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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission File No. 0-28067
FIRST RESERVE, INC.
(Exact name of registrant as specified in its charter)
Florida 86-0740730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1360 South Dixie Highway, Coral Gables, FL 33146
(Address of principal executive offices) (Zip Code)
(305) 667-8871
Issuer's Telephone Number, Including Area Code:
------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if changed since last
report)
Indicate by a 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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
As of June 30, 2002, 6,547,350 shares of the Registrant's Common Stock, no
par value per share, were outstanding.
FIRST RESERVE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 1
Condensed Consolidated Statements of Income and Accumulated Deficit
Six Months Ended June 30, 2002 and June 30, 2001 1
Condensed Consolidated Statements of Income and Accumulated Deficit
Three Months Ended June 30, 2002 and June 30, 2001 1
Condensed Consolidated Statements of Cash Flows
Three Months Ended June 30, 2002 and June 30, 2001 1
Notes to Condensed Consolidated Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk 3
PART II - OTHER INFORMATION
Item 5. Other Information. 4
Item 6. Exhibits and Reports on Form 8-K 5
Signatures 6
ii
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Immediately following the signature page in this Form 10-Q.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein should be read in conjunction with our Condensed
Consolidated Financial Statements, as of June 30, 2002, and the related notes to
the Condensed Consolidated Financial Statements, along with our Consolidated
Financial Statements as of December 31, 2001 and June 30, 2001, and the related
Notes to Consolidated Financial Statements. Our Financial Statements have been
prepared in accordance with generally accepted accounting principles in the U.S.
The financial information in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to our continuing operations.
Comparison of Three Month Period Ended June 30, 2002 and 2001
Results of Operations
Revenues. Our revenues increased approximately 35.7% for the three-month period
ended June 30, 2002, over those for the three-month period ended June 30, 2001.
The percentage increase resulted from the following sources: (i) the operations
of our new real estate offices in Coconut Grove and Las Olas/Ft. Lauderdale
opened during 2001; (ii) the operations of our existing sales offices; and (iii)
title company operations.
Operating Expenses. Operating expenses increased to approximately $13.7 million
for the three-month period ended June 30, 2002 versus $10.1 million for the
three-month period ended June 30, 2001. The significant components of our
operating expenses are: (i) commissions to sales people; (ii) officer and staff
salaries; (iii) office rental costs; (iv) advertising expenses; (v) promotional
expenses and; (vi) insurance. Our operating expenses also increased as a result
of the costs incurred by the Company in connection with the opening of our Las
Olas/Ft. Lauderdale and Coconut Grove sales offices and for additional office
space leased in Miami Beach, and for new office on Key Biscayne which was
purchased in January 2002 (both of these buildings will be occupied by the end
of 2002).
Interest. Interest income decreased from $53,701 for the three-month period
ended June 30, 2001 to $35,419 for the three-month period ended June 30, 2002,
primarily due to decreased cash balances and lower interest rates.
Net Income. We had a net income of $827,725 for the three-month period ended
June 30, 2002 as compared to a net income of $549,562 for the three-month period
ended June 30, 2001. This increase was primarily due to an increase in revenues
from sales commissions.
1
Comparison of Six Month Period Ended June 30, 2002 and 2001
Results of Operations
Revenues. Our revenues increased approximately 23.8% for the six-month period
ended June 30, 2002, over those for the six-month period ended June 30, 2001.
The percentage increase resulted from the following sources: (i) the operations
of our new real estate offices in Coconut Grove and Las Olas/Ft. Lauderdale
opened during 2001; (ii) the operations of our existing sales offices; and (iii)
title company operations.
Operating Expenses. Operating expenses increased to approximately $24.0 million
for the six-month period ended June 30, 2002 versus $19.4 million for the
six-month period ended June 30, 2001. The significant components of our
operating expenses are: (i) commissions to sales people; (ii) officer and staff
salaries; (iii) office rental costs; (iv) advertising expenses; (v) promotional
expenses and; (vi) insurance. Our operating expenses also increased as a result
of the costs incurred by the Company in connection with the opening of its Las
Olas/Ft. Lauderdale and Coconut Grove sales offices and for additional office
space leased in Miami Beach, and for a new office on Key Biscayne which was
purchased in January 2002 (both of the buildings will be occupied by the end of
2002).
Interest. Interest income decreased from $91,408 for the six-month period ended
June 30, 2001 to $75,007 for the six-month period ended June 30, 2002, primarily
due to decreased cash balances and lower interest rates.
Net Income. We had a net income of $929,749 for the six-month period ended June
30, 2002 as compared to a net income of $721,438 for the six-month period ended
June 30, 2001. This increase was primarily due to an increase in revenues from
sales commissions.
Liquidity and Capital Resources
Cash provided by operating activities was approximately $2.5 million for the
six-month period ended June 30, 2002. This was primarily due to the increase in
revenues from sales commissions and sales of mortgages to third parties.
Cash used for investing activities was $1,033,504 for the six-month period ended
June 30, 2002. This was primarily due to purchases of property and equipment
offset by a decrease in deposits.
Cash used in financing activities was approximately $2.0 million for the
six-month period ended June 30, 2002, principally due to our subsidiary's
acquisition of our common stock and an increase in pay downs on the warehouse
line of credit offset by an increase in proceeds from borrowings.
At June 30, 2002, we had long-term obligations payable of approximately $4
million. We also had a $3.5 million "warehouse" line of credit available to fund
loans to be made in connection with Embassy's operations. Each "warehouse" loan
is fully backed by a permanent "take-out" loan commitment from a national
institutional lender in residential
2
financing. As of June 30, 2002, the balance of this "warehouse" line of credit
was $2,196,456 with a corresponding asset of "mortgage loans held for sale" of
$2,219,484. Current maturities of long term debt due in 2002 was $500,000,
exclusive of the "warehouse" line of credit.
At June 30, 2002, we had shareholder equity of approximately $1,641,730. For the
period ended June 30, 2002, working capital (current assets less current
liabilities) decreased to $1,297,812, primarily as a result of a significant
decrease in cash and mortgage loans held for sale offset by a decrease in the
warehouse line of credit.
We anticipate that our Broward offices and our new offices in Coconut Grove and
Las Olas/Ft. Lauderdale will continue to increase opportunities to substantially
increase our sales. We also anticipate that our title and insurance businesses
will continue to be profitable during 2002 and will contribute to our cash flow
and our overall financial performance.
Seasonality
Our operations are principally based on the residential real estate market in
South Florida. These markets have historically been seasonal with generally
higher sales in the second and third fiscal quarters. Therefore, the results of
any interim period is not necessarily indicative of the results that might be
expected during a full fiscal year.
Forward Looking Statements
From time to time, we make statements about our future results in this Form 10-Q
that may constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
our current expectations and the current economic environment. We caution you
that these statements are not guarantees of future performance. They involve a
number of risks and uncertainties that are difficult to predict. Our actual
results could differ materially from those expressed or implied in the
forward-looking statements. Important assumptions and other important factors
that could cause our actual results to differ materially from those in the
forward-looking statements, include, but are not limited to: (i) the continued
growth in the residential real estate market in South Florida; (ii) the general
availability of home mortgage financing at favorable rates; (iii) continued
positive economic climate in the U.S.; (iv) competition in our existing lines of
business; and (v) our ability to obtain and maintain working capital, whether
internally generated or from financing sources (on acceptable terms) in order to
finance our growth strategy.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company, in its normal course of business, is exposed to interest rate
changes as they relate to real estate mortgage loans and the effect of such
mortgage rate changes. Additionally, the Company's cash equivalents and
short-term investments, if any, generally bear variable interest rates. Changes
in the market rates of interest on short
3
term investments will affect the interest earned by the Company. Since the
Company does not rely on its interest earnings on short-term investments to fund
working capital needs, changes in these interest rates will not have an impact
on the Company's results of operations or working capital position.
PART II
OTHER INFORMATION
Item 5. Other Information.
In early 2002, the Company completed negotiations with one of its principal
shareholders for the purchase of all of the shares of common stock of the
Company owned by such shareholder. In order to consummate this transaction, EWM
entered into a Credit Agreement with Mellon United National Bank (the "Bank"),
dated April 19, 2002, whereby EWM borrowed $3 million from the Bank (the "Loan")
to be used for the purchase of such shares. The Credit Agreement is attached to
this report as Exhibit 10.1 and incorporated herein by reference. The stock
purchase transaction, which had previously been authorized by the Board of
Directors of the Company, was evidenced by a Stock Purchase Agreement, dated as
of January 10, 2002, by and among Charles Manni, the Company and EWM (the "Stock
Purchase"). The Stock Purchase Agreement is attached to this report as Exhibit
10.2 and incorporated herein by reference. The Stock Purchase transaction was
closed on May 16, 2002.
On April 18, 2002, the Company purchased 39,700 shares of its common stock from
James E. Newmeyer, a director of the Company. This transaction was evidenced by
a stock purchase agreement which is attached to this report as Exhibit 10.3 and
incorporated herein by reference.
In connection with the Loan, Ronald A. Shuffield and Allen C. Harper, entered
into new employment agreements with the Company on April 19, 2002. These
employment agreements supersede all prior agreements relating to the employment
of Messrs. Shuffield and Harper with the Company. The agreements have an initial
two- year term, with an option for each employee to extend for an additional
two-year period. Mr. Shuffield's agreement provides for his employment as
President of the Company and EWM at a base salary of $500,000 per year with a
bonus of up to 5.0% of the Company's pre-tax net income. Mr. Harper's agreement
provides for his employment as Chairman and Chief Executive Officer of the
Company and EWM at a base salary of $150,000 per year with a bonus of up to 5.0%
of the Company's pre-tax net income. Each of the employment agreements provide
that the base salary shall be increased at least 3.0% per year during the term
of the agreement. The Company also pays for disability and life insurance for
both Messrs. Harper and Shuffield and provides each with full medical and health
insurance coverage, a 401(K) plan and an automobile. The employment agreements
also contain two-year non-compete provisions. The employment agreements for
Messrs. Shuffield and Harper are attached to this report as Exhibits 10.4 and
10.5, respectively, and are incorporated herein by reference.
4
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Exhibit
10.1 Credit Agreement, dated as of April 19, 2002, by and
between Esslinger-Wooten-Maxwell, Inc. and Mellon
United National Bank
10.2 Stock Purchase Agreement, dated as of January 10, 2002,
by and among Esslinger-Wooten-Maxwell, Inc., First
Reserve, Inc. and Charles Manni.
10.3 Stock Purchase Agreement, dated as April 18, 2002, by
and between James Newmeyer and First Reserve, Inc.
10.4 Employment Agreement, dated as of April 19, 2002, by
and between First Reserve, Inc. and Ronald A.
Shuffield.
10.5 Employment Agreement, dated as of April 19, 2002, by
and between First Reserve, Inc. and Allen C. Harper.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K.
None.
5
SIGNATURES
Pursuant to the requirements 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.
Date: August 14, 2002 FIRST RESERVE, INC.
By: /s/ Ronald A. Shuffield
Ronald A. Shuffield,
President and Principal
Financial Officer
6
FIRST RESERVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(Unaudited)
June 30, December 31,
2002 2001
----------- -----------
CURRENT ASSETS
Cash $ 1,792,087 $ 2,333,012
Receivables 675,467 409,551
Mortgage loans held for sale 2,219,484 3,422,025
Prepaid expenses and other 187,134 167,160
----------- -----------
Total current assets 4,874,172 6,331,748
----------- -----------
PROPERTY AND EQUIPMENT
Land 190,571 -
Building 829,097 -
Furniture and fixtures 1,406,655 1,378,055
Office equipment 980,187 921,348
Transportation equipment 20,000 20,000
Leasehold improvements 781,030 779,830
Equipment held under capital leases 35,730 35,730
----------- -----------
4,243,270 3,134,963
Less accumulated depreciation (1,436,286) (1,249,088)
----------- -----------
Net property and equipment 2,806,984 1,885,875
----------- -----------
OTHER ASSETS
Goodwill, net 1,376,122 1,224,922
Deposits and other 169,727 245,219
----------- -----------
Total other assets 1,545,849 1,470,141
----------- -----------
Total assets $ 9,227,005 $ 9,687,764
=========== ===========
The accompanying notes to the condensed consolidated financial statements are an
integral part of these statements.
9
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
June 30, December 31,
2002 2001
------------ ------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 446,824 $ 331,127
Income tax payable 356,771 59,861
Deferred mortgage fee income 54,361 64,296
Reserves on deposit 13,424 10,414
Warehouse line of credit - bank 2,196,456 3,377,379
Current portion of obligations under capital leases 8,524 8,049
Current maturities of long-term debt 500,000 400,000
----------- ----------
Total current liabilities 3,576,360 4,251,126
----------- ----------
LONG-TERM LIABILITIES
Obligations under capital leases 5,544 9,238
Notes payable 3,900,000 500,000
Deferred tax liability 103,369 63,022
----------- ----------
Total long-term liabilities 4,008,913 572,260
----------- ----------
Total liabilities 7,585,273 4,823,386
----------- ----------
STOCKHOLDERS' EQUITY
Common stock, no par value, 100,000,000 authorized shares, 7,027,050
and 6,915,050 shares issued or issuable at June 30, 2002 and
December 31, 2001, and 6,547,350 and 6,475,050 outstanding at June
30, 2002 and December 31, 2001, respectively 6,290,507 6,139,307
Retained earnings (accumulated deficit) 248,820 (680,929)
Less treasury stock, 479,700 and 440,000 common shares, no par
value, at cost at June 30, 2002 and December 31, 2001, respectively (647,595) (594,000)
----------- ----------
5,891,732 4,864,378
Less 2,160,001 common shares held by a consolidated subsidiary (4,250,000) -
----------- ----------
Total stockholders' equity 1,641,732 4,864,378
----------- ----------
Total liabilities and stockholders' equity $ 9,227,005 $9,687,764
=========== ==========
10
FIRST RESERVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND ACCUMULATED DEFICIT
(Unaudited) (Unaudited)
Six-month Six-month
period ended period ended
June 30, 2002 June 30, 2001
------------- -------------
REVENUES
Real estate management and brokerage $23,586,522 $18,772,084
Mortgage 896,963 955,267
Title fees 797,291 695,713
Insurance 12,191 6,418
------------- ------------
Total revenues 25,292,967 20,429,482
------------- ------------
COSTS AND EXPENSES
Commissions, fees, and other incentives:
Real estate 16,428,582 13,010,179
Mortgage 356,718 330,765
Title 256,977 212,883
Insurance - -
General and administrative expenses 6,758,275 5,625,729
Depreciation and amortization 203,689 199,046
------------- ------------
Total costs and expenses 24,004,241 19,378,602
------------- ------------
Income from operations before income
taxes and other income and expenses 1,288,726 1,050,880
------------- ------------
OTHER INCOME AND (EXPENSE)
Interest income 75,007 91,408
Interest expense (104,721) (85,838)
Other income 232,632 45,398
Loss on disposition of property and equipment - (4,715)
------------- ------------
Total other income and (expense) 202,918 46,253
------------- ------------
Income before income taxes 1,491,644 1,097,133
PROVISION FOR INCOME TAX 561,895 375,695
------------- -------------
Net income 929,749 721,438
ACCUMULATED DEFICIT, beginning of period (680,929) (1,869,309)
------------- ------------
RETAINED EARNINGS (ACCUMULATED DEFICIT),
end of period $ 248,820 $(1,147,871)
============= ============
BASIC EARNINGS PER COMMON SHARE $ 0.16 0.11
============= ============
WEIGHTED AVERAGE COMMON SHARES 5,831,148 6,693,759
============= ============
DILUTED EARNINGS PER COMMON SHARE $ 0.16 $ 0.11
============= ============
WEIGHTED AVERAGE DILUTED COMMON SHARES 5,909,927 6,693,759
============= ============
The accompanying notes to the condensed consolidated financial statements are an
integral part of these statements.
11
FIRST RESERVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND ACCUMULATED DEFICIT
(Unaudited) (Unaudited)
Three-month Three-month
period ended period ended
June 30, 2002 June 30, 2001
------------- -------------
REVENUES
Real estate management and brokerage $ 13,816,524 $ 9,996,193
Mortgage 509,894 504,239
Title fees 478,748 414,168
Insurance 5,731 2,462
------------ ------------
Total revenues 14,810,897 10,917,062
------------ ------------
COSTS AND EXPENSES
Commissions, fees, and other incentives:
Real estate 9,618,262 6,793,861
Mortgage 207,558 184,665
Title 148,499 129,611
Insurance - -
General and administrative expenses 3,568,000 2,852,399
Depreciation and amortization 107,462 103,329
------------ ------------
Total costs and expenses 13,649,781 10,063,865
============ ============
Income from operations before income
taxes and other income and expenses 1,161,116 853,197
============ ============
OTHER INCOME AND (EXPENSE)
Interest income 35,419 53,701
Interest expense (56,244) (49,313)
Other income 154,752 29,698
------------ ------------
Total other income and (expense) 133,927 34,086
------------ ------------
Income before income taxes 1,295,043 887,283
PROVISION FOR INCOME TAX 467,318 337,721
------------ ------------
Net income 827,725 549,562
ACCUMULATED DEFICIT, beginning of period (578,905) (1,697,433)
------------ ------------
RETAINED EARNINGS (ACCUMULATED DEFICIT),
end of period $ 248,820 $ (1,147,871)
============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.16 $ 0.08
============ ============
WEIGHTED AVERAGE COMMON SHARES 5,083,554 6,693,759
============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.16 $ 0.08
============ ============
WEIGHTED AVERAGE DILUTED COMMON SHARES 5,242,655 6,693,759
============ ============
The accompanying notes to the condensed consolidated financial statements are an
intergal part of these statements.
12
FIRST RESERVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited) (Unaudited)
Six-month Six-month
period ended period ended
June 30, 2002 June 30, 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 25,252,758 $ 20,488,747
Interest received 75,007 91,408
Interest paid (104,721) (85,838)
Cash paid to suppliers and employees (23,699,131) (19,085,016)
Receipts from (payments to borrowers) 1,202,541 86,906
Settlements paid - (422,691)
Income taxes paid (224,638) (22,000)
------------ ------------
Net cash provided by operating activities 2,501,816 1,051,516
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Advances) repayments to employees (5,698) 12,500
Net decrease in deposits 80,501 4,740
Purchases of property and equipment (1,108,307) (150,964)
------------ ------------
Net cash used in investing activities (1,033,504) (133,724)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 3,500,000 -
(Pay downs) net proceeds from warehouse line of credit (1,180,923) 52,996
Payment of capital lease obligation (3,219) (3,385)
Cash paid for loan acquisition cost (21,500)
Acquisition of treasury stock (53,595) (33,750)
Subsidiary's acquisition of the parent's common stock (4,250,000) -
------------- ------------
Net cash (used in) provided by financing activities (2,009,237) 15,861
------------ ------------
Net (decrease) increase in cash (540,925) 933,653
CASH, beginning of period 2,333,012 881,258
------------ ------------
CASH, end of period $ 1,792,087 $ 1,814,911
============ ============
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
13
FIRST RESERVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited) (Unaudited)
Six-month Six-month
period ended period ended
June 30, 2002 June 30, 2001
------------- -------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $ 929,749 $ 721,438
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation 187,198 151,687
Amortization 16,491 47,359
Bad debt on other receivables 37,435 -
Loss of property and equipment - 4,715
(Increase) decrease in accounts receivable (265,916) 84,797
Decrease in mortgage loans held for sale 1,202,541 195,266
(Increase) decrease in prepaid expenses and other assets (51,711) 1,422
Increase (decrease) in reserves on deposit 3,010 (53,312)
Increase (decrease) in accounts payable and accrued expenses 115,697 (316,959)
Decrease in bank overdraft - (108,360)
Decrease in deferred mortgage fee income (9,935) (9,481)
Increase in income tax payable 296,910 307,671
Increase in deferred tax liability 40,347 25,273
----------- -----------
Net cash provided by operating activities $2,501,816 $1,051,516
----------- -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
As further discussed in Notes 3 and 10, as part of the acquisition of Ross &
Associates, the Company held 112,000 shares in escrow as "contingent" shares,
pending the sole shareholder of Ross meeting the requirements set forth in the
purchase agreement. The sole shareholder of Ross has met the requirements in the
purchase agreement, but the shares have not been issued. As a result, for the
six-month period ended June 30, 2002, the Company deemed these shares issuable
and increased common stock and goodwill by $151,200.
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
14
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements include
the accounts of First Reserve, Inc. and its wholly-owned subsidiaries,
Esslinger, Wooten & Maxwell, Inc. ("EWM"), First Reserve Realty, Inc.
("FRRI'), First Reserve Management, Inc., First Reserve Equities, Inc.,
Embassy Financial Services, Inc. ("Embassy"), Columbia Title of
Florida, Inc. ("Columbia"), and First Reserve Insurance, Inc.,
(collectively the "Company").
In the opinion of management, the accompanying unaudited condensed
consolidated interim financial statements reflect all adjustments
(consisting of only normal and recurring adjustments) necessary to
present fairly the financial position of First Reserve, Inc. and
Subsidiaries (the "Company"), as of June 30, 2002, and the results of
their operations and cash flows for the periods then ended. The results
of operations for such interim periods are not necessarily indicative
of the results for a full year. The accompanying unaudited condensed
consolidated interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial reporting and with instructions
to Form 10-Q and, accordingly, do not include all disclosures required
by accounting principles generally accepted in the United States of
America. The condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and
the notes to the audited consolidated financial statements included in
the Company's Form 10-K annual report for 2001 filed with the
Securities and Exchange Commission.
The accounting policies followed for interim financial reporting are
the same as those disclosed in Note 1 of the notes to the consolidated
financial statements included in the Company's Form 10-K annual report
for the year ended December 31, 2001.
NOTE 2 - USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
NOTE 3 - BUSINESS COMBINATIONS
On September 1, 2000, EWM acquired substantially all the assets of Ross
& Associates, Inc. ("Ross") in a business combination accounted for as
a purchase. Ross was primarily engaged in the same activity as EWM.
Under the terms of the agreement, Ross's sole shareholder received
138,000 shares of common stock of the Company on the date of the
acquisition. An additional 112,000 "contingent" shares of common stock
of the Company were to be issued pending future gross commission income
that will be generated by the former shareholder of Ross between
January 1, 2001 to December 31, 2001. Based on a recent private
offering of the Company's stock, the fair value of the Company's share
price on the acquisition date was $1.35 per share. At June 30, 2002,
the former shareholder of Ross had met the gross commission
requirement; accordingly, these shares of stock are issuable. As
further discussed in Note 10, an additional 112,000 shares of common
stock of the Company were recorded as goodwill in the amount of
$151,200 during the six-month period ended June 30, 2002. The total
cost of the Ross acquisition was $337,500.
15
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - CASH HELD IN TRUST
The Company maintains separately designated trust accounts for home
buyers earnest money, property owners, tenants, and other third
parties. The Company holds such funds until sold properties are
closed and leases have expired. Funds are disbursed in accordance
with the settlement instructions or rental management agreements.
These funds are not recorded in the Company's financial statements as
they are held in a fiduciary capacity. At June 30, 2002, the Company
held approximately $6,775,000 of funds in trust.
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS AND RELATED ADOPTION OF SFAS
NO. 142
Effective January 1, 2002, the Company adopted the Financial
Accounting Standards Board Statement of Financial Accounting
Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting for goodwill and other
intangible assets. Under this standard, goodwill and intangible
assets with indefinite lives are no longer amortized, but are subject
to an annual impairment test. The Company will perform its annual
impairment review during the second quarter of each year commencing
in the second quarter of 2002. Under FAS 142, goodwill impairment is
deemed to exist if the net book value of the reporting unit exceeds
its estimated fair value. The Company's reporting units are generally
consistant with the operating segments identified in Note 12 -
Business Segment Information. The Company completed the annual
impairment analysis for the real estate management and brokerage and
title company segments, and determined that there was no goodwill
impairment. The Company will routinely perform a detailed valuation
analysis in connection with the application of this statement, which
may result in future charges.
As of June 30, 2002 and December 31, 2001, the Company's intangible
assets and related accumulated amortization consisted of the
following:
Intangible assets not subject to amortization for periods after
January 1, 2002:
June 30, 2002 December 31, 2001
--------------------------------------------------------------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
--------------------------------------------------------------------------------------------
Goodwill $ 1,591,415 $(215,293) $1,376,122 $1,440,215 $(215,293) $1,224,922
Intangible assets subject to amortization:
Non-compete
agreement $ 97,925 $ (35,906) $ 62,019 $ 97,925 (26,113) $ 71,812
Other 88,493 (52,874) 35,619 66,993 (46,175) 20,818
----------- --------- ---------- ---------- --------- ----------
Total $ 186,418 $ (88,780) $ 97,638 $ 164,918 $ (72,288) $ 92,630
=========== ========= ========== ========== ========= ===========
Intangible assets subject to amortization are included on the balance
sheet as a component of Deposits and other assets.
16
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS AND RELATED ADOPTION OF SFAS NO.
142 (CONTINUED)
The following table sets forth reported net income and earnings per
share, as adjusted to exclude goodwill amortization expense:
Six-month Six-month
period ended period ended
June 30, 2002 June 30, 2001
------------- -------------
Net income, as reported $ 929,749 $ 721,438
Goodwill amortization, net of tax - 19,253
--------- ---------
Net income, as adjusted $ 929,749 $ 740,691
========= =========
Basic earnings per share:
Net income, as reported $ 0.16 $ 0.11
Goodwill amortization, net of tax - -
--------- ---------
Net income, as adjusted $ 0.16 $ 0.11
========= =========
Diluted earnings per share:
Net income, as reported $ 0.16 $ 0.11
Goodwill amortization, net of tax - -
--------- ---------
Net income, as adjusted $ 0.16 $ 0.11
========= =========
Three-month Three-month
period ended period ended
June 30, 2002 June 30, 2001
------------- -------------
Net income, as reported $ 827,725 $ 549,562
Goodwill amortization, net of tax - 3,818
--------- ---------
Net income, as adjusted $ 827,725 $ 553,380
========= =========
Basic earnings per share:
Net income, as reported $ 0.16 $ 0.08
Goodwill amortization, net of tax - -
--------- ---------
Net income, as adjusted $ 0.16 $ 0.08
========= =========
Diluted earnings per share:
Net income, as reported $ 0.16 $ 0.08
Goodwill amortization, net of tax - -
--------- ---------
Net income, as adjusted $ 0.16 $ 0.08
========= =========
17
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 - MORTGAGE PAYABLE
On January 18, 2002, EWM acquired commercial real estate located in Key
Biscayne, Florida to be used as an office by EWM for approximately
$990,000. EWM obtained a mortgage loan to acquire this real estate from
an unrelated third party in the amount of $500,000. The loan bears
interest at 7.5% for the first year. After the first year, interest is
at the Wall Street Journal prime rate with a 12% ceiling and a 7.5%
floor. The loan is payable in monthly installments of interest-only and
the principal is due on February 18, 2007. In addition to this mortgage
loan, First Reserve's existing $400,000 loan was changed to a mortgage
loan secured by this real estate. The new mortgage loan bears interest
at 7.5% for the first year. After the first year, interest is at the
Wall Street Journal prime rate with a 12% ceiling and a 7.5% floor. The
loan is payable in monthly installments of interest-only and the
principal is due on February 18, 2007.
NOTE 7 - NOTE PAYABLE
EWM obtained a $3,000,000 loan from a financial institution as part of
the acquisition of its parent company's common stock, (see Note 9). The
loan bears interest at prime, plus 1% per annum. The loan is payable in
monthly installments of $25,000 principal plus interest. The loan,
including any unpaid principal, matures in April 2004. EWM must pay
additional interest of 2% per annum of any unpaid principal balance
from the closing date until the loan is paid in full. The loan can be
prepaid early and is secured by this common stock and EWM's assets, as
well as the common stock of First Reserve that is owned by the
Company's two largest shareholders. Additionally, the loan is
personally guaranteed by one of these shareholders.
NOTE 8 - COMMITMENTS
In February 2002, EWM entered into an exclusive marketing and
sales management agreement with a Miami Beach developer to
sell-off the remaining unit inventory of two luxury
beach-front condominium buildings in Miami Beach. The
agreement is for a twelve-month period or until all the units
are sold, whichever comes first, but in no event prior to the
payoff by the developer of its bank's construction loan. Under
the terms of the agreement, EWM will become the exclusive
agent for the buildings, will staff and support the buildings'
sales center, and provide other marketing and advertising
services.
The developer will reimburse EWM for the cost of maintaining the sales
center. EWM will earn a commission on each unit sold, as defined in the
agreement. Additionally, the agreement has an incentive clause whereby
EWM receives additional compensation if the units are sold within two
separate specified time periods.
18
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 - COMMITMENTS (CONTINUED)
On April 19, 2002, the Company entered into new employment agreements
with two executives. These new agreements supersede the previous
agreements, which were to expire in 2003. The new agreements provide
for base salaries to be increased annually by a minimum of 3%, plus
benefits. The executives are also entitled to a 5% bonus of the
Company's "pre-tax net income," as defined in the agreement, which may
be up to 50% of the executives' salary. The terms of the contracts are
for two years expiring in April 2004, with the option of the
executives to extend employment for an additional two years. In the
event of termination without cause or change in control (as defined in
the agreement), the Company must pay the executives severance
compensation for a period of two years (or the remainder of the
executives' term if shorter) plus benefits.
NOTE 9 - STOCKHOLDERS' EQUITY
On April 26, 2002, EWM acquired 1,778,825 shares of common stock of
First Reserve, Inc. (its parent company) from a majority shareholder
for $3,500,000. EWM also agreed to purchase an additional 127,059
shares for $250,000 in cash within 30 days of the original purchase
date. In addition, EWM agreed to purchase the remaining shares owned
by this stockholder, 254,117 shares for $500,000 in cash on or prior
to June 30, 2002. The total purchase price of these shares through
June 30, 2002 was $4,250,000 or $1.97 per common share. EWM's
investment in the parent company is presented in the financial
statements as a reduction of stockholders' equity. As part of the
agreement, the 1,000,000 stock warrants previously issued to this
stockholder were cancelled.
Under the new agreement, the former stockholder has the option to
purchase, on or before June 30, 2007, up to 5% of the then-outstanding
shares of common stock of the Company at a purchase price equal to 90%
of the fair market value of the shares.
NOTE 10 - CONTINGENT SHARES
Under the terms of the September 1, 2000 asset acquisition agreement
between EWM and Ross, the sole shareholder of Ross would receive an
additional 112,000 "contingent" shares of common stock of the Company,
pending future gross commission income to be generated by the sole
shareholder of Ross over a 12-month "review" period, beginning January
1, 2001. At June 30, 2002, the former shareholder of Ross had met the
gross commission income requirements stated in the agreement. These
shares have not yet been issued by the Company, however, with all the
conditions set forth in the purchase agreement having been met, these
shares are deemed issuable.
19
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 - CONTINGENT SHARES (CONTINUED)
As a result, the Company recorded common stock and goodwill in the
amount of $151,200 or $1.35 per share, which was the fair value per
share at the time the conditions were met. These shares are included
in the basic earnings per share calculation.
NOTE 11 - EARNINGS PER SHARE
Basic earnings per share ("EPS") was computed by dividing net income
by the weighted average number of common shares outstanding during
the period. Diluted EPS was determined on the assumption that the
contingent shares were increased at the beginning of the period, or
at time of issuance, if later.
The following is the calculation of earnings per share:
Six-month Six-month
period ended period ended
June 30, 2002 June 30, 2001
------------- -------------
Basic earnings per common share:
Numerator
Net income before extraordinary items applicable to
common stockholders $ 929,749 $ 721,438
Extraordinary items, net - -
---------- -----------
Income applicable to common stockholders $ 929,749 $ 721,438
========== ===========
Denominator
Weighted average common shares 5,831,148 6,693,759
---------- -----------
Basic EPS $ 0.16 $ 0.11
========== ===========
Six-month Six-month
period ended period ended
June 30, 2002 June 30, 2001
------------- -------------
Diluted earnings per common share:
Numerator
Net income before extraordinary items applicable to
common stockholders $ 929,749 $ 721,438
Extraordinary items, net - -
---------- -----------
Income applicable to common stockholders $ 929,749 $ 721,438
========== ===========
Denominator
Weighted average common shares 5,831,148 6,693,759
Contingent shares 78,779 -
---------- -----------
5,909,927 6,693,759
---------- -----------
Diluted EPS $ 0.16 $ 0.11
========== ===========
20
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 - EARNINGS PER SHARE (CONTINUED)
Three-month Three-month
period ended period ended
June 30, 2002 June 30, 2001
------------- -------------
Basic earnings per common share:
Numerator
Net income before extraordinary items applicable to
common stockholders $ 827,725 $ 549,562
Extraordinary items, net - -
---------- ----------
Income applicable to common stockholders $ 827,725 $ 549,562
========== ==========
Denominator
Weighted average common shares 5,083,554 6,693,759
---------- ----------
Basic EPS $ 0.16 $ 0.08
========== ==========
Diluted earnings per common share:
Numerator
Net income before extraordinary items applicable to
common stockholders $ 827,725 $ 549,562
Extraordinary items, net - -
---------- -----------
Income applicable to common stockholders $ 827,725 $ 549,562
========== ===========
Three-month Three-month
period ended period ended
June 30, 2002 June 30, 2001
------------- -------------
Denominator
Weighted average common shares 5,083,554 6,693,759
Contingent shares 159,101 -
---------- -----------
5,242,655 6,693,759
---------- -----------
Diluted EPS $ 0.16 $ 0.08
========== ===========
For the six-month period ended June 30, 2001, warrants to purchase
500,000 shares of common stock at $2.54 per share, and 500,000 shares
of common stock at $2.93 per share, were outstanding but were not
included in the computation of diluted EPS because the warrants'
exercise price was greater than the average market price of the
common shares. As a result of EWM's acquisition of First Reserve's
shares, these warrants were cancelled (see Note 9). Under the new
agreement, this former shareholder has the option to purchase up to
5% of the outstanding shares of the Company.
As discussed in Note 9, a former shareholder has the option to
purchase, on or before June 30, 2007, up to 5% of the
then-outstanding shares of common stock of the Company at a purchase
price equal to 90% of the fair market value of the shares. For the
six-month period ended June 30, 2002, this option amounted to 219,367
shares of common stock at $1.77 per share, which is included in the
computation of diluted EPS.
21
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 - BUSINESS SEGMENT INFORMATION
The Company's operations are principally managed on a product
services basis and are comprised of five reportable segments:
Esslinger, Wooten & Maxwell, Inc. ("EWM"), Embassy Financial
Services, Inc. ("Embassy"), Columbia Title of Florida, Inc.
("Columbia"), and First Reserve Insurance, Inc. ("FRINS"), and First
Reserve, Inc. EWM's product services consist of residential and
commercial real estate brokerage, management, and relocation
services. Embassy's product services have been in the capacity of a
mortgage lender and mortgage broker in the South Florida area,
specializing in conventional, FHA, and VA mortgages. Columbia's
product has been in the capacity of a title company. FRINS has been
in the capacity of insurance broker. First Reserve's capacity has
been as a holding Company. Revenue, net income (loss) EBITDA, which
is defined as earnings before interest, taxes, depreciation, and
amortization, and identifiable assets for these segments are as
follows:
Six-month period ended June 30, 2002
------------------------------------
Esslinger, Embassy Columbia First
Wooten & Financial Title of Reserve First
Maxwell, Services Florida, Insurance Reserve
Inc. Inc. Inc. Inc. Inc. Total
----------- ---------- -------- --------- --------- ----------
Revenue $23,586,522 $ 896,963 $797,291 $12,191 $ - $25,292,967
EBITDA $ 1,982,859 $ 10,954 $ 12,742 $11,861 $(218,362) $ 1,800,054
Net income
(loss) $ 1,117,960 $ (41,759) $ (2,743) $ 7,398 $(151,107) $ 929,749
Identifiable
assets at
period end $ 6,239,048 $2,450,637 $291,296 $14,916 $ 231,108 $ 9,227,005
Three-month period ended June 30, 2002
--------------------------------------
Esslinger, Embassy Columbia First
Wooten & Financial Title of Reserve First
Maxwell, Services Florida, Insurance Reserve
Inc. Inc. Inc. Inc. Inc. Total
----------- ---------- -------- --------- --------- ---------
Revenue $13,816,524 $ 509,894 $478,748 $ 5,731 $ - $14,810,897
EBITDA $ 1,459,215 $ 40,919 $ 68,792 $ 5,403 $(115,580) $ 1,458,749
Net income
(loss) $ 861,948 $ 2,729 $ 37,370 $ 3,370 $ (77,692) $ 827,725
Identifiable
assets at
period end $ 6,239,048 $2,450,637 $291,296 $14,916 $ 231,108 $ 9,227,005
Six-month period ended June 30, 2001
------------------------------------
Esslinger, Embassy Columbia First
Wooten & Financial Title of Reserve First
Maxwell, Services Florida, Insurance Reserve
Inc. Inc. Inc. Inc. Inc. Total
---------- ---------- -------- --------- --------- --------
Revenue $18,772,084 $ 955,267 $695,713 $ 6,418 $ - $20,429,482
EBITDA $ 1,297,286 $ 125,120 $ 69,048 $ 4,318 $(113,755) $ 1,382,017
Net income
(loss) $ 620,280 $ 38,804 $109,842 $ 2,442 $ (49,930) $ 721,438
Identifiable
assets at
period end $ 5,185,466 $2,377,237 $358,118 $ 9,158 $ 172,982 $ 8,102,961
22
FIRST RESERVE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 - BUSINESS SEGMENT INFORMATION (CONTINUED)
Three-month period ended June 30, 2001
--------------------------------------
Esslinger, Embassy Columbia First
Wooten & Financial Title of Reserve First
Maxwell, Services Florida, Insurance Reserve
Inc. Inc. Inc. Inc. Inc. Total
--------- ---------- --------- --------- ---------- ---------
Revenue $9,996,193 $ 504,239 $414,168 $2,462 $ - $10,917,062
EBITDA $ 964,382 $ 55,987 $ 71,455 $ 383 $(52,282) $ 1,039,925
Net income
(loss) $ 476,946 $ 238 $ 86,864 $ (533) $(13,953) $ 549,562
Identifiable
assets at
period end $5,185,466 $2,377,237 $358,118 $9,158 $172,982 $ 8,102,961
NOTE 13 - REGULATORY MATTERS
HUD Requirements Embassy is a non-supervised loan correspondent for
purposes of the U.S. Department of Housing and Urban Development
("HUD"). As such, 24-CFR Part 202 of the HUD handbook requires
Embassy to have an Adjusted Net Worth of at least $100,000. Embassy
is in compliance with this requirement.
State of Florida Requirements
Embassy is also a licensed mortgage lender under Chapter 494 of the
State of Florida. As such, Embassy is required to have a minimum net
worth of $250,000. Embassy is in compliance with this requirement.
NOTE 14 - RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with
the current period's presentation
23
Exhibit Index
Exhibit No. Exhibit
10.1 Credit Agreement, dated as of April 19, 2002, by and between
Esslinger-Wooten-Maxwell, Inc. and Mellon United National Bank.
10.2 Stock Purchase Agreement, dated as of January 10, 2002, by and
among Esslinger-Wooten-Maxwell, Inc., First Reserve, Inc. and
Charles Manni.
10.3 Stock Purchase Agreement, dated as April 18, 2002, by and
between James Newmeyer and First Reserve, Inc.
10.4 Employment Agreement, dated as of April 19, 2002, by and
between First Reserve, Inc. and Ronald A. Shuffield.
10.5 Employment Agreement, dated as of April 19, 2002, by and
between First Reserve, Inc. and Allen C. Harper.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002