The Company also leases 33,478 square feet of office space in Houston, Texas for its insurance brokerage business.
On May 17, 1996, Possible Dreams, Ltd, a Delaware corporation ("Possible Dreams"), acquired substantially all of the assets and assumed certain liabilities of Possible Dreams, Ltd. and Columbia National Corporation both Massachusetts corporations (collectively, the "Sellers"), for consideration of approximately $17.4 million. The assets purchased from the Sellers consisted of the assets used in the conduct of their business. These assets included cash, accounts receivable, inventories, prepaid expenses, real estate, furniture, fixtures, computers, and intellectual property rights and other intangibles. See Note 2 of Notes to Consolidated Financial Statements of the Company.
In addition, the Company entered into a Consolidated Income Tax Sharing Agreement (the "Tax Sharing Agreement") with Possible Dreams and Holdings whereby Possible Dreams will calculate and pay to the Company the amount of its income tax liability as if Possible Dreams was not part of a consolidated group. The excess of the payment made by Possible Dreams to the Company over the Company's tax liability will accrue to the Company subject to certain rights of the lenders. The lenders required the Company to set aside in a separate account such excess amounts paid by Possible Dreams to the Company during the first three years of the Tax Sharing Agreement and to pledge the Company's rights in such account to the lenders as additional collateral for the loans to Possible Dreams.
Consolidated Balance Sheets -- As of September 30, 1996 and 1995. . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows--For the Years Ended September 30, 1996, 1995 and 1994 . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . .. . . . . . .
Balance Sheets--As of September 30, 1996 and 1995. . . . . .
Statement of Partners' Equity --For the Years Ended September 30, 1996, 1995 and 1994. . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . . . .
We have audited the accompanying consolidated balance sheets of Security Capital Corporation and subsidiaries (the "Company") as of September 30, 1996 and 1995 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
Consolidated Statements of Income Security Capital Corporation and Subsidiaries - --------------------------------------------------------------------------- Year Ended September 30, 1996 1995 1994 - --------------------------------------------------------------------------- (In thousands, except share and per share amounts)
- --------------------------------------------------------------------------- Total other income $ 196 $ 939 $ 453 - ---------------------------------------------------------------------------
Minority interest share of net income (129) - - - --------------------------------------------------------------------------- Income(loss) before provision for income tax $ 1,071 $ 244 $ (69) Provision for income taxes 58 - -
Net income(loss) per common share: $.14 $*(.05) $*(.24) - --------------------------------------------------------------------------- Weighted average shares outstanding 4,060 *4,061 *2,146 - --------------------------------------------------------------------------- * Restated for one-for-eight reverse stock split. The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
Property and equipment (net of accumulated depreciation of $200 and $353) 1,105 14 Intangible assets (net of accumulated amortization of $215 and $0 ) 9,122 - Investment in and advances to joint enterprise 87 653 Licenses and other assets 401 285 - --------------------------------------------------------------------------- Total Assets $ 34,502 $ 10,926 - --------------------------------------------------------------------------- Liabilities and Stockholders' Equity - ------------------------------------ Current liabilities: Note payable $ 8,884 $ - Current portion of long-term debt 1,010 - Accounts payable 1,646 - Accounts payable - FGS & designee - 166 Accrued expenses and other liabilities 466 464 ------------ ------------ Total current liabilities 12,006 630
Long-term debt, less current portion 10,329 - Minority interest 858 - - --------------------------------------------------------------------------- Total Liabilities $ 23,193 $ 630 - --------------------------------------------------------------------------- Commitments and Contingencies $ - $ - - --------------------------------------------------------------------------- Class A preferred stock (redeemable), $.01 par value, 50,000 shares authorized, 30,000 shares issued (including dividends in arrears of $1,425 and $975) $ 4,425 $ 3,975 - --------------------------------------------------------------------------- Stockholders' Equity - -------------------- Common stock, $.01 par value, 7,500 shares authorized; 551 and *564 shares issued $ - $ - Class A common stock, $.01 par value, 10,000,000 and *10,000,000 shares authorized; 4,378,190 and *4,378,671 shares issued 44 350 Preferred stock, $.01 par value, 2,500,000 shares authorized; none issued - - Additional paid-in capital 62,544 62,238 Accumulated deficit (50,489) (51,052) Less: Treasury stock, at cost, 318,575 and *318,575 shares (5,215) (5,215) - --------------------------------------------------------------------------- Total Stockholders' Equity $ 6,884 $ 6,321 - ---------------------------------------------------------------------------
* Restated for one-for-eight reverse stock split. The accompanying notes to consolidated financial statements are an integral part of these statements.
Cash flows from financing activities: Net increase in borrowings under line of credit 6,234 - - Borrowings incurred to finance the acquisition of Possible Dreams and Columbia National Corporation 14,360 - Proceeds from stock rights offering, net of issuance costs of $227 - - 6,904
- --------------------------------------------------------------------------- Net cash provided (used) by financing activities 20,594 - 6,904 - ---------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 9,794 9,381 2,833 - --------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 8,706 $ 9,794$ 9,381 - ---------------------------------------------------------------------------
* Includes both Common Stock and Class A Common Stock The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
Security Capital Corporation ("Security Capital" or, when referred to together with its subsidiaries, the "Company") owns, effective May 1, 1996, through its 90% owned subsidiary, P.D. Holdings, Inc. 90% (77.5% effective after consideration of the outstanding warrants issued in conjunction with debt to purchase outstanding shares of common stock) of the outstanding shares of Possible Dreams, Ltd.("Possible Dreams"), a Delaware corporation. Possible Dreams acquired substantially all of the assets and assumed certain liabilities of Possible Dreams, Ltd. and Columbia National Corporation, both Massachusetts corporations, during May 1996. Possible Dreams operates as an importer, designer, warehouser and distributor of collectible Christmas figurines and ornaments and, to a lesser extent, religious articles. The Company owns all of the outstanding shares of Security Capital Insurance Group, Inc. ("SCIGI") and, through SCIGI, the Company owns Foster Insurance Managers, Inc. ("FIM") and Lloyd's Management Corporation ("LMC"). FIM has a management services agreement with the Company's insurance agency affiliate, Foster Insurance Services, Inc. ("FIS"). FIS and Bowen, Miclette & Descant, Inc. ("BMD"), another unaffiliated independent insurance agency, entered into a partnership agreement effective October 1, 1993. The new enterprise was named Bowen, Miclette, Descant & Britt ("BMDB") and has done business under that name since October 1, 1993.
- ------------------------------------------------------------------------------- 2. Summary of significant accounting and reporting policies - -------------------------------------------------------------------------------
ACQUISITION OF POSSIBLE DREAMS, LTD. The Company acquired the assets and assumed certain liabilities of Possible Dreams, Ltd., a Massachusetts corporation, and Columbia National Corp., a Massachusetts corporation, in May 1996, for a total purchase price of $17,360,000 (the "Acquisition"). To finance the transaction, the Company used $3,000,000 of equity contribution from P.D. Holdings, Inc. ($300,000 provided by minority owners of P.D. Holdings, Inc.), borrowed $9,250,000 under term loan agreements, borrowed $2,650,000 under a line-of-credit agreement and issued $2,460,000 in subordinated debt. The acquisition was accounted for under the purchase method of accounting and the acquisition can be summarized as follows:
Allocation of purchase price: Goodwill and other intangible assets $ 9,337,175 Inventories 3,443,796 Accounts receivable 2,824,506 Property and equipment 1,100,000 Other assets 113,605 Working capital 540,918 ----------------- $17,360,000 ----------------- -----------------
CONSOLIDATION The accompanying consolidated financial statements include the accounts of Security Capital, all of its subsidiaries and its affiliate, FIS. All significant intercompany balances have been eliminated in consolidation. The Company accounts for its investment in BMDB under the equity method of accounting.
USE OF MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
CONSOLIDATED STATEMENTS OF CASH FLOWS For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. Interest paid during the three years ended September 30, 1996 was $730,942, $0, and $0, respectively. There were no income taxes paid during the prior three years ended September 30, 1996.
INTANGIBLE ASSETS Intangible assets consist of the cost in excess of the fair value of net assets acquired in the Possible Dreams acquisition ("Goodwill") of $8,663,348 (net of amortization) and net deferred financing costs of $458,702. Goodwill and deferred financing costs are being amortized on a straight-line basis over 20 years and the estimated term of the related debt, respectively.
INCOME TAXES The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (the "Statement"). The Statement requires an asset and liability approach for financial accounting and reporting for income taxes which differs from the method previously required by generally accepted accounting principles. The Company adopted the Statement during the year ended September 30, 1994. As discussed further in Note 4, the adoption of the Statement did not materially impact the Company's financial statements.
Changes in outstanding shares under option during each of the three years in the period ended September 30, 1996 and the balance outstanding and available for future grant at September 30, 1996 are summarized as follows:
- ------------------------------------------------------------------------------- Number of Option Price Shares * Range * - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- Outstanding at September 30, 1995 4,012 $5.00 Granted - Exercised - Canceled - ------------------------------------------------------------------------------- Outstanding at September 30, 1996 4,012 $5.00 Exercisable: At September 30, 1996 4,012 - ------------------------------------------------------------------------------- Available for future grant 0 - -------------------------------------------------------------------------------
During 1994, the Company adopted the Statement, which requires the Company to compute deferred income taxes based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The adoption had no effect on financial position or results of operations because of a 100% valuation allowance applied against the Company's net deferred tax asset.
A reconciliation of the provision for income taxes to income taxes based on the 34% statutory rate for the year ended September 30, 1996 is as follows (in thousands):
1996. The line of credit bears interest at the commercial paper rate plus 4% (9.46% at September 30, 1996). Interest on the revolving line of credit is payable monthly.
The Tranche A and B loans and the revolving line of credit are secured by substantially all the assets of Possible Dreams as well as a pledge to the lender of the capital stock of Possible Dreams.
In March 1996, the Company effected a one-for-eight reverse split of the Company's Common Stock and Class A Common Stock. The reverse split had the effect of decreasing the number of issued shares from 35,033,880 to approximately 4,378,741. The par value of the reduced shares in connection with the reverse split was charged to Common Stock and Class A Common Stock and a like amount credited to paid in capital. Accordingly, all share and per share data in the financial statements and footnotes have been restated to reflect the reverse stock split.
Both of the key executives of Possible Dreams have entered into employment, consulting and non-competition agreements. Mr. Warren Stanley, the President and Chief Executive Officer of Possible Dreams, acquired 10% of the Class A Common Stock of Holdings for $300,000, as part of the Company's transaction to purchase Possible Dreams. Mr. Stanley and another executive officer were granted options to purchase an additional 10% of such Class A Common Stock at an exercise price of approximately $1,904 per share. Both executive officers, Holdings and the Company entered into a Stockholders' Agreement providing for certain restrictions on transfers of the shares of Holdings owned by them, together with certain preemptive rights, rights of first refusal, puts and calls, "tag along/drag along" rights and registration rights with respect to the Class A and Class B Common Stock of Holdings.
The initial term of the Advisory Agreement was for one year commencing on January 26, 1990; the agreement provides that thereafter it will be automatically extended for additional one-year periods unless either party gives 30 days' written notice to the other of its intention to terminate.
Pursuant to the Buy-Sell Agreement, FIM received an option to purchase 50% of the stock of FIS at any time for $1,000. In addition, Britt received the option, any time after the later of (i) September 30, 1994 and (ii) the payment to FIM of $1,000,000 pursuant to the Agency Agreement, to purchase any shares of FIS then owned by FIM and to terminate the Agency Agreement for a purchase price equal to 50% of the then fair market value of FIS (which fair market value shall in any event not be less than $3,000,000) plus an amount equal to $1,000,000 less the amounts previously paid to FIM pursuant to the Agency Agreement. On August 29, 1996 Britt exercised the Put Option in the Buy-Sell agreement to purchase all of the assets, liabilities and business of FIS, the 50% corporate partner of BMDB for a price to be determined by an independent third party appraiser. It is expected that Britt's purchase of FIS will be concluded in the first half of 1997. Management expects a gain to be recorded in connection with the purchase of FIS by Britt. However, at this time, management cannot estimate the gain to be recorded.
Possible Dreams maintains certain agreements with giftware designers which require payment of royalties based upon a percentage of net sales of certain products and other formulas as stated in the agreements. The royalty expense under these agreements amounted to $124,496 for the period May 1, 1996 to September 30, 1996.
Revenues: - --------- Commissions $ 10,418 $ 9,391 $ 7,155 Investment income 27 22 16 Risk management fees 17 15 32 Other income 7 (1) 4 - --------------------------------------------------------------------------- Total revenues $ 10,469 $ 9,427 $ 7,207 - --------------------------------------------------------------------------- Expenses: - --------- Salaries and commission expenses $ 6,161 $ 5,480 $ 4,304 Payroll taxes and benefits 930 818 668 Travel and entertainment 586 496 431 Office and equipment rental 449 376 280 Office expenses 394 388 299 Professional fees 180 191 61 Insurance 199 180 129 Depreciation and amortization 285 217 160 Interest 46 41 35 Bad debt expense 65 87 35 Data processing 72 56 29 Other 377 279 197 - ---------------------------------------------------------------------------
Total expenses $ 9,744 $ 8,609 $ 6,628 - ---------------------------------------------------------------------------- Net income $ 725 $ 818 $ 579 - ---------------------------------------------------------------------------- The accompanying Notes to Financial Statements are an integral part of these financial statements.
- ---------------------------------------------------------------------------- As of September 30, 1996 1995 - ---------------------------------------------------------------------------- (In thousands) Assets - ------ Current assets: Cash and cash equivalents $ 700 $ 1,019 Accounts receivable - premiums (net of allowance for doubtful accounts of $199 and $145) 2,849 2,283 Accounts receivable - company direct bill commissions 671 504 Accounts receivable - joint owners 123 46 Other receivable 132 102 Expense advances: Employees 38 48 Officers 358 348 Prepaid insurance 58 45 --------- ----------- Total current assets 4,929 4,395 Fixed assets, (net of $650 and $400 of accumulated depreciation) 887 756 Other assets 31 47 - ---------------------------------------------------------------------------- Total assets $ 5,847 $ 5,198 - ---------------------------------------------------------------------------- Liabilities and Partners' Equity - -------------------------------- Current liabilities: Accounts payable - insurance companies $ 4,140 $ 3,145 Producers' commissions payable 113 139 Accrued expenses 181 126 Note payable - current 9 13 Lease obligation - current 213 152 Accounts payable - joint owners 16 63 --------- ----------- Total current liabilities 4,672 3,638 Long term liabilities: Note payable - long term 6 15 Lease obligations - long term 369 339 Partners' advances 260 100 --------- ----------- Total long term liabilities 635 454 - ---------------------------------------------------------------------------- Total liabilities $ 5,307 $ 4,092 - ---------------------------------------------------------------------------- Commitments and Contingencies $ - $ - - ---------------------------------------------------------------------------- Total partners' equity $ 540 $ 1,106 - ---------------------------------------------------------------------------- Total liabilities and partners' equity $ 5,847 $ 5,198 - ---------------------------------------------------------------------------- The accompanying Notes to Financial Statements are an integral part of these financial statements.
Statements of Cash Flows Bowen, Miclette, Descant & Britt - ------------------------------------------------------------------------------ Year ended September 30, 1996 1995 1994 - ------------------------------------------------------------------------------ (In thousands)
Cash flows provided (used) by operating activities: Net income $ 725 $ 818 $ 579 Adjustment to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 285 217 160
Increase (decrease) in liabilities: Accounts payable - insurance companies 995 250 (2,321) Producers' commissions payable (26) 26 22 Accrued expenses 55 (31) (10) Management fee payable to joint owners - (128) - Accounts payable - joint owners (47) (53) (155) Other liabilities 295 231 216 -------- -------- -------- Subtotal 1,272 295 (2,248) - ------------------------------------------------------------------------------ Net cash provided (used) by operating activities 1,429 1,485 (250) - ------------------------------------------------------------------------------ Cash flows from investing activities:
- ------------------------------------------------------------------------------ Balance, September 30, 1996 $ 540 - ------------------------------------------------------------------------------ The accompanying Notes to Financial Statements are an integral part of these statements.
USE OF MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reporting amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION Commissions are recognized on the effective date of the applicable policies or the billing date, whichever is later. Contingent commissions are recognized when the related contingent periods have expired and such commissions can be reasonably estimated. Fee income for services other than placement of insurance coverage is recognized as those services are provided.
The Company provides a 401(k) plan for eligible employees. Employees may contribute up to 20% of their compensation to the maximum allowed by the Internal Revenue Service. The Company matches employee contributions up to two and one half percent of an employee's compensation. Contributions by the Company paid to the plan for the twelve month period ended September 30, 1996 amounted to $100,157 (fiscal year 1995 and 1994 amounted to $73,439 and $65,187 respectively). In addition the Company accrued a $40,000 profit sharing bonus for the employees of the 401(k) plan for 1996. The Company paid that same amount to the plan for fiscal years 1995 and 1994.
- ------------------------------------------------------------------------------ Year ending September 30, Lease Rentals - ------------------------------------------------------------------------------ (in thousands)
1997 $414 1998 430 1999 440 2000 150 - ------------------------------------------------------------------------------ Total 1,434 - ------------------------------------------------------------------------------
The Company has entered into several capital leases for office furniture and equipment. The leases transfer title of the equipment to the Company at the end of the lease period. The amount capitalized is shown in Note 2 under the caption "leased equipment." The future minimum lease payments under the capitalized leases and the present value of the net minimum lease payments as of September 30, 1996 are as follows:
On July 23, 1993, the Texas State Board of Insurance approved the application for an insurance license for FIS and BMD to form a general partnership. The Company entered into a partnership agreement effective October 1, 1993 and began operations as a general partnership instead of a corporation, and, in
connection therewith, changed its name to Bowen, Miclette, Descant & Britt. The agreement provides a formula for the division of profits and losses between FIS and BMD (1994 profit and losses split 52% to BMD and 48% to FIS and every year thereafter split 50% to each partner), as well as the individual rights and obligation of each partner.