Pumpkin leases 5,000 square feet of office space in Denver, Colorado for its sales and administrative activities.
Security Capital reported net income of $2,149,000 for the twelve month period ended December 31, 1998 compared to net income of $3,360,000 for the twelve month period ended December 31, 1997. The net income per common share was $0.41 for the twelve month period ended December 31, 1998 compared to net income per common share (after accrual for Class A Preferred Stock dividends) of $0.66 for the twelve month period ended December 31, 1997. The decrease in net income and net income per share was primarily attributable to the sale of the Company's insurance agency affiliate, which resulted in a $1,149,000 non-recurring gain (net of tax) in the prior calendar year. The Company has recorded the disposal of its proprietary interest in its insurance operations as a discontinued operation. The Company changed its reporting year from a September 30th fiscal year end to a calendar year end as of December 31, 1996. The Company reported net income of $125,000 and $1,013,000 for the three month transitional period ended December 31, 1996 and the twelve month period ended September 30, 1996, respectively. The net income per share was $0.0 and $0.14 (after accrual for Class A Preferred Stock dividends) for the three month transitional period ended December 31, 1996 and the twelve month period ended September 30, 1996, respectively.
On August 29, 1996, an officer of Foster Insurance Services Inc. ("FIS") exercised the put option in the Buy-Sell Agreement to purchase the Company's proprietary interest in FIS, a 50% partner in Bowen, Miclette, Descant & Britt. On July 17, 1997 the Company sold, effective June 30, 1997, its beneficial interest in FIS, a Texas corporation, to Bowen, Miclette, Descant and Britt for consideration of $1,525,845 and recognized a gain of approximately $1,149,000 (net of tax). In an unrelated transaction, the Company in December 1997 sold Foster Insurance Managers Inc. ("FIM") for $265,000 in cash to Tri-Star Insurance Services, Ltd., a Kentucky corporation. The Company recognized no gain as part of this transaction. The Company no longer has any interest in the insurance brokerage business as a result of these two transactions.
The Company has been assessing the impact of the Year 2000 on its business by conducting a review of the computer systems with date-related functionality used in its business. The Company is in the process of taking all steps that it believes are necessary or appropriate to ensure that such systems actively process all dates, including those before, on or after January 1, 2000, without loss of functionality or performance. Incremental spending for hardware upgrades and software modifications and testing required for Year 2000
Cash and cash equivalents decreased by $908,000, or 9%, to $9,133,000 at December 31, 1998, from $10,041,000 at December 31, 1997, primarily due to debt incurred for the acquisitions of Possible Dreams and Pumpkin. However, consolidated working capital at December 31, 1998 increased by $637,000, or 4%, to $15,156,000 from $14,519,000 at December 31, 1997, primarily due to an increase in the Company's deferred tax asset. The Company reported long-term debt of $10,036,000 at December 31, 1998 compared to $12,383,000 at the end of calendar year 1997. It is expected that cash generated from operations will continue to decrease the Company's debt incurred by the Company in connection with the acquisition of Possible Dreams and Pumpkin.
We have audited the accompanying consolidated balance sheets of Security Capital Corporation and subsidiaries (the "Company") as of December 31, 1998 and 1997 and the related consolidated statements of income, stockholders' equity, and cash flows for the years ended December 31, 1998 and 1997, the three months ended December 31, 1996 and the year 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.
SECURITY CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AS OF DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents....... $ 9,133 $ 10,041 Account receivable (net of allowance for doubtful accounts of $351 and $317).............. 3,279 2,746 Inventories..................... 5,339 4,307 Deferred tax asset.............. 1,175 539 Other current assets............ 828 582 ---------- ---------- Total current assets............. 19,754 18,215 Property and equipment (net of accumulated depreciation of $310 and $133).......................... 1,507 1,404 Intangible assets (net of accumulated amortization of $1,961 and $1,067)............................ 12,044 12,767 Licenses and other assets............ 196 164 ---------- ---------- Total Assets.......... $ 33,501 $ 32,550 ========== ==========
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 initial purchase price of $17,360,000. To finance the transaction, the Company used $3,000,000 of equity contributed by P.D. Holdings, Inc. ($300,000 of which was 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 subordinated debt included a note payable for $500,000 which was contingent on Possible Dreams' obtaining a certain level of cash flow from May 1, 1996 to December 31, 1996. Possible Dreams did not achieve the required cash flow and the subordinated debt was reduced during 1997 by $500,000 to $1,960,000 and goodwill was reduced in the same amount. The acquisition, after subordinated debt reduction of $500,000, was accounted for under the purchase method of accounting and can be summarized as follows:
The consolidated financial statements of the Company include the operations of Possible Dreams since May 1, 1996.
The Company acquired the assets and assumed certain liabilities of Pumpkin, Ltd. in June 1997 for a total purchase price of $7,717,493. The Company used a $1,500,000 equity contribution and borrowed $5,000,000 under term loan agreements to finance the acquisition. The acquisition was accounted for under the purchase method of accounting and the purchase price was allocated as follows:
The purchase agreement also provides for additional payments ("Additional Payments") to the Predecessor Company which are also contingent upon future EBITDA. At a minimum, Pumpkin will be required to make Additional Payments totaling $120,000 annually through the year 2001. The present value of the minimum Additional Payments based upon an imputed interest rate of 10% has been recorded as a liability in the accompanying balance sheet. The annual Additional Payment will increase to $160,000 in any year in which EBITDA is greater than $2,400,000.
The Company's consolidated financial statements include the operations of Pumpkin for the period ended December 31, 1998 and the period from June 27, 1997 (date of inception) through December 31, 1997.
DISCONTINUED OPERATIONS OF FOSTER INSURANCE SERVICES, INC. AND FOSTER INSURANCE MANAGERS INC.
Significant estimates included within the financial statements include sales return and discount reserves, allowance for doubtful accounts, inventory obsolescence reserves and the fair value and economic lives of intangible assets.
DECEMBER 31, -------------------- 1998 1997 --------- --------- (IN THOUSANDS) Land and improvements................ $ 370 $ 370 Buildings and improvements........... 828 738 Machinery and equipment.............. 405 251 Data processing equipment............ 110 83 Furniture and fixtures............... 104 95 --------- --------- Total cost........................... $ 1,817 $ 1,537 --------- --------- Less accumulated depreciation........ 310 133 --------- --------- Net book value....................... $ 1,507 $ 1,404 ========= =========
DECEMBER 31, -------------------- 1998 1997 --------- --------- (IN THOUSANDS) Goodwill............................. $ 10,762 $ 11,257 Patents.............................. 483 666 Deferred financing costs............. 799 844 --------- --------- Total................................ $ 12,044 $ 12,767 ========= =========
of Common and Class A Common Stock is used because the two classes are identical except for certain transfer restrictions. Earnings per common share assuming full dilution are based on the actual shares outstanding and the dilutive effect, if any, of outstanding stock options. The assumed conversion of these options was anti-dilutive and had no impact for all periods presented.
The weighted average number of shares outstanding used in the computations of basic and fully diluted earnings per share was 5,306,325, 4,382,157, 4,060,166 and 4,060,166 for calendar years 1998, 1997, the three month transitional period ended December 31, 1996 and fiscal year 1996, respectively. All references to amounts per share and number of shares in the financial statements and elsewhere throughout this report are restated to give effect to the one-for-eight reverse stock split effected in March 1996.
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, whereby deferred taxes are provided to recognize the effect of temporary differences between tax and financial statement reporting (see Note 4).
The Financial Accounting Standards Board released in June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement addresses the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Since the Company has not entered into transactions involving derivative instruments, the Company does not believe that the adoption of this new statement will have a material effect on the Company's financial statements. In the second quarter of 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." This Statement provides guidance on financial reporting of start-up costs and organizational costs. This Statement of Position is effective for financial statements for fiscal years after December 15, 1998. This Statement of Position requires start-up costs to be expensed as incurred. The Company does not believe that the adoption of this statement will have a material impact on the Company's financial statements.
Security Capital's 1982 Incentive Stock Option Plan (the "Plan"), as amended on December 10, 1990, provided for the granting of options to purchase up to 950,000 shares of Class A Common Stock to eligible employees of the Company at the fair market value on the date of the grant. Options were to be exercised in installments over the option period, but no options could be exercised after 10 years from the date of the grant. The Plan terminated on January 25, 1992.
DECEMBER 31, --------------------- 1998 1997 --------- ---------- (IN THOUSANDS) Deferred tax assets (credits): Allowance for doubtful accounts and inventory differences..... $ 284 $ 189 Operating loss carry-forwards... 10,095 10,744 Alternative minimum tax carryover..................... 141 100 Accelerated depreciation and other......................... (11) (11) --------- ---------- 10,509 11,022 Valuation allowance........ (9,334) (10,483) --------- ---------- Net deferred tax asset............... $ 1,175 $ 539 ========= ==========
A reconciliation of the provision for income taxes to income taxes based on the 34% statutory rate for the twelve month period ended December 31, 1998 and 1997 and the twelve month period ended September 30, 1996 are as follows:
Long-term debt consists of the following at December 31, 1998 and 1997:
1998 1997 --------- --------- (IN THOUSANDS) Possible Dreams Tranche A Term Loan, payable in twenty quarterly installments through July 1, 2001. The loan bears interest at the commercial paper rate plus 4% (8.920% at December 31, 1998). Interest is payable monthly........ $ 3,363 $ 4,175 Possible Dreams Tranche B Term Loan, payable in seven annual installments through April 1, 2003. The loan bears interest at the commercial paper rate plus 6% (10.92% at December 31, 1998). Interest is payable monthly........ 3,500 3,500 Possible Dreams Subordinated promissory notes payable to the former owners of Possible Dreams, interest rates ranging from 10 - 14% (10% at December 31, 1998) per annum. The principal payments are due in one installment on May 31, 2003. Interest is payable in semi-annual installments on May 1 and November 1..................... 1,960 1,960 Pumpkin Tranche A Term Loan, payable in 16 quarterly installments ranging from $150,000 to $225,000 through December 31, 2001; The loan bears interest at the commercial paper rate plus 4.5% (9.42% at December 31, 1998). Interest is payable monthly.................... 1,117 2,448 Pumpkin Tranche B Term Loan, payable in eight quarterly installments commencing upon repayment of the Tranche A Term Loan but no later than October 1, 2001. The loan bears interest at the commercial paper rate plus 6.5% (approximately 11.42% at December 31, 1998). Interest is payable monthly........ 2,000 2,000 --------- --------- $ 11,940 $ 14,083 Less amounts representing debt (245) discount........................... (361) Less current portion................. (1,659) (1,339) --------- --------- Total long term debt................. $ 10,036 $ 12,383 ========= =========
December 31, AMOUNT ------------------ -------------- (IN THOUSANDS) 1999............................ $ 1,659 2000............................ 1,776 2001............................ 1,920 2002............................ 2,850 2003............................ 3,735 -------------- Total scheduled payments............. $ 11,940 ==============
In connection with the Possible Dreams Tranche A and Tranche B loans, Possible Dreams issued warrants to purchase 250 shares (12.5%) of Possible Dreams' Class B Common Stock. The Class B Common Stock is non-voting and convertible at any time into voting, Class A Common Stock of Possible Dreams. The warrants were valued at approximately $428,571 and recorded as an original issue discount. The discount will be amortized over the life of the debt using the effective interest method. The Tranche A and B loans contain financial and prepayment of principal covenants. If Possible Dreams' cash flows meet certain thresholds, as defined in the loan agreements, payments due under the Tranche A and B loans will become accelerated. Possible Dreams' subordinated promissory note contained provisions under which the notes would be reduced by $500,000 if certain levels of cash flows were not met by Possible Dreams. Since
In connection with the Pumpkin Tranche A and Tranche B loans, Pumpkin issued a warrant to purchase 100 shares of Pumpkin's Class B common stock. The Class B Common Stock is non-voting and convertible at any time into voting, Class A Common Stock of Pumpkin The warrants were valued at $150,000 and recorded as an original issue discount. The discount will be amortized over the term of the debt of five to six years using the effective interest method.
In addition, the Company entered into a Consolidated Income Tax Sharing Agreement (the "Tax Sharing Agreement") with Possible Dreams and Pumpkin whereby both companies will calculate and pay to the Company the amount of its income tax liability as if they were not part of a consolidated group. The excess of the payment made by Possible Dreams and Pumpkin to the Company over the Company's tax liability will accrue to the Company subject to certain rights of the lenders. The lenders require the Company to set aside in a separate account such excess amounts paid by Possible Dreams and Pumpkin 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 and Pumpkin.
Possible Dreams maintains a $10,000,000 revolving line of credit that expires on May 17, 2003. Pumpkin maintains a $3,500,000 revolving line of credit which is limited to the borrowing base, as defined, and expires on the earlier of the date upon which the Pumpkin Tranche A and Tranche B loans have been paid in full or July 1, 2003. Possible Dreams had $1,000,000 drawn on its revolving line of credit at December 31, 1998 and 1997, while Pumpkin had nothing outstanding at December 31, 1998. Pumpkin's revolving line of credit bears interest at the commercial paper rate plus 4.25% (9.17% at December 31, 1998), while Possible Dreams' revolving line of credit bears interest at the commercial paper rate plus 4% (8.920% at December 31, 1998). Interest on both the revolving lines of credit is payable monthly.
Both Possible Dreams and Pumpkin's lines of credit and term loans are secured by substantially all their assets as well as by a pledge to the lender of their common stock.
FGS (see note 7) and its designees had purchased 30,000 shares of Class A Preferred Stock from the Company for $3,000,000 on July 30, 1993. This non-voting preferred stock was subject to mandatory redemption on the following date or dates: (1) eight years from the date of issuance of the first shares of such stock; (2) the occurrence of a change of control in the majority of the Board of Directors; or (3) each date, if any, on which an adjustment to the purchase price of the stock shall be required. The stock had a purchase price and redemption price equal to the liquidation value, which was $100 per share. In addition, the Class A Preferred Stock bore a dividend of 15% per annum payable in cash. Until redemption or the liquidation of the Company, dividends on Preferred Stock were payable only out of cumulative net income since January 1, 1990
On January 26, 1990, Security Capital executed a Stock Purchase Agreement with FGS, Inc., a Delaware corporation ("FGS"). Pursuant to the Stock Purchase Agreement, FGS and its designees had acquired for an aggregate consideration to date of $4,416,613 (subject to adjustments as noted below) 4,483,975 shares (without adjusting for the reverse stock split) of Class A Common Stock, 1025 shares (without adjusting for the reverse stock split) of Common Stock and 30,000 shares of Class A Preferred Stock. The original purchase price per share for such Common Equity purchased by FGS and its designees was $0.3822816 per share. This per share price was the unconsolidated net book value of the Company's Common Stock as of September 30, 1989 which were subject to various adjustments pursuant to the Stock Purchase Agreement. The adjustments to the Per Share Price under the Stock Purchase Agreement which have been made since the purchase of capital stock by FGS, reflected the difference between estimated amounts and actual amounts (a) received in connection with (i) the liquidation of the Company's investment in Security Capital Lloyds ("SCL"), (ii) the sale of certain assets of the Company and (iii) the termination of the Company's pension plan and (b) expended in connection with termination of the lease of the Company's New York office. Such adjustments shall be made no less frequently than every six months with the final adjustment no later than the date of termination of the sublease of the Company's former New York office in January 1995. In addition, the Per Share Price is subject to adjustment (i) to reflect liabilities of the Company, if any, existing prior to January 26, 1990 not included in the calculation of the Per Share Price or (ii) in satisfaction of Security Capital's obligation to indemnify FGS for losses resulting from or relating to (x) any misrepresentation, breach of warranty or breach of covenant in the Stock Purchase Agreement or (y) operations of the Company prior to January 26, 1990. As of the date of this report, the only known remaining adjustments to the per share price under the Stock Purchase Agreement relate to possible amounts due to the City and State of New York. During fiscal year 1996, the Company paid $166,000 to FGS and its designees for prior year adjustments.
provide management advisory services to Pumpkin. The fee to CP, Inc. will be payable quarterly and will be the greater of $100,000 annually or 5% of the Pumpkin's annual EBITDA, as defined in the purchase agreement. During the calendar year ended December 31, 1998 and the period from June 27, 1997 (date of inception) through December 31, 1997 Pumpkin paid $175,000 for such advisory fees. Such fees are subject to appropriate adjustment should the scope of operations of the Company change, whether from an acquisition or otherwise. Pursuant to the Advisory Agreement, no compensation is paid to the current Chairman of the Board, President and Secretary and Assistant Secretary in their respective capacities as such.
The Advisory Agreement states that, from time to time, CP, Inc. may present acquisition opportunities to the Company that it believes may be appropriate for the Company, but that CP, Inc. is under no obligation to present any or all acquisition candidates of which it is aware to the Company except for insurance agency business. If the Company or any of its subsidiaries completes any acquisition which was presented by CP, Inc., the Company is obligated to pay CP, Inc. an investment banking fee at the usual and customary rate for transactions of such size and complexity. In connection with the Possible Dreams and Pumpkin acquisitions, investment banking fees of $200,000 and $120,000 were paid to CP, Inc., respectively. 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.
Both of the key executives of Possible Dreams have entered into employment, consulting and non-competition agreements. The President and Chief Executive Officer of Possible Dreams, acquired 10% of the Class A Common Stock of P.D. Holdings for $300,000, as part of the Company's transaction to purchase Possible Dreams. The President 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, P.D. Holdings and the Company entered into a Stockholders' Agreement providing for certain restrictions on transfers of the shares of P.D. 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 Company has employment agreements with both key executives for five and three year terms. In addition, at the conclusion of the employment agreements the President and the other key executive officer each have a consulting agreement for three and one year terms, respectively. During the term of the agreement, the President will be paid $75,000, adjusted for the cost of living, and the other executive officer will be paid $50,000, adjusted for the cost of living.
Effective September 1, 1992, FIM entered into (i) an Agency and Management Services Agreement (as amended, the "Agency Agreement") with FIS which replaced a previous agreement with Stanley L. Spring, and (ii) a Buy-Sell Agreement (the "Buy-Sell Agreement") with FIS and Edward G. Britt, Jr. ("Britt"), the sole shareholder of FIS. In connection with these transactions, Mr. Spring resigned all directorships and offices held by him with Security Capital and its affiliates.
Pursuant to the Agency Agreement, FIM reappointed FIS as its local recording agent in Texas for FIM and related insurance companies and FIM agreed to provide management consultation services to FIS and to use its best efforts to maintain insurance markets for the placement of the insurance business produced by FIS. As compensation for its management consultation services, FIM will be paid 100% of the net pre-tax income of FIS (after the accrual of up to 25% of the pre-tax income to FIS for the payment of bonuses to FIS's employees) until the earlier of (i) the payment to FIM of (x) $1,000,000 (plus or minus the net pre-tax profits or losses of FIS from October 1, 1991 through the effective date of the Agency Agreement and less amounts paid to FIM as rental for certain office furniture), reduced by (y) an amount equal to two times any amount paid by FIS to FIM prior to September 30, 1995 from the proceeds of capital contributions by Britt or (ii) September 30, 1996. Thereafter, FIM will be paid a percentage of FIS's net pre-tax income based upon the amounts theretofore paid to FIM as provided in the Agency Agreement, but in any event not less than 50% of such net pre-tax income. The Agency Agreement has a term of 20 years, and will be automatically renewed for successive one year periods unless terminated by either party on 60 days' prior notice; provided, however, that the Agency Agreement will terminate upon the earliest to occur of (i) the death or disability of Britt, (ii) a sale of the stock of FIS by Britt or the termination of the Buy-Sell Agreement, (iii) the inability of FIM and FIS to resolve material disputes on or after September 30, 1994 upon notice of termination from either party, and (iv) notice from FIM following the suspension, cancellation or failure to renew any of the insurance licenses of FIS.
Pursuant to the Buy-Sell Agreement, FIM had 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. The Buy-Sell Agreement also required FIM to purchase Britt's shares of FIS for $500,000 in the event that the Agency Agreement was terminated due to the death or disability of Britt and required Britt to make certain payments to FIM in the event that the Agency Agreement is terminated for any other reason.
Mr. Larry M. Karren ("Karren"), the Vice President and Treasurer of Security Capital, the Controller of FIS and the Vice President and Chief Financial Officer of FIM, had entered into an agreement (the "Participation Agreement") with Britt, FIS and FIM whereby Karren was entitled to receive from FIS, after payment in full of the FIM Fee (as defined in the Buy-Sell Agreement), a bonus payment equal to 10% of the net pre-tax income of FIS until the occurrence of either (i) the exercise by Britt of the Put Option under the Buy-Sell Agreement or (ii) the sale of a majority of the stock or assets of FIS to a party other than Karren, FIS or FIM. In the case of (i), Karren was entitled to purchase for nominal consideration approximately 10% of the stock of, or an interest in, FIS. In the case of (ii), Karren was entitled to receive a portion of the net proceeds of any such sale described in (ii) otherwise distributable to Britt.
CALENDAR YEAR 1997: Net product sales.................. $ 2,542 $ 3,490 $14,863 $ 4,828 Net (loss) income.................. (240) 1 3,517 82 (Loss) earnings per common share... (0.09) (0.03) 0.80 (0.02) Dividends per share of common stock............................
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 $324,567 and $237,961 for the calendar years ended December 31, 1998 and 1997. Possible Dreams rents a show room in New York under a five year lease agreement, which expires in 2002. Annual rent expense is $78,600 through the year 2001 and $72,050 in the year 2002. Pumpkin leases its office building and certain equipment from the minority shareholders of Pumpkin Holdings under operating lease agreements. Annual rent expense is $44,669 thru the year 2001 and $22,334 in year 2002. Future minimum rental payments under the office space operating leases for the years ending December 31 are as follows: