The Company believes its owned and leased space is adequate for its current needs.
On June 27, 1997, the Company's subsidiary, Pumpkin Masters Holdings, Inc. ("Pumpkin. Holdings"), through its subsidiary Pumpkin, Ltd. ("Pumpkin"), both Delaware corporations, acquired substantially all of the assets and assumed certain liabilities of Pumpkin Ltd. d/b/a Pumpkin Masters, Inc. (" Seller of Pumpkin Masters"), a Colorado corporation. Pumpkin is engaged in the business of manufacturing and distributing pumpkin and watermelon carving kits and related accessories. The consideration paid to the Seller of Pumpkin Masters and the transaction fees and expenses incurred at the closing date aggregated $7,717,493. The assets purchased consisted of the assets used by the Seller of Pumpkin Masters in the conduct of its business, including cash, accounts receivable, inventories, prepaid expenses, furniture, fixtures, computers, and intellectual property rights and other intangibles.
Product sales for the Company increased to $25,408,000 for the twelve month period ended December 31, 1997 as compared to $5,073,000 and $9,854,000 for the three month transitional period ended December 31,1996 and the twelve month period ended September 30, 1996, respectively. The acquisition of Pumpkin had a significant impact on product sales and profitability. The acquisition was completed just prior to Pumpkin's busiest period since 90% of its sales historically occurs between July and October. The Company's current calendar year product sales also reflected a full year of Possible Dreams' product sales as compared to only the five month period from May 1, 1996 to the end of the prior fiscal year. The Company has reduced its cost of goods sold by 2%, which had the effect of increasing the Company's gross margin. Selling, general and administrative expense increased to $8,878,000 for the twelve month period ended December 31, 1997 as compared to $1,528,000 and $3,790,000 for the three month transitional period ended December 31, 1996 and the twelve month period ended September 30, 1996, respectively. Selling, general and administrative expense increased because Possible Dreams' expense for the current calendar year represents a full year of its expense while the prior fiscal year represented only the five month period from May 1, 1996 ( the date of inception) through September 30, 1996. The acquisition of Pumpkin increased selling, general and administrative expense during the current calendar year by approximately $1,405,000.The Company acquired a considerable amount of goodwill in its acquisitions of Pumpkin and Possible Dreams. During calendar year 1997 the Company incurred $950,000 of depreciation and amortization expense as compared to $182,000 and $296,000 for the three month transitional period ended December 31, 1996 and the twelve month period ended September 30, 1996, respectively. Interest expense increased to $2,005,000 for calendar year 1997 as compared to $507,000 and $731,000 for the three month transitional period ended December 31, 1996 and the twelve month period ended September 30, 1996, respectively. This increased interest cost can be attributed to debt service for short-term working capital and long-term bank debt incurred in connection with the purchase of both Possible Dreams and Pumpkin.
As previously disclosed, 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 $17,360,000. 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. The purchase price for Possible Dreams was adjusted by $500,000 to $16,860,000 because it did not achieve the required cash flow
from May 1, 1996 to December 31, 1996. See Note 2 of Notes to Consolidated Financial Statements of the Company for more information.
Possible Dreams experiences a significant seasonal pattern in its working capital requirements and operating results. Possible Dreams has historically received orders representing approximately 50% of its annual bookings during the first quarter for each of the last three calendar years. It ships product throughout the year, with a majority of the shipping occurring in the third and fourth calendar quarters of each year. Possible Dreams hires temporary employees during its third and fourth calendar quarters to accommodate peak shipping periods. Possible Dreams offers extended payment terms to some of its customers for seasonal merchandise and, accordingly, collects a substantial portion of its accounts receivable in the fourth calendar quarter. Due to the seasonal pattern, Possible Dreams has had greater working capital needs in its second and third calendar quarters and has experienced greater cash availability in its fourth calendar quarter. As a result of this sales pattern, Possible Dreams typically records a substantial portion of its revenues in its third and fourth calendar quarters and expects this seasonal pattern to continue for the foreseeable future. Possible Dreams has historically financed its operations through internally generated cash flow and short term seasonal borrowings.
Cash and cash equivalents increased by $2,031,000 to $10,041,000 at December 31, 1997, primarily due to proceeds received from the sale of the Company's insurance agency brokerage operation. The Company sold its proprietary interest in FIS, an independent insurance agency, for $1,525,000 in cash and recognized a gain of $1,298,000. The Company, in an unrelated sale, sold FIM, its managing general agency, for $265,000 in cash. The combination of these two transactions had the effect of increasing consolidated working capital. Consolidated working capital at December 31, 1997 increased by $2,610,000 to $14,519,000 as compared to $11,909,000 at December 31, 1996.
The Company expects no major increase in capital expenditures during calendar year 1998. The Company believes that with the addition of Pumpkin, the proceeds from the sale of the Company's insurance agency operations and from cash and cash equivalents at December 31, 1997, there will be sufficient cash on hand to meet the Company's working capital and operating expenditure requirements during calendar year 1998 and to compete for other acquisition opportunities.
Consolidated Statements of Income Security Capital Corporation and Subsidiaries (In thousands, except per share amounts)
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
Source of acquisition funds: Cash $ 2,700,000 Debt issued (Note 5) 13,860,000 Minority interests investment 300,000 --------------------- $16,860,000 =====================
Allocation of purchase price: Goodwill and other intangible assets $ 8,837,175 Inventories 3,443,796 Accounts receivable 2,824,506 Property and equipment 1,100,000 Other assets 113,605 Working capital 540,918 --------------------- $16,860,000 =====================
Source of acquisition funds: Cash $444,007 Debt issued 5,000,000 Future minimum additional payments 391,014 Liabilities assumed 1,646,342 Transaction costs 236,130 --------------------- $7,717,493 =====================
On July 17, 1997 the Company sold its beneficial interest in Foster Insurance Services, Inc. ("FIS"), a Texas corporation, to Bowen, Miclette, Descant and Britt Inc. for consideration of $1,525,845 and recognized a gain of approximately $1,298,000. 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 net revenues and expenses of FIS are shown on the consolidated statements of income as income (loss) from joint enterprise.
CONSOLIDATION The accompanying consolidated financial statements include the accounts of Security Capital, all of its subsidiaries and its affiliate FIS prior to its disposition effective June 30, 1997 and FIM prior to its disposition effective December 30, 1997. All significant inter-company balances have been eliminated in consolidation.
EARNINGS PER SHARE Earnings per common share amounts are based on the weighted average number of Common and Class A Common Shares outstanding and the dilutive effect, if any, of outstanding stock options. The sum 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 4,382,157, 4,060,166, 4,060,166 and 4,060,659 for calendar year 1997, the three month transitional period ended December 31, 1996 and fiscal years 1996 and 1995, 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.
Security Capital's 1982 Incentive Stock Option Plan (the "Plan"), as amended on December 10, 1990, provides 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.
- -------------------------------------------------------------------------------- Number of Option Price Shares * Range * - -------------------------------------------------------------------------------- Outstanding at September 30, 1994 4,325 $5.00 - $49.04 Granted - Exercised - Canceled 313
- -------------------------------------------------------------------------------- Outstanding at September 30, 1995 4,012 $5.00 Granted - Exercised - Canceled -
The tax effects of the items comprising the Company's net deferred tax asset at December 31, 1997 and 1996 in the Company's statement of financial position are as follows:
A reconciliation of the provision for income taxes to income taxes based on the 34% statutory rate for the year ended December 31, 1997 is as follows (in thousands):
Long-term debt consists of the following at December 31, 1997 and December 31, 1996:
DECEMBER 31, AMOUNT ------------ ------ (In thousands) 1998 $1,339 1999 1,930 2000 2,083 2001 2,326 2002 3,025 Thereafter 3,380 ================= $14,083 =================
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 Pumkin 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.
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, while Pumpkin had nothing outstanding at December 31, 1997. Pumpkin's revolving line of credit bears interest at the commercial paper rate plus 4.25% (9.84% at December 31, 1997), while Possible Dreams' revolving line of credit bears interest at the commercial paper rate plus 4% (9.586 at December 31, 1997). Interest on both the revolving lines of credit are payable monthly.
The Possible Dreams' credit agreement contains restrictive covenants prohibiting or limiting certain actions of Possible Dreams, including payment of capital expenditures, investments, and incurrences of debt, and requires certain actions of Possible Dreams, including the maintenance of specified levels of profitability and tangible net worth, as defined. At December 31, 1997, Possible Dreams was not in compliance with the restrictive covenants related to capital expenditures and minimum EBITDA. However, Possible Dreams received a waiver of such noncompliance for the entirety of calendar year 1997 from its lender.
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 $.3822816 per share. This per share price was the unconsolidated net book value of the Company's Common Stock as of September 30, 1989 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, and which may in the future be made, reflect the difference, if any, 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.
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.
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
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. The Buy-Sell Agreement also requires FIM to purchase Britt's shares of FIS for $500,000 in the event that the Agency Agreement is terminated due to the death or disability of Britt and requires Britt to make certain payments to FIM in the event that the Agency Agreement is terminated for any other reason.
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 $237,961 for calendar year 1997 and $183,226 for the period May 1, 1996 to December 31, 1996 (the period the Company owned Possible Dreams during calendar year 1996). Possible Dreams also rents a show room in New York under a five year lease agreement. Annual rent expense is $72,800 through the year 2001 and $66,733 in the year 2002. Pumpkin leases its office building and certain equipment from the minority shareholders of Holdings under operating lease agreements. Future minimum rental payments under the office space operating leases for the years ending December 31 are as follows:
Year Minimum rental payments ------------------------------ (In thousands) 1998 $116 1999 116 2000 116 2001 116 2002 88 ------------------------------ Total minimum operating lease payments $552 ==============================
On May 4, 1992, the Company received a notice from the State of New York that the Company owed $244,116 in additional withholding taxes, interest and penalties for calendar year 1984. The Company has submitted information to the State of New York and is awaiting a reply. At this time, although the Company is unable to determine the amount, if any, which may eventually be owed to the State of New York, the Company believes its previously filed returns are correct and that no additional amounts are owed to the state.
The Company is a party to several legal actions arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses to these actions, and they should have no material adverse effect on the operations or financial condition of the Company.