Bonadio; and (viii) whether the Company or any of its affiliates were aware of firm offers made by any unaffiliated person during the preceding 18 months for (A) the merger, consolidation of the Company into or with such unaffiliated person or of such unaffiliated person into or with the issuer, (B) the sale or the transfer of all or any substantial part of the assets of the Company or (C) the sale or any other transfer of the securities of the Company which would enable the securities holder thereof to exercise control of the Company. In assessing these factors, the Board and its Affiliated Shareholders concluded that it was desirable and appropriate to engage the services of the Company's accounting firm, Bonadio, to assist each of them in according the proper weight to be given to each of these factors and to -13- prepare an appraisal of the Company in order to arrive at the cash consideration to be offered to Fractional Shareholders in connection with the Reverse Stock Split. In this connection, no restrictions and/or limitations were placed by either the Board or the Affiliated Shareholders upon Bonadio on the scope of any investigation to be undertaken or carried on by Bonadio in making such an appraisal. In seeking such assistance, the Board and the Affiliated Shareholders considered the professional experience and background of the Bonadio firm, its familiarity with the Company and its business, its familiarity with the U.S. and New York economies as such economies relate to the housing industry and, more specifically, the Company's sole business, namely, the Title Insurance Industry. Bonadio is the second largest CPA firm in the metropolitan area of Rochester, New York. They have four professional specialists in their business valuation group who concentrate in this area. Each of the members of their business valuation group has received specialized training in the area of business valuations through courses offered by the American Institute of Certified Public Accountants, the National Association of Certified Valuation Analysts, and the American Society of Appraisers. Their experience includes performing business valuations in connection with employee stock ownership plans, gift and estate taxes, buy-sell agreements, mergers and acquisitions, and succession planning. The Board and the Affiliated Shareholders also noted that there was no material relationship between the Company, its Affiliated Shareholders and Bonadio and/or its members, either currently or during the past two years, and that no material relationship was understood by the Board and its Affiliated Shareholders to be contemplated in the future. The Board of Directors and the Affiliated Shareholders instructed Bonadio to provide their professional opinion of the fair market value of Four Corners Financial Corporation and its wholly owned subsidiary on a minority interest basis as of March 31, 1998. The results of the Board's and the Affiliated Shareholders' assessment of the eight factors set forth above were as follows: (i) current market prices - no weight assigned since no such prices exist; (ii) historical market prices - no weight assigned since the last bid price for the Company's common stock was made nearly a decade ago; (iii) Net book value - assigned partial weight. The net book value of the Company at March 31, 1998 after applicable discounts for liquidity and minority interest was estimated as $304,000 or $.09 per share outstanding. Because this method does not include intangible value related to the Company's operations, it was not accorded substantial weight. (iv) going concern value - substantial weight assigned as this factor was the major component of Bonadio's "capitalization of earnings" approach to value described on pages 17 and 18 of this Proxy Statement; -14- (v) Liquidation value - assigned partial weight. The liquidation value of the Company at March 31, 1998 was estimated to be less than the net book value share of $.09 per share outstanding described in (iii) above. Because the Company is a going concern and because liquidation value does not include intangible value related to the Company's operations, it was not accorded substantial weight. (vi) purchase price paid by the Company - it was noted that on September 5, 1996 the Company repurchased 50,000 shares of its common stock from a former director of the Company at $.50 per share for the total consideration of $25,000.00. The amount of this transaction was equal to the former director's original purchase price for such shares upon his election as a director in 1988. The Board of Directors and Affiliated Shareholders requested Bonadio to give adequate consideration to this transaction during its appraisal process, and the Board and the Affiliated Shareholders have been assured by Bonadio that such consideration was given. (vii) Bonadio appraisal - the Board and the Affiliated Shareholders accepted Bonadio's appraisal report and its opinion that the fair market value of the cash consideration to be paid to Fractional Shareholders was $12.00 times each fraction of a share resulting from the 1 for 100 Reverse Stock Split. As described on Page 1 of the valuation report, Bonadio's opinion of value relied on a "value in use" or going concern premise. They assumed in their valuation that the Company is an ongoing business enterprise. The concept behind going concern value is that an operating enterprise has a work force, systems, procedures, operating assets and organizational structure in place. Since the Company is a viable operating entity, it has "intangible" value above and beyond the "tangible" value of its assets. The net book and liquidation values were considered by Bonadio but given only minor weight since the intangible value of the Company would be ignored. Bonadio also considered the purchase of shares held by a former director in 1996 at $.50 per share for total consideration of $25,000. The amount of the transaction was equal to the director's original purchase price upon his election as a director in 1988. This transaction was considered to be an isolated event with specific circumstances and not an accurate indication of fair market value as would be determined in an efficient market between a hypothetical willing buyer and seller. The number of shares purchased represented less than 2% of the total shares outstanding. Because the transaction was isolated with specific circumstances and was for less than 2% of the total shares -15- outstanding, no weight was assigned to this transaction in estimating the current value of the Company. (viii) firm offers - this factor was assigned no weight since no firm offers have been received. The appraisal report of Bonadio relied on by the Board of Directors and Affiliated Shareholders in order to establish the cash consideration to be paid to the Fractional Shareholders in connection with the Reverse Stock Split is attached to this Proxy Statement as Exhibit "B". A summary of Bonadio's appraisal report is as follows: (i) Appraisal Procedures -------------------- Bonadio's analysis began with the review of certain information relating to the financial and operational performance of the Company. The information included financial statements and tax returns of the Company for the years ended December 31, 1993 through 1997. Bonadio also utilized information obtained through analytical reviews of significant accounts, trend analysis, inventory accounting policies and valuation, management questionnaires and discussions, including an interview with William S. Gagliano, Executive Vice President, receivable collection history, business litigation issues, sales analysis, etc. This information and Bonadio's extensive knowledge of the Company's operating history was found to be useful in performing the valuation. After it had collected the information received from the Company or obtained from its own resources, Bonadio analyzed this information in order to select the methods of valuation applicable to its appraisal. It arrived at its opinion of value utilizing generally accepted valuation approaches and methods, including the capitalization of earnings method. It also considered but did not use the asset method because the Company does not hold significant tangible assets. The guideline company method was also considered. However, a publicly traded company in a similar business with similar operating characteristics could not be located. (ii) Objective --------- The objective of the analysis was to provide an independent opinion of the fair market value of a minority interest in the Company's common stock as of a reasonably practicable date and the date chosen was March 31, 1998. The appraisal report, annexed to this Proxy Statement as Exhibit B, provides a detailed narrative explanation of the methods, procedures and calculations used to arrive at Bonadio's opinion of fair market value as of such date. The purpose of the valuation was to provide a basis for valuing the stock of the Company for purposes of the Reverse Stock Split. The Bonadio opinion is the result of a detailed analysis of the Company including data accumulations, quantitative analysis, financial analysis and selection of appropriate valuation criteria. All of the these items were combined with informed professional judgment to produce a reasonable opinion of the fair market value of the Company's stock. Bonadio's opinion of fair market value relied on "value in use" or going concern value. This premise assumes that the Company is an ongoing business enterprise with management operating in a rational way with a goal of maximizing shareholder value. The Bonadio analysis -16- considered those facts and circumstances present with respect to the Company at the valuation date of March 31, 1998 and Bonadio stated in its opinion that its opinion of value would likely be different if another valuation date was used. (iii) Material Factors Considered --------------------------- The appraisal report considered the nature and history of the Company, its marketing activities and marketing strategies, the Company's competition, its facilities and equipment, its current state of financing, its management, the stock ownership of the Company and the Company's expectations for the future, the United States, New York economic conditions and outlook in general as well as the conditions and outlook for the Company's specific business, namely, the title insurance industry. (iv) Capitalization of Earnings -------------------------- The basic approach to valuing the Company was the capitalization of earnings method. The rate used to capitalize the earnings of the Company is the estimated rate of return currently available in the market on alternative investments with comparable risk. Bonadio's estimate of the capitalization rate of the Company was 22.7% and is derived from market evidence and is the sum of the following components: a risk free investment rate, which is represented by the yield on 20 year U.S. Treasury Bonds as of the valuation date; a premium for risk which is the sum of the following: an equity risk premium, an additional premium for the extra risk associated with the size of the Company, and an additional premium for other risk factors specific to the Company relating to its operations. In determining an adjustment for other risk factors that should be provided for the Company, Bonadio considered the following primary factors: o the Company is regional and dependent on the local economy; o there are few barriers to entry; o most customers are loyal to their agent, not necessarily the company their agent works for; o the company does not provide specialized or proprietary services; o the Company does not control significant market share in any market it operates in; o the Company has a current ratio of less than 1; o the Company is highly leveraged; -17- o the Company operates in a mature industry; and o the Company has not experienced stable operating margins and earnings in recent years. The following table summarizes how the capitalization rate of 22.7% was achieved: Risk-free investment rate 6.0% Equity risk premium 8.2% ------ Average market return 14.2% Risk premium for company size 6.0% Other risk factors 5.0% ------ Discount rate 25.2% Average growth rate (2.5)% ------ Capitalization Rate 22.7% ====== (v) Discount -------- For purposes of the valuation, Bonadio applied discounts to reflect the lack of marketability and the lack of control associated with a minority interest. In making these discounts, Bonadio noted that the availability of a marketability discount is based on the inability of an owner to quickly convert his investment to cash. Despite the fact that the Company is a public company, trading has been nonexistent since 1989, the stock is currently listed in the Pink Sheets with virtually no market for its shares, and consequently for purposes of the valuation, a marketability discount of 10% was applied. A minority discount was used to reflect the practical difficulties that a minority shareholder experiences in influencing management or affecting liquidation in order to convert his shares to cash. For the purpose of its valuation, a minority discount of 25% was applied. In accepting the appraisal report of Bonadio, the Board of Directors and Affiliated Shareholders noted that each had instructed Bonadio to prepare a fair valuation of the Company's common stock as of March 31, 1998 for the specific purpose of determining the fair value of the cash consideration to be paid to Fractional Shareholders in lieu of fractional shares resulting from the Reverse Stock Split and that it had imposed no limitations on the scope of any investigation to be undertaken or carried on by Bonadio in making such appraisal. -18- The Board of Directors and Affiliated Shareholders did not structure the Reverse Stock Split to require the approval of at least a majority of the Company's nonaffiliated Shareholders. Management believed that such an approach would be extremely cumbersome and ultimately fruitless since few, if any, nonaffiliated Shareholders have taken any interest, let alone an active interest, in the Company for over a decade. The Board of Directors and Affiliated Shareholders noted over the past 10 years, the Company has had virtually no meaningful contact with its numerous but small Shareholders and that only a few nonaffiliated Shareholders had exchanged their shares for new shares as a result of the July, 1992 reverse stock split and/or received the cash consideration to which they were entitled as a result of such split. See Proposal Three. Management did not retain a nonaffiliated independent representative to act on behalf of nonaffiliated Shareholders in connection with the proposed Reverse Stock Split. The Board of Directors and Affiliated Shareholders did not believe that retaining such a representative was justified in the light of the Company's history, its current size and financial condition as well as the lack of nonaffiliated Shareholder response to the 1992 reverse stock split. In addition, management noted that while the Reverse Stock Split, if approved, would result in the elimination of 1,008 nonaffiliated Shareholders of record, such nonaffiliated Shareholders owned only .46% of the Company's issued and outstanding common stock as of the record date. Moreover, management did commission Bonadio to opine as to a fair market value to be paid as cash consideration in connection with the Reverse Stock Split. The Board of Directors and Affiliated Shareholders concluded that the retention of Bonadio to perform an appraisal of the Company for the specific purpose of determining the cash consideration to be paid to Fractional Shareholders served as an adequate substitute for such representative. The appraisal report of Bonadio specifically concludes that $12.00 times each fraction of a share resulting from the Reverse Stock Split constitutes fair market value and the Board and the Affiliated Shareholders are relying on Bonadio's opinion in recommending the Reverse Stock Split to the Company's nonaffiliated Shareholders. Conflict of Interest - -------------------- The Board of Directors and Affiliated Shareholders also considered that the Reverse Stock Split presented potential or actual conflicts of interest between certain members of the Company's Board of Directors in their capacity as Affiliated Shareholders and the Company's nonaffiliated Shareholders. Specifically, it was noted that the Company's Affiliated Shareholders own, as of the record date, 2,882,861 shares of the Company's issued and outstanding common stock representing 87.5% of such stock. If the Reverse Stock Split is approved, 1,008 Shareholders of record, owning 15,275 shares or .46% of such stock, will cease being Shareholders of the Company. Consequently, the percentage of the Company owned by the Company's Affiliated Shareholders would increase by .59%, from 87.5% to 88.09%. If the Reverse Stock Split is approved, therefore, the Affiliated Shareholders' share of any dividends and/or other corporate distribution, including net proceeds of any liquidating distribution or the net proceeds generated by the sale of the Company would correspondingly increase. The Board of Directors and Affiliated Shareholders did not believe that the percentage increase in the Affiliated Shareholders' ownership interest in the Company impacted negatively upon the fairness -19- of the proposed Reverse Stock Split to nonaffiliated Shareholders. This conclusion was based on the fact that nonaffiliated Shareholders have not had and management's belief that for the foreseeable future, nonaffiliated Shareholders will not have any realistic opportunity to convert their shares to cash, that the proposed Reverse Stock Split does enable such Shareholders to realize cash for their shares, and the appraisal report of Bonadio provides that Bonadio's professional opinion that the cash consideration to be paid constitutes fair market value for the shares of the nonaffiliated Shareholders. THE REVERSE STOCK SPLIT - CERTAIN EFFECTS - ----------------------------------------- If the Reverse Stock Split is approved by the Company's Shareholders, upon the Effective Date, the number of authorized shares of common stock will be decreased from 15,000,000 shares with a par value of $.04 per share to 150,000 shares with a par value of $4.00 per share. The number of issued and outstanding shares of common stock will be decreased, after the elimination of the fractional shares, from 3,293,403 shares to 32,723 shares. The number of Shareholders of record will be decreased from 1,194 to 186. Shareholders of the Company who, after the effectiveness of the Reverse Stock Split, remain as Shareholders of the Company will have their proportionate interest in the Company increased from 99.54% to 100%. Each share of common stock owned by Fractional Shareholders which would upon conversion represent a fraction of a share will be automatically converted into the right to receive from the Company, in lieu of fractional shares of common stock, cash in the amount of $12.00 times the fraction of shares such Fractional Shareholders otherwise would have received. Shareholders owning less than 100 shares of common stock immediately prior to the Reverse Stock Split will cease to be Shareholders or have any equity interest in the Company and, therefore, will not share in its future earnings and growth, if any, will not have any right to vote on any future corporate matters, and would not share in liquidation proceeds, if any, if the Company were to dissolve. Shareholders who immediately prior to the effectiveness of the Reverse Stock Split hold fewer than 100 shares of the common stock of the Company may remain Shareholders by acquiring a sufficient number of shares to raise their ownership level to 100 or more shares. The proposed Reverse Stock Split will eliminate 1,008 out of 1,194 record holders of the Company's common stock, representing .46% of the Company's pre-Reverse Stock Split equity ownership. The following table sets forth illustrations of the effect of the Reverse Stock Split for Shareholders holding various representative number of shares: -20- Illustrations of the Effect of the Reverse Stock Split for Shareholders Holding Various Representative Numbers of Shares
Shares Held Fractional Share Shares Held After 100:1 Payout @ Shares Held Shareholder Currently Reversal $12/Share After Pay Out ----------- --------- -------- --------- ------------- A 75 .75 $ 9.00 0 B 99 .99 11.88 0 C 100 1.00 0 1 D 499 4.99 11.88 4 E 2,500 25.00 0 25 F 5,688 56.88 10.56 56 G 15,758 157.88 6.96 157 H 50,000 500.00 0 500 I 369,129 3,691.29 3.48 3,691 J 919,287 9,192.87 10.44 9,192
The shares of Common Stock are currently registered under the Exchange Act. Such registration may be terminated by application of the Company to the Securities and Exchange Commission, if the Company has fewer than 300 record holders of its shares of common stock. If the Reverse Stock Split is approved, upon the Effective Date, the Company will have fewer than 300 record holders of its common stock. The Company currently intends to make an application to the Securities and Exchange Commission for termination of the registration of its common stock as promptly as possible after the filing of the Certificate of Amendment. Deregistration would substantially reduce the information required to be furnished by the Company to its Shareholders, would make certain, otherwise applicable provisions, of the Exchange Act, such as the short-swing profit recovery provisions of section 16(b) and the requirement of furnishing a proxy statement in connection with Shareholder meetings pursuant to section 14(a), inapplicable and would eliminate the requirement that the Company prepare and file annual, quarterly and current reports under cover of Form 10-K, Form 10-Q and Form 8-K with the Securities and Exchange Commission. As a result of the Company's termination of its 1934 Act registration, the ability of post-Reverse Stock Split Shareholders to locate broker/dealers willing to enter quotations for the -21- Company's common stock and/or effectuate trades therein may be severely curtailed since such broker/dealers would not have access to current information about the Company and its financial condition. It is management's belief, therefore, that the only realistic way for continuing Shareholders to realize upon their equity ownership in the Company would be privately-negotiated transactions, a corporate redemption and/or liquidation or management's ability to locate one or more third-party purchasers for the Company's assets or common stock. PLANS FOR THE COMPANY AFTER THE REVERSE STOCK SPLIT - --------------------------------------------------- After the consummation of the Reverse Stock Split, the Company does not have any present plans or proposals which relate to or would result in any extraordinary corporate transaction, such as a merger, reorganization, or liquidation, involving the Company or any of its subsidiaries; a sale or transfer of a material amount of assets of the Company or any of its subsidiaries; any change in the present Board of Directors or management of the Company including, but not limited to, any plan or proposal to change the number or term of directors, to fill any existing vacancy on the Board of Directors or to change any material term of the employment contract of any executive officer or any material change in the present dividend rate or policy or indebtedness or capitalization of the Company. Upon consummation of the Reverse Stock Split, the assets, business, and operations of the Company will be continued substantially as they are currently being conducted as more fully set forth in the Company's annual report (Form 10-K) for the fiscal year ended December 31, 1997. MATERIAL FEDERAL INCOME TAX CONSEQUENCES - ---------------------------------------- The receipt by any Fractional Shareholder of cash in lieu of fractional shares of common stock pursuant to the Reverse Stock Split will be a taxable transaction for federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"). Under Section 302 of the Code, a Fractional Shareholder will recognize gain or loss upon receiving cash in lieu of fractional shares of common stock if (i) the Reverse Stock Split results in a "complete redemption" of all of the Fractional Shareholder's shares of common stock, (ii) the receipt of cash is "substantially disproportionate" with respect to the Fractional Shareholder, or (iii) the receipt of cash is "not essentially equivalent to a dividend" with respect to the Fractional Shareholder. These three tests are applied by taking into account not only shares that a Fractional Shareholder actually owns, but also shares that a Fractional Shareholder constructively owns pursuant to Section 318 of the Code. If any one of these three tests is satisfied, the Fractional Shareholder will recognize gain or loss equal to the difference between the amount of cash received by the Fractional Shareholder pursuant to the Reverse Stock Split and the tax basis in the existing shares of common stock owned by the Fractional Shareholder immediately prior to the Effective Date of the Reverse Stock Split. Provided that such shares of common stock constitute a capital asset in the hands of the Fractional Shareholder, this gain or loss will be taxed at a maximum rate of 20% if the shares of Common Stock have been held for more than one year and will constitute short-term capital gain or loss if the shares of Common Stock are held for one year or less. -22- Pursuant to the constructive ownership rules of Section 318 of the Code, a shareholder is deemed to constructively own shares owned by certain related individuals and entities in addition to these shares actually owned by the shareholder himself. For instance, an individual shareholder is considered to own shares owned by or for his or her spouse and his or her children, grandchildren and parents ("Family Attribution"). A shareholder is also considered to own a proportionate number of shares owned by estates or certain trusts in which the shareholder has a beneficial interest, by partnerships in which the shareholder is a partner, and by corporations in which 50% or more of the value of the stock is owned directly or indirectly by or for such shareholder. Similarly, shares directly or indirectly owned by beneficiaries of estates or certain trusts, by partners of partnerships and, under certain circumstances, by shareholders of corporations may be considered owned by these entities ("Entity Attribution"). A shareholder is also deemed to own shares which the shareholder has the right to acquire by exercise of an option. The receipt of cash by a Fractional Shareholder pursuant to the Reverse Stock Split will result in a "complete redemption" of all of the Fractional Shareholder shares of common stock, so long as the Fractional Shareholder does not actually or constructively own any shares of the Company's common stock as a result of and immediately after the effectiveness of the Reverse Stock Split. However, even if a Fractional Shareholder constructively owns shares of the Company's common Stock after the Reverse Stock Split, the receipt of cash may qualify for capital gain or loss treatment under the "complete redemption" test provided that (i) the Fractional Shareholder constructively owns shares of common stock as a result of the Family Attribution rules (or, in some cases, as a result of a combination of the Family and Entity Attribution rules), and (ii) the Fractional Shareholder qualifies for a waiver of the Family Attribution rules (such waiver being subject to several conditions, one of which is that the Fractional Shareholder has no interest (other than an interest as a creditor) in the Company immediately after the Reverse Stock Split including an interest as an officer, director, or employee. Based upon a review of the Company's stock transfer books as certified by the Company's Transfer Agent, management believes that most Fractional Shareholders will qualify for capital gain or loss treatment as a result of satisfying the "complete redemption" requirements. Consequently, management believes that most Fractional Shareholders will qualify for long-term capital gains treatment. However, a number of Fractional Shareholders will receive shares as well as cash in lieu of fractional shares upon the effectiveness of the Reverse Stock Split. Such Fractional Shareholders may nevertheless qualify for capital gain or loss treatment by satisfying either the "substantially disproportionate" or the "not essentially equivalent to a dividend" requirements. In general, the receipt of cash pursuant to the Reverse Stock Split will be "substantially disproportionate" with respect to the Fractional Shareholder if the percentage of shares of common stock owned by the Fractional Shareholder immediately after the effectiveness of the Reverse Stock Split is less than 80% of the percentage of shares of common stock actually and constructively owned by the Fractional Shareholder immediately before the Reverse Stock Split. Alternatively, the receipt of cash pursuant to the Reverse Stock Split will, in general, be "not essentially equivalent to a dividend" if the Reverse Stock Split results in a "meaningful reduction" in the Fractional Shareholder's proportionate interest in the Company. -23- If none of the three tests described above is satisfied, a Fractional Shareholder receiving cash as a result of the Reverse Stock Split will be treated under the distribution rules of Section 301 of the Code. Generally, pursuant to Section 301 of the Code, a distribution of cash by a corporation to its Shareholders is considered a taxable dividend in an amount equal to the entire amount of cash received by such Shareholder to the extent of the earnings and profits, both current and accumulated, of such corporation. Since the Company has generated earnings in each of its last two fiscal years, Fractional Shareholders who do not qualify for capital gain or loss treatment under the above described Section 302 rules will be treated as receiving dividend income under the distribution rules of Section 301. The receipt of new shares of common stock by Shareholders as a result of the Reverse Stock Split in exchange solely for such Shareholders' old shares of common stock will be a nontaxable transaction for federal income tax purposes. Consequently, a Shareholder (whether or not a Fractional Shareholder) receiving new shares of common stock will not recognize gain or loss, or dividend income, as a result of the Reverse Stock Split with respect to such shares received. In addition, the basis and holding period attributed to the old shares of common stock will carry over as the basis and holding period of such Shareholder's new shares of common stock. NO FORMAL OPINION OF TAX COUNSEL WAS OBTAINED WITH RESPECT TO THE MATERIAL TAX ASPECTS OF THE REVERSE STOCK SPLIT. THE FOREGOING IS ONLY A GENERAL DESCRIPTION OF CERTAIN OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT TO THE SHAREHOLDERS WITHOUT REFERENCE TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY PARTICULAR SHAREHOLDER. EACH SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH SHAREHOLDER OF THE REVERSE STOCK SPLIT (INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS). -24- THE REVERSE STOCK SPLIT - EXPENSES The Company estimates that fees and expenses incurred or to be incurred by the Company in connection with the Reverse Stock Split will be approximately $36,333, consisting of the following: Cash Consideration $ 2,533 Legal Fees 25,000 Accounting Fees 4,800 Printing, Mailing Costs & Filing Fees 4,000 ------- $36,333 The Company has paid or will be responsible for paying all of such expenses. It will pay such expenses, including the cash consideration, from its general working capital. It will not borrow any funds to pay these expenses. THE REVERSE STOCK SPLIT - APPRAISAL RIGHTS - ------------------------------------------ Under the Delaware General Corporation Law, as well as under the Company's Certificate of Incorporation, as amended, the existing holders of the Company's common stock are not entitled to dissenters' rights of appraisal in connection with the consummation of the Reverse Stock Split. The Company is not voluntarily according such rights. Under the Delaware General Corporation Law, nonaffiliated Shareholders of the Company are entitled to bring an action that the Board of Directors, in approving the Reverse Stock Split, violated its fiduciary obligations to the Company's nonaffiliated Shareholders and was not an appropriate exercise of the Board's business judgment. THE REVERSE STOCK SPLIT - RECOMMENDATION OF THE - ----------------------------------------------- BOARD OF DIRECTORS AND AFFILIATED SHAREHOLDERS - ---------------------------------------------- The Board of Directors and Affiliated Shareholders, at its meeting held July 28, 1998, considered and reviewed the Reverse Stock Split and concluded that the Reverse Stock Split is fair and in the best interests of the Company and its nonaffiliated Shareholders and unanimously approved the Reverse Stock Split. The Board of Directors and Affiliated Shareholders unanimously recommend that the Shareholders vote for approval of the Reverse Stock Split. The Board of Directors and Affiliated Shareholders stated that they would vote the shares they beneficially own in favor of the Reverse Stock Split. Messrs Frank B., Bernard J. and Anthony M. Iacovangelo stated that they would cause the shares owned by Wegman Building Associates to be voted in favor of the Reverse Stock Split. -25- Director/Executive Officer Shares of Common Stock Percent and Affiliated Shareholders Beneficially Owned of Class --------------------------- ------------------ -------- Frank B. Iacovangelo 1,219,287 37.02% Bernard J. Iacovangelo 1,228,687 37.31% William S. Gagliano 15,758 .48% Anthony M. Iacovangelo 50,000 1.52% Wegmans Building Associates 369,129 11.21% ---------- ------ 2,882,861 87.54% Based upon these statements, the Reverse Stock Split will be approved even if all of the Company's nonaffiliated Shareholders vote against the Reverse Stock Split. THE REVERSE STOCK SPLIT - VOTING; VOTE REQUIRED - ----------------------------------------------- The proposed Reverse Stock Split must be approved by a vote of not less than a majority of the total number of votes cast at the Special Meeting (including abstentions) in person or by Proxy. Broker non-votes will not be treated as votes cast or shares entitled to vote on matters as to which the applicable rules of the National Association of Securities Dealers, Inc. withhold the broker's authority to vote in the absence of direction from the beneficial owner. Non-broker Shareholders who are present in person or by Proxy and have the legal authority to vote their shares but who abstain from voting will adversely affect the outcome of this Proposal. THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. -26- PROPOSAL THREE -------------- The Shareholders of the Company will be asked at the Special Meeting to consider, vote upon and approve Proposal to approve the payment by the Company of the indebtedness owed to Shareholders owing fractional shares resulting from the 1 for 4 reverse stock split effective July 29, 1992, together with the payment of simple interest on the amount of such indebtedness. On July 29, 1992, the Company's Board of Directors recommended and the Shareholders approved a 1 for 4 reverse stock split which, upon the Company's filing of a Restated Certificate of Incorporation on July 31, 1992 with the Secretary of State of the State of Delaware, became effective on July 31, 1992. As the result of the 1992 reverse stock split, the number of authorized shares of the Company's common stock was reduced from 30,000,000 authorized shares with a par value of $.01 per share to 15,000,000 authorized shares with a par value of $.04 per share. Each 4 shares of the Company's common stock, $.01 par value per share, issued and outstanding immediately prior to July 31, 1992 were automatically converted into 1 share of the Company's common stock with a par value of $.04 per share. As part of the 1992 reverse stock split, the Company's Board authorized and the Company's Shareholders approved a cash payment of $3.00 times the fraction of a share to which a Shareholder otherwise would have been entitled, in lieu of the issuance of fractional shares. The legal effect of the 1992 reverse stock split was to reduce the outstanding number of shares held by Shareholders as of July 31, 1992 by a factor of 4. In addition, each Shareholder who owned a fraction of shares of common stock as a result of the 1992 reverse stock split became a creditor of the Company to the extent of the fraction times $3.00. Despite the legal effectiveness of the 1992 reverse stock split, the overwhelming proportion (97.48%) of the Company's nonaffiliated Shareholders did not exchange their pre-1992 reverse stock split stock certificates for post-1992 reverse stock split stock certificates and the Company did not make payment of the cash consideration owing to such Shareholders owning fractions of shares. In conjunction with its approval of the 1 for 100 Reverse Stock Split at its meeting held on July 28, 1998, the Board concluded that it would be appropriate to recommend to the Company's Shareholders that they authorize the payment by the Company of the indebtedness owed to the Shareholders owning fractional shares as a result of the 1992 reverse split, together with payment of simple interest at the rate of 10% per year on the amount of said indebtedness to the date of payment. If the current Reverse Stock Split is approved and this Proposal Three is approved, the Company shall cause its Transfer Agent to request all Shareholders to tender their stock certificates currently held by them to the Transfer Agent. Upon the receipt of such certificates, the Transfer Agent shall issue to those persons who shall remain Shareholders of the Company upon the effectiveness of the proposed Reverse Stock Split certificates representing the number of shares owned by them in the Company upon the effectiveness of the Reverse Stock Split. The -27- Company shall also cause its Transfer Agent to distribute cash consideration of $3.00 per fractional share plus 10% interest to the date of payment to those Shareholders who were entitled to such payment as a result of the 1992 reverse stock split and, in addition, cash consideration of $12.00 per share to Fractional Shareholders as a result of the proposed Reverse Stock Split. The Company estimates that the amount of cash consideration to be paid by the Company in connection with this Proposal Three, including payment of simple interest at the rate of 10% annually calculated from July 31, 1992 to the estimated date of payment will be approximately $1,700.00. RECOMMENDATION OF THE BOARD OF DIRECTORS - ---------------------------------------- The Board of Directors, at its meeting held July 28, 1998, considered and reviewed Proposal Three and concluded that Proposal Three is fair and in the best interests of the Company and its nonaffiliated Shareholders and unanimously approved Proposal Three. The Board of Directors unanimously recommended that the Shareholders vote for approval of Proposal Three. The Board of Directors stated that they would vote the shares they beneficially own in favor of Proposal Three. Messrs Frank B., Bernard J. and Anthony M. Iacovangelo stated that they would cause the shares owned by Wegman Building Associates to be voted in favor of Proposal Three. Director/Executive Officer Shares of Common Stock Percent and Affiliated Shareholders Beneficially Owned of Class --------------------------- ------------------ -------- Frank B. Iacovangelo 1,219,287 37.02% Bernard J. Iacovangelo 1,228,687 37.31% William S. Gagliano 15,758 .48% Anthony M. Iacovangelo 50,000 1.52% Wegmans Building Associates 369,129 11.21% ---------- ------ 2,882,861 87.54% Based upon these statements, Proposal Three will be approved even if all of the Company's nonaffiliated Shareholders vote against Proposal Three. -28- VOTING; VOTES REQUIRED - ---------------------- The proposed Reverse Stock Split must be approved by a vote of not less than a majority of the total number of votes cast at the Special Meeting (including abstentions) in person or by Proxy. Broker non-votes will not be treated as votes cast or shares entitled to vote on matters as to which the applicable rules of the National Association of Securities Dealers, Inc. withhold the broker's authority to vote in the absence of direction from the beneficial owner. Non-broker Shareholders who are present in person or by Proxy and have the legal authority to vote their shares but who abstain from voting will adversely affect the outcome of this Proposal. MARKET PRICES FOR SHARES OF COMMON STOCK; DIVIDENDS - --------------------------------------------------- AND COMMON STOCK INFORMATION - ---------------------------- 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 1995, 1996 and 1997 is shown below, as reported by the National Quotations Bureau, Inc. and as adjusted to reflect the Company's 1 for 4 reverse stock split which became effective July 31, 1992. COMMON STOCK DATA 1995 BID ASKED ---- --- ----- 1ST Quarter *Unpriced *Unpriced 2nd Quarter *Unpriced *Unpriced 3rd Quarter *Unpriced *Unpriced 4th Quarter *Unpriced *Unpriced 1996 1ST Quarter *Unpriced *Unpriced 2nd Quarter *Unpriced *Unpriced 3rd Quarter *Unpriced *Unpriced 4th Quarter *Unpriced *Unpriced 1997 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 * = Listed in pink sheets without prices. -29- 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. The Company's agreement with its Bank placed a restriction on its payment of dividends and consequently, dividends were declared or paid during 1995, 1996 or 1997. On February 24, 1999 the Company had 1,194 holders of record of its common stock. On September 5, 1996, the Company repurchased 50,000 shares of its common stock from a former director of the Company at $.50 per share (post-1992 reverse split basis)for a total consideration of $25,000 which dollar amount represented the former director's original purchase price for such shares upon his election as a director in 1988. The number of shares purchased reflected the 1 for 4 1992 reverse stock split. As discussed on page 15 of this Proxy Statement, this transaction was taken into account by Bonadio in making its determination that $12.00 per share represents a fair market value to be paid as cash consideration to Fractional Shareholders as a result of the Reverse Stock Split. DIRECTORS AND EXECUTIVE OFFICERS - -------------------------------- 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 February 24, 1999.
Shares of Position with the Company or Common Stock Percent of Name Age Principal Occupation Director Since Beneficially owned Class ---- --- -------------------- -------------- ------------------ ----- Frank B. 58 President and Treasurer (1) 1987 1,588,416 (3) 48.23% Iacovangelo Bernard J. 50 Vice President Secretary 1987 1,597,816 (4) 48.51% Iacovangelo William S. 48 Executive Vice President and 1992 15,758 .48% Gagliano Director Anthony M. 57 President, Director and principal 1987 419,129 (5) 12.73% Iacovangelo shareholder of Faber Construction., Inc. Rochester, NY (2) All Directors and Officers of the Company as a group (four persons) 2,882,861 (6) 87.54%
-30- (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 369,129 shares owned by Wegman Building Associates, a partnership in which Frank Iacovangelo has shared voting and investment power with respect to the shares owned by the partnership. (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 369,129 shares owned by Wegman Building Associates, a partnership in which Bernard Iacovangelo has shared voting and investment power with respect to the shares owned by the partnership. (5) Includes 369,129 shares owned by Wegman Building Associates, a partnership in which Anthony Iacovangelo has shared voting and investment power with respect to the shares owned by the partnership. (6) Includes 300,000 shares owned by children of Frank B. Iacovangelo (beneficial ownership which is disclaimed) 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 (beneficial ownership of which is disclaimed) and 369,129 shares owned by Wegman Building Associates, a partnership in which Messrs. Frank, Bernard and Anthony Iacovangelo share voting and investment power with respect to the shares owned by the partnership. The 369,129 shares owned by Wegman Building Associates is counted only once for purposes of setting forth the approximate number of shares owned by all directors and executive officers as a group. -31- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of February 24, 1999 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 has sole voting and investment power with respect to their shares unless otherwise indicated. Amount and Nature of Name and Address Beneficial Ownership Percent of Class - ---------------- -------------------- ---------------- Frank B. Iacovangelo 1,588,416 (1) (3) 48.23% 39 State Street Rochester, NY 14614 Bernard J. Iacovangelo 1,597,816 (2) (3) 48.51% 39 State Street Rochester, NY 14614 Wegman Building Associates 369,129 (3) 11.21% 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 369,129 shares owned by Wegman Building Associates, a partnership in which Frank Iacovangelo has shared voting and investment power with respect to the shares owned by the partnership. (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 369,129 shares owned by Wegman Building Associates, a partnership in which Bernard Iacovangelo has shared voting and investment power with respect to the shares owned by the partnership. (3) Wegman Building Associates is a general partnership in which Messrs. Frank, Bernard and Anthony Iacovangelo share voting and investment power with respect to the shares owned by the partnership. -32- HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY - ------------------------------------------------------------ The Company hereby incorporates by reference the financial information contained in Part II, Item 8 of the Company's 1997 10-K/A, the report of the independent accountants thereon contained in Part II, Item 8 of the 1997 10-K/A, and Management 's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of its 1997 10-K/A. The Company hereby incorporates by reference the financial information contained in Part I, Item 1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part I, Item 2 of the September, 1998 10-Q. INDEPENDENT PUBLIC ACCOUNTANTS - ------------------------------ The consolidated financial statements included in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1997 incorporated by reference in this Proxy Statement, have been audited by Bonadio, independent public accountants, as indicated in their report with respect thereto. It is expected that two representatives of Bonadio will be present at the Special Meeting to respond to appropriate questions of Shareholders of the Company. PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY - ----------------------------------------------------------- The pro forma consolidated financial information of the Company attached as Exhibit C to this Proxy Statement is based on and should be read in conjunction with the consolidated financial statements of the Company as of and for the year ended December 31, 1997 and as of and for the nine months ended September 30, 1998, both incorporated by reference (from the Company's 1997 Form 10-K/A, and the September 30, 1998 Form 10-Q) in this Proxy Statement. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable in the circumstances. The pro forma consolidated financial information purports neither to represent what the Company's results of operations would actually have been if the Reverse Stock Split and going private transaction had occurred on January 1, 1997 or September 30, 1998 nor to project the Company's financial position or results of operations for any future date or period. ADDITIONAL INFORMATION - ---------------------- The Company is subject to the informational requirements of the Exchange Act and in accordance therewith files reports, proxy statements, and other information with the SEC. Such reports, proxy statements, and other information can be inspected and copied at the public reference facilities of the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the regional office of the SEC located at 7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048. Copies of such materials can also be obtained at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The SEC also maintains a web site at -33- http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. Shareholders may obtain a copy of the Company's Annual Report (Form 10-K/A) for the fiscal year ended December 31, 1997 and the Company's Quarterly Reports (Form 10-Q) for the fiscal quarters ended March 31, 1998, June 30, 1998 and September 30, 1998, as filed with the Securities and Exchange Commission, by writing the Company, 370 East Avenue, Rochester, New York 14604, Attention: William S. Gagliano, Executive Vice President. This Proxy Statement includes information required by the SEC to be disclosed pursuant to Rule 13e-3 under the Exchange Act, which governs so- called "going private" transactions by certain issuers or their affiliates. In accordance with that rule, the Company has filed with the SEC, under the Exchange Act, a Rule 13E-3 Transaction Statement with respect to the Reverse Stock Split. This Proxy Statement does not contain all of the information set forth in the Rule 13E-3 Transaction Statement, parts of which are omitted in accordance with the regulations of the SEC. The Rule 13E-3 Transaction Statement, and any amendments thereto, including exhibits filed as a part thereof, will be available for inspection and copying at the offices of the SEC as set forth above. VOTING OF PROXIES - ----------------- The shares represented by all valid Proxies received will be voted in the manner specified on the Proxies. Where specific choices (including abstentions) with respect to each Proposal are not indicated, THE SHARES REPRESENTED BY ALL VALID PROXIES RECEIVED WILL BE VOTED FOR APPROVAL OF THAT PROPOSAL. The Board of Directors unanimously recommends that the Shareholders vote "FOR" Proposals 1, 2 and 3. By the order of the Board of Directors -----------------------------------, BERNARD J. IACOVANGELO, Secretary -34- EX-99.2 5 CERTIFICATE OF AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 99.2 PAGE 1 [LOGO] STATE OF DELAWARE 991128306 Secretary of State Division of Corporations P.O. Box 898 Dover, Delaware 19903 9152585 04-01-99 CHAMBERLAIN, D'AMANDA, OPPENHEIMER & GREENFIELD 1600 CROSSROADS BLDG. TWO STATE STREET ROCHESTER, NY 14614 ATTN: RICHARD B. SULLIVAN X Description Amount - ----------- ------ FOUR CORNERS FINANCIAL CORPORATION 0800707 0240S Amendment; Stock Stock Amendment Fee 30.00 Receiving/Indexing 50.00 Certification Fee 20.00 Data Entry Fee 20.00 Surcharge Assessment-New Castle 6.00 Page Assessment-New Castle Count 18.00 Expedite Fee, 24 Hour 50.00 FILING TOTAL 194.00 TOTAL PAYMENTS 194.00 SERVICE REQUEST BALANCE .00 State of Delaware PAGE 1 Office of the Secretary of State - -------------------------------------------------------------------------------- [GREAT SEAL OF THE STATE OF DELAWARE--1793--1847--1907] I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "FOUR CORNERS FINANCIAL CORPORATION", FILED IN THIS OFFICE ON THE FIRST DAY OF APRIL, A.D. 1999, AT 9:04 O'CLOCK A.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. [SECRETARY'S OFFICE OF DELAWARE SEAL] /s/ Edward J. Freel ----------------------- Edward J. Freel, Secretary of State 0800707 8100 AUTHENTICATION: 9666124 991128306 DATE: 04-01-99 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:04 AM 04/01/1999 991128306--0800707 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF FOUR CORNERS FINANCIAL CORPORATION FOUR CORNERS FINANCIAL CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies as follows: 1. That at a meeting of the Board of Directors of the Corporation, resolutions were duly adopted setting forth a proposed amendment to the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and calling a meeting of the Shareholders of the Corporation for consideration thereof. 2. That thereafter, pursuant to resolution of the Board of Directors of the Corporation, a special meeting of the Shareholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. 3. Article FOURTH of the Corporation's Certificate of Incorporation is hereby deleted and the following substituted therefor, for the purposes of (a) increasing the par value per share of the authorized shares of the Corporation, and (b) decreasing the issued and unissued authorized shares of the Corporation: FOURTH: The total number of shares of stock which the Corporation shall have the authority to issue is One Hundred Fifty Thousand (150,000) shares of Common Stock have a par value of $4.00 per share. 4. At 5:00 p.m. on the date of filing this Certificate of Amendment, all issued shares of Common Stock shall be automatically combined at the rate of one-for-one hundred and the par value per share thereof shall automatically be increased from $.04 per share to $4.00 per share, without further action on the part of the holders thereof or this Corporation. No fractional shares will be issued. 5. The foregoing amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, I have duly signed and executed this Certificate and affirm under the penalties of perjury that all its contents are true and complete. FOUR CORNERS FINANCIAL CORPORATION Dated: March 26, 1999 By: /s/ Bernard J. Iacovangelo, Secretary ------------------------------------- BERNARD J. IACOVANGELO, SECRETARY EX-99.3 6 TERMINATION OF REGISTRATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 15 Certification and Notice of Termination of Registration under Section 12(g) of the Securities Exchange Act of 1934 or Suspension of Duty to File Reports under Sections 13 and 15(d) of the Securities Exchange Act of 1934 Commission File Number 08628 ---------------------------- FOUR CORNERS FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) ------------------------------------------------------ 370 East Avenue, Rochester, New York 14604 ------------------------------------------ (Address, including zip code of registrant's principal executive offices) ------------------------------------------- (716) 454-2263 (Registrant's telephone number, including area code) Commmon Stock, $4.00 par value ------------------------------ (Title of each class of securities covered by this Form) None ---- Titles of all other classes of securities for which a duty to file reports under section 13(a) or 15(d) remains Please place an X in the box(es) to designate the appropiate rule provision(s) relied upon to terminate or suspend the duty to file reports: Rule 12g-4(a)(1)(i) /x/ Rule 12(h)-3(b)(1)(ii) / / Rule 12g-4(a)(1)(ii) / / Rule 12h-3(b)(2)(i) / / Rule 12g-4(a)(2)(i) / / Rule 12h-3(b)(ii) / / Rule 12g-4(a)(2)(ii) / / Rule 15d-6 / / Rule 12h-3(b)(1)(i) /x/ Approximate number of holders of record as of the certification or notice date: 174 Pursuant to the requirements of the Securities Exchange Act of 1934, FOUR CORNERS FINANCIAL CORPORATION has caused this certification/notice on its behalf by the undersigned duly authorized person. DATE: April 9, 1999 By: /s/ William Gagliano -------------------------------- William Gagliano, Executive Vice President -----END PRIVACY-ENHANCED MESSAGE-----