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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 1-7921
SECURITY CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3003070
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1111 NORTH LOOP WEST, SUITE 400, HOUSTON, TEXAS 77008
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 880-7100
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Class A Common Stock, Pacific Stock Exchange
$.01 par value
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or 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.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[X]
As of December 13, 1996, 4,059,390 shares of the Registrant's voting
stock were issued and outstanding, of which 2,835,432 shares were held by
affiliates of the Registrant. The aggregate market value of the remaining
1,223,958 shares of voting stock held by non-affiliates (based upon the closing
price of the Registrant's Class A Common Stock on December 13, 1996 of $2 3/4)
was approximately $3,366,000.
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TABLE OF CONTENTS
PAGE
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Item 1. Business.............................................................1
Item 2. Properties..........................................................10
Item 3. Legal Proceedings...................................................10
Item 4. Submission of Matters to a Vote of Security Holders.................11
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.............................................................12
Item 6. Selected Financial Data ........................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 15
Item 8. Financial Statements and Supplementary Data ...................... 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................18
Item 10. Directors and Executive Officers of the Registrant..................18
Item 11. Executive Compensation..............................................21
Item 12. Security Ownership of Certain Beneficial Owners and Management......23
Item 13. Certain Relationships and Related Transactions......................25
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....27
(i)
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PART I
ITEM 1. BUSINESS.
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GENERAL
Security Capital Corporation (the "Company" or "Security Capital") is a
holding company which was incorporated in Delaware in November 1979. Through
its subsidiary, Possible Dreams, Ltd. ("Possible Dreams"), the Company engages
in the design, importation and distribution of fine quality collectibles, other
specialty seasonal giftware and religious giftware and statuary. Through its
subsidiary, Security Capital Insurance Group, Inc. ("SCIGI"), the Company
engages in insurance brokerage.
POSSIBLE DREAMS
BACKGROUND
On May 17, 1996, the Company, through its subsidiary, P.D. Holdings, Inc.,
a newly- formed Delaware corporation, and Possible Dreams, Ltd., a newly-formed
Delaware corporation and a subsidiary of P.D. Holdings, Inc., acquired
substantially all of the assets and assumed certain liabilities of Possible
Dreams, Ltd., a Massachusetts corporation established in 1988 and engaged in the
design, importation and distribution of fine quality collectible and other
speciality seasonal giftware, and Columbia National Corporation, a Massachusetts
corporation established in 1957 and engaged in the design, importation and
distribution of religious giftware and statuary. The assets purchased consisted
of cash, accounts receivable, inventories, prepaid expenses, real estate,
furniture, fixtures, computer and intellectual property rights and other
intangibles. The consideration paid in connection with the acquisition
aggregated $17,360,000. For additional information regarding the acquisition of
such assets, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Notes to Consolidated Financial Statements of
the Company.
OVERVIEW
Possible Dreams is a leading designer, importer and distributor of fine
quality collectibles and other specialty seasonal giftware. Possible Dreams is
known for its hand-crafted collectible series of Clothtique-Registered
Trademark- items. Possible Dreams' products include the Clothtique-Registered
Trademark- Santa Collection, the American Artists Collection-Registered
Trademark-, the Saturday Evening Post Covers of Norman Rockwell and J.C.
Leyendecker-Registered Trademark-, Pepsi-Registered Trademark- products and a
variety of Angels and ornaments. Other lines include Crinkle Claus-TM-, The
Thickets At Sweetbriar-TM- and Floristine Angels-TM-. Possible Dreams
distributes its products throughout the United States to approximately 15,000
independent gift retailers, as well as to department stores, mail order houses
and large card and gift chains.
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PRODUCTS
Possible Dreams designs, imports and distributes more than 2,000 products.
Possible Dreams' leading product line is Clothtique-Registered Trademark-.
Blending stiffened cloth, porcelain and cold cast, the process was first
utilized by Possible Dreams for a series of angels and Santas. Clothtique is
now used in a variety of both holiday and year round collections. It has the
ability to mimic the look and feel of real wardrobes.
One of Possible Dreams' earliest Clothique collections is entitled the
Santa Claus Collection-Registered Trademark-. This line is known for presenting
a traditional Santa character yet contemporizing its appeal through style and
theme. Many are now retired and have become more valuable as product
availability decreases. A more recent entry, The Clothique Lifestyles
Collection-Registered Trademark-, is designed to appeal to those looking for a
way to pay tribute to postmen, policemen, firemen and other public servants.
In 1989, Possible Dreams introduced its figurines based on the art of
Norman Rockwell and J.C. Leyendecker. Each of such Clothtique pieces is taken
from a classic Saturday Evening Post cover and licensed by CURTIS PUBLISHING
COMPANY. 1/
In addition, hundreds of original figurines, including approximately 165
Santas, have been created through the design talents of many artisans. The
American Artist Collection-Registered Trademark- is an array of Clothtique
Santas inspired by renderings from Tom Browning, Judi Vaillancourt, Mark Alvin,
Mary Monteiro, Judity Ann Griffth, David Wenzel and other nationally recognized
professionals.
Possible Dreams also recently introduced a Clothique line based on classic
cartoon characters. As licensee for Looney Tunes-Registered Trademark-, Warner
Bros.-Registered Trademark-, Hanna-Barbera-Registered Trademark- and
Garfield-Registered Trademark-, Possible Dreams has created Clothique characters
such as Bugs Bunny, Sylvester & Tweety, Tom & Jerry and Garfield the Cat dressed
in Santa Claus suits, as well as other inspired wardrobes.
There are new introductions each year to the Possible Dreams product line,
beyond those to Clothique. Crinkle Claus is a novel technique that lays a cold
cast texture or wrinkly puckers and crannies over an array of Santa shapes and
designs. The success of this product from the time of its introduction has led
to the development and introduction of architectural pieces called Crinkle
Village, Crinkle Cousins, Crinkle Angels and Limited Editions Crinkles. A
Crinkle Claus Collectors Club also is now in the works. Other prominent lines
include a romantic fantasy world of miniature animals called the Thickets At
Sweetbriar-Registered Trademark- and Little Orphan Angels, along with the line's
regular Musical Waterdomes, Stocking Holders and Glass Ornaments.
Possible Dreams takes various steps to enhance the collectibility of its
products. In particular, Possible Dreams limits the availability of certain
styles and retires other styles that are still selling well. While these
actions sometimes cause Possible Dreams to forego some sales, they
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1/ (c) 1989-1992 Curtis Publishing Co.
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tend to provide recurring product demand, increase access to retailer shelf
space and enhance the long-term value of Possible Dreams' products. Possible
Dreams also attempts to improve collectibility by the regular introductions of
product line extensions and new series additions.
Possible Dreams further enhances collectibility and improves sales through
the creation of Collector Clubs. These Clubs can stimulate interest in
particular product lines, strengthen retail relationships and provide helpful
consumer preference data. For example, in addition to the Crinkle Claus
Collectors Club now being formed, the success of Possible Dreams' Santa line led
to the establishment in 1992 of the Santa Claus Network, a Clothtique-Registered
Trademark- Santa Collectors Club. This Club has approximately 15,000 members
worldwide paying a $25 annual membership fee and receiving quarterly
newsletters.
DESIGN AND PRODUCTION
Possible Dreams' in-house creative team, together with outside artists,
have frequently developed new products that have established trends within the
giftware industry. The team regularly attends trade shows and seminars, and
travels extensively throughout the world for ideas. All catalog design and
preparation, excluding some photograph and printing, is done in-house.
The design and manufacture of Possible Dreams' many product lines is a
complex process. Once a product is conceived, it can take up to a year before
it is introduced into the market. First, detailed and scaled drawings are made
for each piece. A prototype is then produced and reviewed by creative directors
and management. Samples of the various designs are then made by the
manufacturer for review by Possible Dreams and, often, prospective buyers.
Typically, only about 40% of new designs created each year will make it into
production.
Possible Dreams endeavors to use first-rate craftsmanship at affordable
prices. This strategy limits the possible sources of manufacturers and,
accordingly, helps to achieve more controlled growth of product lines. Possible
Dreams has long-standing relationships with overseas manufacturers, which to
date have helped account for reliable delivery of goods.
DISTRIBUTION AND SYSTEMS
As noted above, Possible Dreams has a retail customer base of approximately
15,000 independent gift shops, department stores and mail order houses. Its
products are primarily sold by approximately 14 sales groups with over 105 sales
representatives operating out of 13 showrooms nationwide located in each of the
major giftware markets in the United States.
Possible Dreams also has a preferred dealer network consisting of some of
its best retail customers. These customers agree to certain product display and
other requirements. In return, they are entitled to sell certain limited pieces
not available through non-network channels.
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Products sold by Possible Dreams in the United States are generally shipped
by ocean freight from abroad and then by rail and/or common carrier to the
company's warehouse and distribution center in Foxboro, Massachusetts.
Shipments from Possible Dreams to its customers are handled by United Parcel
Service or commercial trucking lines.
Possible Dreams utilizes computer systems and internally developed software
to help maintain efficient order processing from the time a product enters the
company's system through shipping and ultimate payment collection from its
customers. Possible Dreams has developed software for the processing and
shipment of orders from its warehouse and believes that this has played a
significant role in allowing it to maintain customer satisfaction.
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
Possible Dreams has several federal trademark registrations and
copyrights. In addition, Possible Dreams from time to time registers certain
of its trademarks in foreign countries. The registrations for the trademarks
are currently scheduled to expire or be canceled at various times between
1999 and 2005, but Possible Dreams believes that the marks can be maintained
and renewed provided that they are still in use for the goods and services
covered by such registrations.
EMPLOYEES
Possible Dreams employed 94 people at September 30, 1996, 11 of whom were
salaried employees, with the remainder being hourly employees. None of the
employees is represented by a labor union, and Possible Dreams considers its
relationship with employees to be satisfactory.
COMPETITION
Possible Dreams competes with other producers of fine quality collectibles,
specialty giftware and home decorative accessory products. The giftware
industry is highly fragmented and competitive, with a substantial number of both
large and small participants. Possible Dreams believes that the principal
elements defining competitiveness are product design and quality, product brand
name loyalty, product display and price. Although Possible Dreams believes it
generally competes favorably with respect to these factors, some of Possible
Dreams' competitors are larger than Possible Dreams and have greater financial
resources and a wider range of products.
IMPORTS; MAJOR SUPPLIERS
Possible Dreams does not own or operate any manufacturing facilities and,
like most of its competitors, imports most of its products from the Pacific Rim,
primarily mainland China and, to a lesser extent, Taiwan and the Philippines.
Possible Dreams' ability to import products and thereby satisfy customer orders
is affected by the availability of, and demand for, quality
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production capacity abroad. Possible Dreams competes with other importers of
specialty giftware products for a limited number of foreign manufacturing
sources that can produce detailed, high quality products at affordable prices.
In addition, Possible Dreams' import operations may be adversely affected by
political instability resulting in the disruption of trade from exporting
countries, regulatory changes, increases in transportation costs or delays, any
significant fluctuation in the value of the United States dollar against foreign
currencies and restrictions on the transfer of funds.
Substantially all of Possible Dreams' products are subject to United States
Customs Service duties and regulations pertaining to the importation of goods,
including requirements for the marking of certain information regarding the
country of origin on its products. The United States and the countries in which
Possible Dreams' products are manufactured may, from time to time, impose new
quotas, duties, tariffs or other charges or restrictions, or adjust presently
prevailing quotas, duty, or tariff levels, which could adversely affect Possible
Dreams' financial condition or results of operations or its ability to continue
to import products at current or increased levels.
From May 1, 1996 to September 30, 1996, Possible Dreams purchased
approximately 50%, 36% and 10% of its supplies from, respectively, Folkcraft,
Seagull Decor Co. and Novelty Trading. The loss of any of these suppliers could
have an adverse effect on Possible Dreams' results of operations and
financial condition.
SECURITY CAPITAL INSURANCE GROUP, INC.
AND ASSOCIATED ENTITIES
OVERVIEW
Organized in November 1984, SCIGI owns all of the outstanding capital stock
of Foster Insurance Managers, Inc. ("FIM"), a Texas managing general agency. As
more fully described below, FIM is a party to an Agency and Management Services
Agreement with Foster Insurance Services, Inc. ("FIS"), an insurance brokerage
firm that is a Texas-licensed local recording agency. Pursuant to the Agency
and Management Services Agreement, as compensation for providing management
consulting services to FIS, FIM is entitled to a percentage of the net pre-tax
income of FIS. See "-- Agency Agreement and Buy-Sell Agreement Among FIM, FIS
and Edward G. Britt, Jr." FIS is primarily engaged in brokering property,
liability, automobile, workers' compensation and life insurance and surety
bonds.
During fiscal year 1993, FIS entered into an interim agreement with Bowen,
Miclette & Descant, Inc. ("BMD"), an unaffiliated independent insurance agency,
to create a joint enterprise. The joint enterprise began doing business as a
corporation under the name of Bowen, Miclette, Descant & Britt, Inc. ("BMD&B
Inc.") on January 1, 1993. On that date, the Company began accounting for its
investment in BMD&B Inc. on the equity method. 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. FIS and BMD began operating as a
general partnership, effective
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October 1, 1993, under the name of Bowen, Miclette, Descant & Britt (the
"Partnership"). BMD&B Inc. provides support services to FIS and to the
Partnership pursuant to separate agreements with each of such entities. See
"--Management Services Agreement with BMD&B Inc." and "--Interim Agreement with
BMD, Partnership Agreement with BMD and Partnership Services Agreement with
BMD&B Inc."
INSURANCE AGENCY BUSINESS
The partnership of FIS and BMD makes the combined entity, Bowen, Miclette,
Descant & Britt, one of the largest independent insurance agents in Houston,
Texas. The Partnership combines FIS's strength in sales with BMD's strength in
service and administration and provides the combined entity with access to
markets previously served by one, but not both, entities.
The Partnership provides all forms of commercial and personal insurance.
For commercial customers with highly specialized insurance needs, the
Partnership provides risk management, loss control services, surety bonds,
insurance consulting, claims analysis, client support during contract
negotiations, group coverage and customized forms of umbrella protection. The
Partnership also underwrites personal life, disability, homeowner's and
automobile insurance.
The Partnership offers clients national and international insurance
underwriting capabilities through most major domestic insurance carriers in the
"Standard" market, numerous other carriers in the "Excess" market and direct
access to the London insurance market.
The Partnership currently brokers property and casualty insurance policies
with aggregate premiums totaling between $60 and $70 million.
COMPETITION
The Partnership competes with other insurance brokerages, many of which
have greater financial, marketing and other resources, offer more varied lines
of policies and enjoy more significant economies of scale. Insurance brokerage
firms compete principally with respect to premiums charged, the scope of policy
coverage and the quality of service provided to clients.
AGENCY AGREEMENT AND BUY-SELL AGREEMENT AMONG FIM, FIS AND EDWARD G. BRITT, JR.
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.
Pursuant to the Agency Agreement, FIM appointed FIS as the 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
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placement of the insurance business produced by FIS. As compensation for its
management consultation services, FIM was 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 (collectively, the "FIM
Fee") and (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 (after the accrual of up to 25% of the pre-tax income to FIS for
the payment of bonuses to FIS's employees). The $1,000,000 in pre-tax income
level discussed above was reached during fiscal year 1996. 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. The
Agency Agreement will also terminate upon (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; or (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 received an option to purchase 50%
of the stock of FIS at any time for $1,000. In addition, Britt received an
option, exercisable at 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 sell
to FIM, for $1,000, any shares of FIS then owned by him (the "Put Option"), and
an additional option to repurchase such shares from FIM or to purchase all of
the assets of FIS 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 provides that, upon the termination of the Agency
Agreement due to the death or disability of Britt, FIS shall cause $500,000 to
be paid to Britt's wife (or other beneficiary designated by Britt), and Britt's
estate, heirs or guardian will transfer the shares of FIS to FIM. The Buy-Sell
Agreement further requires Britt to make certain payments to FIM in the event
that the Agency Agreement is terminated for any other reason. FIS has entered
into a Stock Purchase Agreement with BMD&B Inc. which provides, in part, for the
termination of the Buy-Sell Agreement and the purchase by BMD&B Inc. of all of
the shares or assets of FIS upon the death or disability of Britt. See "--
Stock Purchase Agreement."
On August 29, 1996, Britt exercised his put option pursuant to Section 2(a)
of the Buy-Sell Agreement to require FIM to purchase all of the shares of FIS
common stock held by Britt for the put option price of $1,000. By the same
notice, Britt also exercised his option pursuant to Section 2(b) of the Buy-Sell
Agreement to purchase all of the assets, liabilities and business of FIS at
fifty percent (50%) of their Fair Market Value (as defined in the Buy-Sell
Agreement). FIM
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and Britt are in the process of determining such Fair Market Value with the
assistance of an independent third party appraiser. Upon the consummation of
the purchases and sales described above, which are anticipated to occur in the
first half of 1997, the Agency Agreement and the Buy-Sell Agreement will
terminate and the Company no longer will have any interest in the insurance
brokerage business currently operated through FIS.
PARTICIPATION AGREEMENT WITH LARRY M. KARREN
Mr. Larry M. Karren ("Karren"), the Vice President and Treasurer of the
Company, the Controller of FIS and the Vice President and Chief Financial
Officer of FIM, has entered into an agreement (the "Participation Agreement")
with Britt, FIS and FIM pursuant to which Karren is entitled to receive from
FIS, after payment in full of the FIM Fee, a bonus payment equal to 10% of the
net pre-tax income of FIS until (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. As discussed above, Mr.
Britt has exercised the Put Option. Accordingly, Karren will be entitled to
purchase for nominal consideration approximately 10% of the stock of, or an
interest in, FIS.
MANAGEMENT SERVICES AGREEMENT WITH BMD&B INC.
FIS entered into a Management Services Agreement with BMD&B Inc., dated
August 10, 1994 and effective January 1, 1993, pursuant to which BMD&B Inc.
provided sales, administrative, management and other services to FIS on a cost
plus basis. As of October 1, 1993, the arrangement with BMD&B Inc. described in
this paragraph was superseded by the arrangements described below pursuant to
which FIS and BMD agreed to conduct their combined insurance agency operations
through the Partnership, which is jointly owned by them. While the Partnership
arrangements provide for BMD&B Inc. to furnish certain services to the
Partnership, the services to be provided by BMD&B Inc. have been limited as
described below. See "-- Interim Agreement with BMD, Partnership Agreement with
BMD and Partnership Services Agreement with BMD&B Inc."
INTERIM AGREEMENT WITH BMD, PARTNERSHIP AGREEMENT WITH BMD AND PARTNERSHIP
SERVICES AGREEMENT WITH BMD&B INC.
On October 30, 1992, FIS entered into an interim agreement (the "Interim
Agreement") with BMD, an independent insurance agency, pursuant to which,
among other things, FIS and BMD indicated their intent to participate in
shared management services through a joint enterprise. The Interim Agreement
was entered into so that an office lease could be executed for the joint
enterprise.
FIS then negotiated and executed a Partnership Agreement with BMD, dated
June 15, 1994 and effective October 1, 1993 (the "Partnership Agreement"),
pursuant to which each entity acquired 50% of the Partnership formed thereunder.
Concurrently, FIS and BMD negotiated and
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executed a Personnel Services and Clarification Agreement with BMD&B Inc., dated
June 15, 1994 and effective October 1, 1993, pursuant to which BMD&B Inc.
provides sales, administrative, management and other support services to the
Partnership on a cost plus basis (the "Partnership Services Agreement").
As noted above, on July 23, 1993, the Texas State Board of Insurance
approved the application of FIS and BMD to form a general partnership. Since
October 1, 1993, many of the activities previously conducted by BMD&B Inc. for
FIS have been conducted by the Partnership, and BMD&B Inc. has acted as agent
for BMD, FIS and the Partnership for the following limited purposes: (i) to
continue as lessee of the office facilities and equipment; (ii) to process
specific insurance business which BMD, FIS and the Partnership decide to handle
in BMD&B Inc.'s name; and (iii) to render personnel and employment services for
BMD, FIS and the Partnership, including acting as common paymaster.
The Partnership Agreement outlines the terms of the Partnership relating to
capital contributions, distributions of Partnership interests and the rights and
obligations of each partner. It also describes the terms in the event of
dissolution, termination or liquidation of the Partnership. Each of BMD and FIS
has a 50% interest in the Partnership. Partnership income, gains, credits,
losses and deductions are allocated among the corporate partners for Federal
income tax and accounting purposes in accordance with their Partnership
interests, except for calendar years 1993 and 1994. For these calendar years,
FIS's allocation was 46% and 48%, respectively, with the remainder allocated to
BMD.
STOCK PURCHASE AGREEMENT
FIS has entered into a Stock Purchase Agreement with BMD&B Inc. and certain
other parties, effective as of the 1st day of January, 1993, which provides for
the termination of the Partnership Services Agreement and the Buy-Sell Agreement
and the purchase by BMD&B Inc. of all of the shares or assets of FIS upon the
death of Britt. The Stock Purchase Agreement also provides for BMD&B Inc. to
make a payment to FIS in consideration of the termination of the Partnership
Services Agreement and the Buy-Sell Agreement upon Britt's death. Such payment
will be funded from the proceeds of one or more life insurance policies to be
acquired by BMD&B Inc. on Britt's life. The amount of such payment will equal
(i) 50% of the fair market value of FIS as of the date of Britt's death, plus
(ii) $1,000,000, plus (iii) FIS's net pre-tax losses, if any, for the period
October 1, 1991 to September 1, 1992, less (iv) FIS's net pre-tax income, if
any, for the period from October 1, 1992 to September 1, 1993, less (v) payments
previously made by FIS to FIM.
ADVISORY SERVICES AGREEMENT
On April 27, 1990, effective as of January 26, 1990, the Company entered
into an Advisory Services Agreement (the "Advisory Agreement") with Capital
Partners, Inc. ("CP Inc."), an entity controlled by Brian D. Fitzgerald, the
Chairman of the Board of the Company,
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and for which A. George Gebauer, the President and Secretary of the Company,
serves as an officer. Pursuant to the Advisory Agreement, CP Inc. provides
certain advisory services in the areas of investments, general administration,
corporate development, strategic planning, stockholder relations, financial
matters and general business policy. See "Item 13. Certain Relationships and
Related Transactions."
EMPLOYEES
As described under "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations," effective January 1, 1993, all
employees of FIS and BMD were transferred to BMD&B Inc. BMD&B Inc. employed
approximately 115 full-time employees and one part-time employee at September
30, 1996. The Company estimates that 58 of the full-time and the only part-time
employee were engaged in activities relating to the insurance operations of FIM
and FIS at September 30, 1996. The Company considers relations with such
employees to be satisfactory. None of these employees is represented by any
union or other collective bargaining agreement.
ITEM 2. PROPERTIES.
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Possible Dreams owns a 55,000 square feet building in Foxboro,
Massachusetts where it maintains all its distribution, sales and administrative
facilities. Possible Dreams currently utilizes approximately 48,000 square feet
as distribution space and approximately 7,000 square feet as sales and
administrative offices. Substantially all of the properties and other assets of
Possible Dreams are pledged to Possible Dreams' principal lender as security for
a line of credit and related loans.
The Company also leases 33,478 square feet of office space in Houston,
Texas for its insurance brokerage business.
The Company believes its owned and leased space is adequate for its current
needs. For further information regarding the Company's properties, see Note 5
of Notes to Financial Statements of the Partnership.
ITEM 3. LEGAL PROCEEDINGS.
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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.
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By notice received January 3, 1994, the Company's insurance agency
affiliate, FIS, was sued in the 281st Judicial District Court of Harris County,
Texas by Quality Oilfield Products, Inc. for damages of at least $2,000,000 plus
attorneys' fees, plus potentially treble damages, for alleged failure to provide
a policy of insurance for compensation for future losses related to business
interruption. FIS turned the claim into its Errors & Omissions Insurance
carrier to handle the litigation and to respond to the lawsuit. FIS' Errors and
Omissions carrier has responded to the lawsuit, and both parties are in the
discovery phase of the suit. Although there can be no assurance, the Company
does not believe that FIS will incur any material loss with respect to this
matter in excess of insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------ ---------------------------------------------------
Not applicable.
-11-
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-----------------------------------------------------------------
MATTERS.
-------
The Class A Common Stock of Security Capital is traded on the Pacific Stock
Exchange (the "PSE"). The following table states the high and low sales prices
for the Class A Common Stock on the PSE for the quarterly periods indicated:
Fiscal 1995 Fiscal 1996
Price Range* Price Range*
Quarter High Low High Low
First--ended December 31st $2 1/2 $1 $2 1/4 $1 1/4
Second--ended March 31st $2 1/2 $1 1/2 $1 3/4 $1 1/4
Third--ended June 30th $1 3/4 $1 1/2 $1 15/16 $1 9/16
Fourth--ended September 30th $3 $1 1/4 $3 3/8 $2
- -----------------
* Stock prices prior to March 27, 1996 have been adjusted retroactively for
the one-to-eight Reverse Split described below.
As of December 13, 1996, there were approximately 2,311 stockholders of
record of the Class A Common Stock and 4,059,015 shares of outstanding, and 13
stockholders of record of the Common Stock and 375 shares outstanding. On such
date, the closing price of the Class A Common Stock on the PSE was $2 3/4. There
is no public trading market for the Common Stock.
In early 1996, the Company's Class A Common Stock was trading below the
minimum price maintenance requirement of the PSE. As a result, a reverse split
(the "Reverse Split") of the Class A Common Stock and of the Common Stock was
authorized by the Board of Directors of the Company, approved by the
stockholders of the Company on March 20, 1996 and became effective on March 27,
1996. As a result of the Reverse Split, each share of Class A Common Stock and
of Common Stock outstanding as of the close of business on March 27, 1996 was
converted into one-eighth of a share of either Class A Common Stock or Common
Stock, as the case may be.
-12-
<PAGE>
The Company's tangible net worth is currently only slightly above the $2
million minimum required by the PSE. If the Company effects another
acquisition, it is likely that goodwill (which is not counted by the PSE as an
asset for purposes of calculating tangible net worth) will be recorded in
connection with such acquisition and will result in the Company's failure to
meet such tangible net worth requirement. This could result in the delisting of
the Class A Common Stock from the PSE.
Security Capital has not paid any dividends since the first quarter of
fiscal year 1987.
-13-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
- ------ -----------------------
The following table sets forth certain selected consolidated financial data for
the Company. This selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included in Item 8 of this Form 10-K and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Item 7 of this
Form 10-K.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Year ended September 30, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Total assets $ 34,502 $ 10,926 $ 10,362 $ 3,734 $ 2,976
Long-term debt $ 11,710 $ - $ - $ - $ 203
Class A preferred stock
(redeemable)(including
dividends in arrears of
$1,425, $975, $525, and $75) $ 4,425 $ 3,975 $ 3,525 $ 3,075 $ -
Total stockholders' equity $ 6,884 $ 6,321 $ 6,694 $ 309 $ 504
Operating revenues $ 9,854 $ - $ - $ 842 $ 2,473
Income from joint enterprise $ 362 $ 415 $ 282 $ 197 $ -
Income (loss) from continuing
operations before
extraordinary item $ 1,013 $ 244 $ (69) $ (91) $ (421)
Net income (loss) $ 1,013 $ 244 $ (91) $ (91) $ (421)
Less preferred stock dividends (450) (450) (450) (75) -
----- ----- ----- ---- ----
Net income(loss) applicable to
common stockholders $ 563 $ (206) $ (519) $ (166) $ (421)
Earnings (loss) per common share:
Earnings (loss) from
continuing operations before
extraordinary items $ .14 $ *(.05) $ *(.24) $ *(.14) $ *(.35)
Earnings (loss) per common
share $ .14 $ *(.05) $ *(.24) $ *(.14) $ *(.35)
Dividends per share
of common stock $ - $ - $ $ - $ -
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* For the fiscal years presented, earnings(loss) per share has been restated for
the one for eight reverse stock split effected in March 1996.
-14-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS.
--------------------------
RESULTS OF OPERATIONS
- ---------------------
Security Capital reported net income of $1,013,000 for fiscal year 1996 as
compared to net income of $244,000 and a net loss of $69,000 for fiscal years
1995 and 1994, respectively. The net earnings per common share (after accrual
for Class A Preferred Stock dividends) were $.14 for fiscal year 1996 as
compared to a net loss per common share (after accrual for Class A Preferred
Stock dividends) of $.05 and $.24 for fiscal years 1995 and 1994, respectively.
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.
The Company's product sales and gross profit increased to $9,854,000 and
$5,090,000, respectively, due to the acquisition of Possible Dreams. Possible
Dreams' sales figures reflect the five month period from May 1, 1996 to the
end of the fiscal year. Possible Dreams' business is very seasonal in nature
because its main products are Christmas related. Therefore, demand for
Possible Dreams' products and the company's best sales activity and gross
margins are in the last two calendar quarters of any year. Selling, general
and administrative expense increased to $4,086,000 for fiscal year 1996 as
compared to $695,000 for fiscal year 1995. This increase can be attributed to
the addition of five months of Possible Dreams' selling, general and
administrative expenses to the Company's results. The Company incurred
interest expense of $731,000, primarily due to debt incurred to acquire
Possible Dreams and due to increased borrowings by Possible Dreams during its
busiest seasonal period. Interest income during the current fiscal year
decreased by $53,000 to $362,000, primarily due to the reduction in cash
related to the payment of $2,700,000 to the Sellers in connection with the
acquisition of Possible Dreams.
The Company's percentage of Bowen, Miclette, Descant & Britt's (the
"Partnership's") net revenue and expenses are classified on the Company's income
statement under the caption "Income from joint enterprise" and amounted to
$362,000 and $415,000 for fiscal years 1996 and 1995. The Company's percentage
interest in the net revenues and expenses of the Partnership was 48% for
calendar year 1994 and has increased to 50% for every calendar year thereafter.
Income from joint enterprise was down $53,000, primarily due to a change in the
bonus percentage due certain officers of the Partnership, from 25% to 50%,
pursuant to the terms of the Agency Agreement. On August 29, 1996, an officer of
the Partnership exercised the put option in the Buy-Sell Agreement to purchase
all of the assets, liabilities and business of Foster Insurance Services,
Inc.("FIS"), the 50% corporate partner of the Partnership. The purchase price
for FIS will be determined by an independent third party appraiser. It is
anticipated that the sale of the Company's interest in FIS will be completed
during 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.
Interest income was $513,000 for fiscal year 1995 as compared to $153,000 for
fiscal year 1994. This increase in interest income can be attributed to the
increase in funds invested by the Company due to the receipt of $6,904,000 from
a rights offering effected during the latter part of fiscal year 1994. Selling,
general and administrative expenses increased $173,000 to $695,000 for fiscal
year 1995 as compared to $522,000 for fiscal year 1994, primarily due to the
Company reserving $205,849 for New York State and City tax assessments. The
Company paid $155,396 of the above reserve on November 2, 1995 to the City of
New York for calendar years 1986 and 1987, which closed out the remaining tax
years that the Company was subject to audit with respect to its former New York
operations.
-15-
<PAGE>
SEASONALITY
- -----------
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 accomodate 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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash equivalents decreased by $1,088,000 to $8,706,000 at September
30, 1996, primarily due to the cost of the Possible Dreams acquisition. Of the
cash paid to the Sellers, $2,700,000 was provided by the Company, $300,000 was
provided from the proceeds of Class A Common Stock of P.D. Holdings,
Inc.("Holdings"),the holding company for Possible Dreams, purchased by an
executive officer of the Sellers, and the balance was borrowed pursuant to a
credit agreement. In connection with the closing of the acquisition, the
lenders provided various credit facilities to Possible Dreams to partially
finance the acquisition, refinance existing bank debt of the Sellers, provide
for seasonal working capital and letter of credit requirements and to pay
transaction expenses. The credit facilities consist of a revolving credit
facility for short-term working capital and seasonal fluctuations of Possible
Dreams' business and $9,250,000 in amortizing term debt maturing from five to
seven years from the closing date. The credit facilities are secured by all of
the acquired assets, as well as a pledge to the lenders of the capital stock
of Possible Dreams owned by Holdings. In connection with the credit facility,
the lenders were issued warrants exercisable for 12.5% of the Class B Common
Stock, on a fully diluted basis, of Possible Dreams. The Class B Common Stock
is non-voting and convertible at any time into voting, Class A Common Stock of
Possible Dreams. The warrants have certain restrictions on transfer,
registration, put and call rights.
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.
The Company's consolidated working capital at September 30, 1996 increased by
$2,437,000 to $11,781,000 from $9,344,000 at September 30, 1995. The main reason
for the increase in working capital can be attributed to the impact of the new
credit agreement with the lenders, as part of the acquisition of Possible
Dreams, on the Company's financial statements. The Company expects no major
increase in capital expenditures during fiscal year 1997. The Company believes
that with the addition of Possible Dreams, the proceeds from the sale of the
Company's insurance agency affiliate, FIS, and from cash and cash equivalents
at September 30, 1996, there will be sufficient cash on hand to meet the
Company's working capital and operating expenditure requirements during fiscal
year 1997 and to compete for other acquisition opportunities.
-16-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------
FINANCIAL STATEMENTS
- --------------------
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
-------------------------------------------
SECURITY CAPITAL CORPORATION
- ----------------------------
Independent Auditors' Report. . . .. . . . . . . . . . . . . . . . .. . F-1
Consolidated Financial Statements
Consolidated Statements of Income--For the Years Ended
September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets -- As of
September 30, 1996 and 1995. . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Cash Flows--For the Years Ended
September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity--For the Years
Ended September 30, 1996, 1995 and 1994 . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . .. . . . . . . F-6
Supplementary Financial Information
See Note 9 to Consolidated Financial Statements under this Item 8.
BOWEN, MICLETTE, DESCANT & BRITT
- --------------------------------
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . F-16
Financial Statements
Statements of Income--For the Years Ended September 30, 1996,
1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . F-17
Balance Sheets--As of September 30, 1996 and 1995. . . . . . F-18
Statements of Cash Flows--For the Years Ended
September 30, 1996, 1995 and 1994. . . . . . . . . . . . . . . F-19
Statement of Partners' Equity --For the Years Ended
September 30, 1996, 1995 and 1994. . . . . . . . . . . . . . . F-20
Notes to Financial Statements . . . . . . . . . . . . . . . . F-21
-17-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Security Capital Corporation
Houston, Texas 77008
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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Security Capital Corporation and
subsidiaries at September 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
December 6, 1996
F-1
<PAGE>
Consolidated Statements of Income
Security Capital Corporation and Subsidiaries
- ---------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994
- ---------------------------------------------------------------------------
(In thousands, except share and per share amounts)
Product sales $ 9,854 $ - $ -
Cost of goods sold 4,764 - -
- ---------------------------------------------------------------------------
Gross profit $ 5,090 $ $ -
- ---------------------------------------------------------------------------
Selling, general and administrative 4,086 695 522
- ---------------------------------------------------------------------------
Operating income(loss) $ 1,004 $ (695) $ (522)
- ---------------------------------------------------------------------------
Other income/expense
- --------------------
Income from joint enterprise $ 362 $ 415 $ 282
Interest income 483 513 153
Interest expense (731) - -
Other income 82 11 18
- ---------------------------------------------------------------------------
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) $ 1,013 $ 244 $ (69)
Less preferred stock dividends (450) (450) (450)
- ---------------------------------------------------------------------------
Net income(loss) applicable to common
stockholders $ 563 $ (206) $ (519)
- ---------------------------------------------------------------------------
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.
F-2
<PAGE>
Security Capital Corporation and Subsidiaries
Consolidated Balance Sheets
- ---------------------------------------------------------------------------
As of September 30, 1996 1995
- ---------------------------------------------------------------------------
ASSETS ( In thousands, except par value and shares)
- ------
Current assets:
Cash and cash equivalents $ 8,706 $ 9,794
Account receivable (net of allowance for
doubtful accounts of $412 and $0) 9,793 -
Inventory 5,010 -
Other current assets 278 180
------------ ------------
Total current assets 23,787 9,974
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
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $ 34,502 $ 10,926
- ---------------------------------------------------------------------------
* Restated for one-for-eight reverse stock split.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE>
Consolidated Statements of Cash Flows
Security Capital Corporation and Subsidiaries
- ---------------------------------------------------------------------------
Year ended September 30, 1996 1995 1994
- ---------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income (loss) $ 1,013 $ 244 $ (69)
Adjustments to reconcile
net income (loss)
to net cash provided
(used) by operating activities:
Depreciation and amortization
of property
and equipment, and
amortization of deferred items 296 17 41
Provision for possible losses - - 6
Minority interest 129 - -
Changes in operating assets and
liabilities, net of effects from
acquisition of business
Increase in accounts receivable (6,969) - -
Increase in inventories (1,566) - -
(Increase)decrease in other assets 839 (169) (127)
Increase(decrease) in payables 885 321 (207)
- ---------------------------------------------------------------------------
Net cash provided (used) by operating
activities (5,373) 413 (356)
- ---------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (13) - -
Purchase of assets of Possible Dreams
and Columbia National Corporation
(net of cash acquired of $764) (16,296) - -
- ---------------------------------------------------------------------------
Net cash provided (used) by
investing activities (16,309) - -
- ---------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------
Increase in cash and cash equivalents (1,088) 413 6,548
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
- ---------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-4
<PAGE>
Consolidated Statement of Stockholders' Equity
Security Capital Corporation and Subsidiaries
<TABLE>
<CAPTION>
Class A Additional
Number of Common Common Paid-in Accumulated Treasury
(In thousands except shares) Shares Issued * Stock Stock Capital Deficit Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1993 12,056,452 $ - $ 121 $ 55,730 $ (50,327) $ (5,215) $ 309
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss for fiscal year 1994 - - - - (69) - (69)
Dividends in arrears on
preferred stock - - - - (450) - (450)
Issuance of 22,977,428 shares
of Class A common stock as
part of stock rights offering,
less issuance costs of $227 22,977,428 - 229 6,675 - - 6,904
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 35,033,880 $ - $ 350 $ 62,405 $ (50,846) $ (5,215) $ 6,694
- -----------------------------------------------------------------------------------------------------------------------------------
Price adjustment of stock
previously sold to FGS and
designees - - - (167) - - (167)
Net income for fiscal year 1995 - - - - 244 244
Dividends in arrears on referred
stock - - - - (450) - (450)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 35,033,880 $ - $ 350 $ 62,238 $ (51,052) $ (5,215) $ 6,321
- -----------------------------------------------------------------------------------------------------------------------------------
Net income for fiscal year 1996 - 1,013 1,013
Dividends in arrears on preferred
stock - - - - (450) - (450)
Reverse one-for-eight stock split (30,654,102) - (306) 306 - - -
Payment for fractional shares (1,037) - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 4,378,741 $ - $ 44 $ 62,544 $ (50,489) $ (5,215) $ 6,884
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes both Common Stock and Class A Common Stock
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
F-5
<PAGE>
Notes to Consolidated Financial Statements
Security Capital Corporation and Subsidiaries
- -------------------------------------------------------------------------------
1. Organization
- -------------------------------------------------------------------------------
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:
Source of acquisition funds:
Cash $ 2,700,000
Debt issued (Note 5) 14,360,000
Minority interests investment 300,000
-----------------
$17,360,000
-----------------
-----------------
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
-----------------
-----------------
The consolidated financial statements of the Company include the operations of
Possible Dreams since May 1, 1996.
F-6
<PAGE>
The following unaudited pro forma financial data have been prepared assuming
that the acquisition of Possible Dreams occurred on October 1, 1995.
- ----------------------------------------------------------
Year ended September 30, 1996 1995
- ----------------------------------------------------------
(In thousands, except per share amounts)
Revenues $18,189 $20,655
Net income $534 $951
Earnings per share $.02 $.12
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.
REVENUE RECOGNITION
Revenues from product sales are recognized in the period in which the
merchandise is shipped.
INVENTORIES
Inventories, comprised of finished goods, are valued at the lower of cost or
market, with cost being determined by the first-in, first-out method("FIFO").
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Fixed
assets are comprised of the following:
- -----------------------------------------------------------------
September 30, 1996 1995
- -----------------------------------------------------------------
(In thousands)
Land and improvements $ 370 $ -
Buildings and improvements 630 -
Machinery and equipment 24 -
Data processing equipment 52 176
Furniture and fixtures 229 191
-----------------------------------
Total cost $ 1,305 $ 367
-----------------------------------
Less: accumulated depreciation 200 353
-----------------------------------
Net book value $ 1,105 $ 14
-----------------------------------
-----------------------------------
F-7
<PAGE>
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist of current assets, current liabilities, notes
payable and long-term debt. Current assets and current liabilities are carried
at cost, which approximates fair value. Note payable and long-term debt bear
interest at current market rates and, accordingly, the carrying value of the
debt approximates fair value.
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 or had no impact for all
periods presented.
The weighted average number of shares outstanding used in the computations of
primary earnings per share was 4,060,166, 4,060,659 and 2,145,873 for fiscal
years 1996, 1995 and 1994, 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.
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.
- -------------------------------------------------------------------------------
3. Stock option plan
- -------------------------------------------------------------------------------
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 may be exercised in
installments over the option period, but no options may be exercised after 10
years from the date of the grant. The Plan terminated on January 25, 1992.
F-8
<PAGE>
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, 1993 4,325 $5.00 - $49.04
Granted -
Exercised -
Canceled -
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
Outstanding at September 30, 1996 4,012 $5.00
Exercisable:
At September 30, 1996 4,012
- -------------------------------------------------------------------------------
Available for future grant 0
- -------------------------------------------------------------------------------
* Restated for one-for-eight reverse stock split.
- -------------------------------------------------------------------------------
4. Federal income taxes
- -------------------------------------------------------------------------------
Security Capital files a consolidated Federal income tax return with its
subsidiaries.
At September 30, 1996, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $17.0 million, the expiration dates
of which are as follows:
- -------------------------------------------------------------------------------
September 30, Amount
- -------------------------------------------------------------------------------
(In thousands)
1998 $ 200
1999 2,500
2000 1,300
2001 3,600
2002 1,800
2003 4,000
2004 2,400
2006 400
2007 200
2008 600
- -------------------------------------------------------------------------------
$ 17,000
- -------------------------------------------------------------------------------
F-9
<PAGE>
In addition, in connection with the disposition of a former subsidiary of the
Company, the Company incurred a tax loss amounting to approximately $26 million
during the year ended September 30, 1988. The Company believes that a
substantial portion of this loss is an ordinary loss for Federal income purposes
which may be carried forward to 2003, although there can be no assurance that
this position would prevail, if challenged. The Company believes that
approximately $7.4 million of the loss is a capital loss which expired unused at
September 30, 1994. The Company's Federal income tax returns have been examined
by the Internal Revenue Service (the "IRS") through fiscal 1986 and the above
loss carryforwards, including the loss on disposition of the aforementioned
subsidiary, remain subject to review by the IRS.
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.
The tax effects of the items comprising the Company's net deferred tax asset at
September 30, 1996 and 1995 in the Company's statement of financial position are
as follows:
- -------------------------------------------------------------------------------
September 30, 1996 1995
- -------------------------------------------------------------------------------
(In thousands)
Deferred tax assets (credits):
Allowance for doubtful accounts $ 39 $ -
Operating loss carryforwards 12,122 12,635
Partnership income (loss) (139)
Accelerated depreciation (17) -
---------------- -------------------
12,144 12,496
100% Valuation allowance (12,144) (12,496)
---------------- -------------------
Net deferred tax asset $ -0- $ -0-
---------------- -------------------
---------------- -------------------
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):
Income taxes based on 34% of net income $ 344
Utilization of net operating loss carryforwards (352)
State income taxes 58
Other 8
Provision for income taxes $ 58
F-10
<PAGE>
- -------------------------------------------------------------------------------
5. Debt
- -------------------------------------------------------------------------------
Long-term debt consists of the following at September 30, 1996 (there was no
debt outstanding at September 30, 1995):
Tranche A Term Loan, payable in twenty quarterly installments
through July 1, 2001. The loan bears interest at the commercial
paper rate plus 4% (9.46% at September 30, 1996). Interest
is payable monthly. $5,750,000
Tranche B Term Loan, payable in seven annual installments
through April 1, 2003. The loan bears interest at the
commercial paper rate plus 6% (approximately 11.46% at
September 30, 1996). Interest is payable monthly. 3,500,000
Subordinated promissory notes payable to the former owners
of Possible Dreams, interest rates ranging from 10 - 14%
( 10% at September 30, 1996) 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. 2,460,000
------------------
11,710,000
Less amounts representing debt discount (371,089)
Less current portion (1,010,000)
------------------
Total long term debt $10,328,911
------------------
------------------
The scheduled repayments of the loans are as follows:
September 30, Amount
------------- ------
1997 $1,010,000
1998 1,000,000
1999 1,250,000
2000 1,250,000
2001 1,240,000
Thereafter 5,960,000
In connection with the Tranche A and Tranche B loans, Possible Dreams issued
warrants to purchase 250 shares (12.5%) of Possible Dreams Class B Common Stock
at a price of $.01 per share. 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.
In addition, the Company entered into a Consolidated Income Tax Sharing
Agreement (the "Tax Sharing Agreement") with Possible Dreams and P.D. Holdings,
Inc. 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. The amount to be segregated for
the five months ended September 30, 1996 is $385,000.
Note Payable - Bank - The Company maintains a $10,000,000 revolving line of
credit that expires on May 17, 2003. The amount outstanding under the revolving
line of credit was $8,884,410 at September 30,
F-11
<PAGE>
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.
- -------------------------------------------------------------------------------
6. Redeemable Preferred Stock
- -------------------------------------------------------------------------------
FGS and its designees purchased 30,000 shares of Preferred Stock from the
Company for $3,000,000, on July 30, 1993. This non-voting preferred stock is
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 has a purchase price and redemption price equal to the
liquidation value, which is $100 per share. In addition, the Class A Preferred
Stock bears a dividend of 15% per annum payable in cash. Until redemption or the
liquidation of the Company, dividends on Preferred Stock are payable only out of
cumulative net income since January 1, 1990. (At a redemption date or upon the
liquidation of the Company, accumulated but unpaid dividends are payable in full
regardless of earnings since January 1, 1990.) Therefore, since there has been a
cumulative net loss since January 1, 1990 of $456,000, preferred stock dividends
of $1,425,000 accrued from July 30, 1993 to September 30, 1996, were in arrears
at September 30, 1996.
- -------------------------------------------------------------------------------
7. Stockholders' Equity
- -------------------------------------------------------------------------------
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, 1,025 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.
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.
F-12
<PAGE>
- -------------------------------------------------------------------------------
8. Related party transactions
- -------------------------------------------------------------------------------
On April 27, 1990, Security Capital entered into an Advisory Services
Agreement effective as of January 26, 1990 (the "Advisory Agreement") with
Capital Partners, Inc. ("CP, Inc."), an entity affiliated with FGS, pursuant
to which such entity provides certain advisory services in the areas of
investments, general administration, corporate development, strategic
planning, stockholder relations, financial matters and general business
policy in lieu of the services previously provided by certain of the
Company's officers and other support personnel from the Company's former New
York office. The annual fee for such services pursuant to the Advisory
Agreement was $150,000 (due in quarterly installments in advance) plus
certain out-of-pocket costs (which do not include rent and utilities of CP,
Inc. and compensation of CP, Inc. employees). In connection with the
acquisition of Possible Dreams, the Company entered into an amendment to the
Advisory Agreement with CP, Inc. to provide management advisory services to
Possible Dreams for an increase in the annual fee of $175,000 to $325,000.
Such fee is 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
acquisition, an investment banking fee of $200,000 was paid to CP, Inc.
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.
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.
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.
F-13
<PAGE>
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.
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, has entered into an agreement (the "Participation Agreement")
with Britt, FIS and FIM whereby Karren will be 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 will be
entitled to purchase for nominal consideration approximately 10% of the stock
of, or an interest in, FIS. In the case of (ii), Karren will be entitled to
receive a portion of the net proceeds of any such sale described in (ii)
otherwise distributable to Britt.
- -------------------------------------------------------------------------------
9. Quarterly information (unaudited)
- -------------------------------------------------------------------------------
The following is a summary of operations by quarter (dollar amounts in
thousands, except per share amounts):
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Fiscal Year 1996:
- -----------------
Operating revenues $ - $ - $ 1,453 $ 8,401
Net income (loss) 12 249 (272) 1,024
Earnings (loss) per common
share (.02) .03 (.09) .22
Dividends per share of
common stock - - - -
Fiscal Year 1995:
- -----------------
Operating revenues $ - $ - $ - $ -
Net income (loss) (101) 277 (114) 182
Earnings (loss) per common
share (.05) .04 (.06) .02
Dividends per share of
common stock - - - -
F-14
<PAGE>
- ------------------------------------------------------------------------------
10. Commitments and Contingencies
- ------------------------------------------------------------------------------
COMMITMENTS
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.
CONTINGENCIES
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.
By notice received January 3, 1994, the Company's insurance agency affiliate,
FIS, was sued in the 281st Judicial District Court of Harris County, Texas by
Quality Oilfield Products, Inc. for damages of at least $2,000,000 plus
attorneys' fees, plus potentially treble damages, for alleged failure to provide
a policy of insurance for compensation for future losses related to business
interruption. FIS has turned the claim into its Errors & Omissions Insurance
carrier to handle the litigation and to respond to the lawsuit. FIS' Errors and
Omissions carrier has responded to the lawsuit and both parties are in the
discovery phase of the suit. Although there can be no assurance, the Company
does not believe that FIS will incur any loss with respect to this matter in
excess of insurance coverage.
An affiliate of Security Capital 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.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Bowen, Miclette, Descant & Britt
Houston, Texas 77008
We have audited the accompanying balance sheets of Bowen, Miclette, Descant &
Britt (the "Company") as of September 30, 1996 and 1995 and the related
statements of income, partners' 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Bowen, Miclette, Descant & Britt at
September 30, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
December 6, 1996
F-16
<PAGE>
Statements of Income
Bowen, Miclette, Descant & Britt
- ---------------------------------------------------------------------------
Year ended September 30, 1996 1995 1994
- ---------------------------------------------------------------------------
(In thousands)
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.
F-17
<PAGE>
Balance Sheets
Bowen, Miclette, Descant & Britt
- ----------------------------------------------------------------------------
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.
F-18
<PAGE>
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
Changes in operating assets and liabilities:
Decrease (increase) in assets
Accounts receivable - premiums (566) 447 1,105
Other receivables (274) (177) 271
Federal income tax recoverable - - 6
Prepaid insurance (13) (6) (8)
Expense advances - (109) (115)
-------- -------- --------
Subtotal (853) 155 1,259
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:
Capital expenditures (400) (318) (345)
Other - - 123
- ------------------------------------------------------------------------------
Net cash flow provided (used) for
investing activities (400) (318) (222)
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Distribution to partners (1,291) (291) (43)
Lease payments (204) (132) (81)
Note payments (13) (7) (22)
Partners' advances 160 (198) 100
- ------------------------------------------------------------------------------
Net cash provided (used) by
financing activities (1,348) (628) (46)
- ------------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents (319) 539 (518)
Cash and cash equivalents, beginning
of the year 1,019 480 998
- ------------------------------------------------------------------------------
Cash and cash equivalents, end
of the year $700 $1,019 $480
- ------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
F-19
<PAGE>
Statement of Partners' Equity
Bowen, Miclette, Descant & Britt
- ------------------------------------------------------------------------------
(In Thousands) Partners' Equity
- ------------------------------------------------------------------------------
Balance, October 1, 1993 $ 43
- ------------------------------------------------------------------------------
Net income for fiscal year 1994 579
Distributions to partners (43)
- ------------------------------------------------------------------------------
Balance, September 30, 1994 $ 579
- ------------------------------------------------------------------------------
Net income for fiscal year 1995 818
Distribution to partners (291)
- ------------------------------------------------------------------------------
Balance, September 30, 1995 $ 1,106
- ------------------------------------------------------------------------------
Net income for fiscal year 1996 725
Distribution to partners (1,291)
- ------------------------------------------------------------------------------
Balance, September 30, 1996 $ 540
- ------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-20
<PAGE>
Notes to Financial Statements
Bowen, Miclette, Descant & Britt
- ------------------------------------------------------------------------------
1. Organization
- ------------------------------------------------------------------------------
Bowen, Miclette, Descant and Britt, a general partnership (the "Company" or
"BMDB"), is a licensed local recording insurance agency domiciled in the State
of Texas. Foster Insurance Services, Inc. ("FIS") and Bowen, Miclette and
Descant, Inc. ("BMD"), two unaffiliated independent insurance agencies, are the
corporate partners of BMDB. On July 23, 1993, the Texas State Board of Insurance
approved the application for an insurance license for BMD and FIS to form the
general partnership. The Company began operating as a general partnership
effective October 1, 1993.
The accompanying Statements of Income reflect results for the years ended
September 30, 1996, 1995 and 1994 of BMDB. The Company conducts operations as a
retail insurance agency collecting commissions on property and casualty, life
and health policies and bonds placed with insurance carriers.
- ------------------------------------------------------------------------------
2. Summary of significant accounting policies
- ------------------------------------------------------------------------------
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.
CASH AND CASH EQUIVALENTS
For purposes of the 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 twelve month periods ended September 30,
1996, 1995 and 1994 was $45,750, $40,916 and $35,392, respectively.
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.
PROVISION FOR POSSIBLE LOSSES
A provision for possible losses is included in expense based on management's
evaluation of customer receivables under existing economic conditions. The
provision for possible losses is based on estimates, and actual losses may vary
from current estimates. These estimates are reviewed periodically and, as
adjustments become necessary, they are reported in earnings in the periods in
which they become known.
FEDERAL INCOME TAXES
Income taxes are the responsibility of each partner.
F-21
<PAGE>
FIXED ASSETS
Property and equipment are carried at cost. Depreciation is computed using the
straight line method over the estimated useful lives of the assets. Fixed
assets are comprised of the following:
- ------------------------------------------------------------------------------
September 30, 1996 1995
- ------------------------------------------------------------------------------
(In thousands)
Leased Equipment $1,063 $ 779
Furniture and Fixtures 102 67
Leasehold Improvements 105 89
Automobiles 93 92
Computers 174 129
------------------------------------
Total $1,537 $1,156
------------------------------------
Less: accumulated depreciation 650 400
------------------------------------
Net book value $ 887 $ 756
------------------------------------
------------------------------------
- ------------------------------------------------------------------------------
3. Notes payable
- ------------------------------------------------------------------------------
Notes payable is comprised of the following:
- ------------------------------------------------------------------------------
September 30, 1996 1995
- ------------------------------------------------------------------------------
(In thousands)
Sterling Bank-auto loan $ 1 $ 8
Frost Bank-auto loan 14 20
---------------------------------------
Total $15 $28
---------------------------------------
Less: current portion 9 13
---------------------------------------
Long-term portion $ 6 $15
---------------------------------------
- ------------------------------------------------------------------------------
4. Employee benefits
- ------------------------------------------------------------------------------
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.
F-22
<PAGE>
- ------------------------------------------------------------------------------
5. Lease commitments
- ------------------------------------------------------------------------------
The lease agreement on the Company's office space was for a six year term
effective January 1, 1993. The landlord required that certain officers of FIS
and BMD execute individual, as well as corporate, guarantees. During the end of
fiscal year 1994, the Company leased additional office space adjacent to its
current space. The landlord paid for all the costs of leasehold improvements
and the Company agreed to extend the term of the original lease by one year.
The original lease had a buy-out option at the end of the fifth year, which
allowed the Company to terminate the sixth year of the lease if the Company
reimbursed the landlord for the unamortized leasehold improvements and the pro
rata broker commissions. With the lease of the additional space, the option
year was transferred to the seventh year of the lease agreement. The Company
leased more adjacent space in January 1995 and November 1995. The landlord paid
for substantially all costs of leasehold improvements and there was no extension
of the lease required. For the year ended September 30, 1996, rentals were
approximately $395,000 for the fiscal year pursuant to these lease agreements.
Periodic lease rentals under these agreements through the years ending September
30, 2000 are as follows:
- ------------------------------------------------------------------------------
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:
- ------------------------------------------------------------------------------
Fiscal Year Lease Obligations
- ------------------------------------------------------------------------------
(In thousands)
1997 $258
1998 218
1999 116
2000 59
2001 12
- ------------------------------------------------------------------------------
Total minimum lease payments $663
- ------------------------------------------------------------------------------
Less: amount representing interest 81
- ------------------------------------------------------------------------------
Present value of net minimum lease
payments including current
maturity of $213 $582
- ------------------------------------------------------------------------------
6. Related party transactions
- ------------------------------------------------------------------------------
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
F-23
<PAGE>
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.
BMD&B, Inc. acts as agent for BMD, FIS and the partnership (hereinafter
"Affiliated Companies") for the following limited purposes: (i) to continue as
lessee of the office facilities and equipment; (ii) to process specific
insurance business which the Affiliated Companies decide to handle in BMD&B,
Inc.'s name; and (iii) to render personnel and employment services for the
Affiliated Companies, including acting as common paymaster for BMD, FIS and the
partnership. As payment for rendering personnel and employment services to
BMDB, BMD&B, Inc. has charged BMDB $2,500 per month, or $30,000 annually since
October 1, 1993.
On August 29, 1996, Edward G. Britt, Jr.("Britt") exercised his put option
under 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. This
transaction is not expected to have any significant effect on the operations
of the Company.
F-24
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
Director Principal Occupations During the Last
Name Age Since Five Years; Other Directorships
- ---- --- -------- -------------------------------------
William T. Bozarth 56 1988 Vice President and Controller of
Travelers Group Inc., a diversified
financial services company, since
November 1991; Senior Vice President
and Chief Financial Officer of Gulf
Insurance Group, a property and
casualty insurance company, since
September 1990; Executive Vice
President of the Company from March
1989 until January 1990; Senior Vice
President of the Company from August
1984 until March 1989; a former
director or officer of various present
and former subsidiaries or affiliates
of the Company; and, previously, a
Partner of Arthur Andersen & Co., New
York, New York, public accountants.
-18-
<PAGE>
Director Principal Occupations During the Last
Name Age Since Five Years; Other Directorships
--- -------- -------------------------------------
Brian D. Fitzgerald 52 1990 Chairman of the Board of the Company
since January 1990; President,
Treasurer and a director of FGS since
March 1989; and a partner, general
partner, stockholder, officer and/or
director of various Capital Partners
entities for more than five years.
Mr. Fitzgerald was a director of
Bryant Universal Roofing, Inc.
("Bryant"), a privately-held Delaware
corporation that on May 17, 1996 filed
a petition for bankruptcy under
Chapter 11 of the U.S. Bankruptcy Code
in the United States Bankruptcy Court
for the District of Arizona.
A. George Gebauer 63 1990 President of the Company since January
1990 and Secretary of the Company
since February 1994; Vice President,
Secretary and a director of FGS since
March 1989; and a partner, general
partner, stockholder, officer and/or
director of various Capital Partners
entities for more than five years.
Mr. Gebauer was formerly a director
and executive officer of Alpha Modular
Systems, Inc., a privately-held
California corporation which had an
involuntary petition under Chapter 7
of the U.S. Bankruptcy Code filed
against it on March 18, 1994 by
certain of its creditors in the United
States Bankruptcy Court for the
Central District of California, San
Bernardino division. Mr. Gebauer also
was a director of Bryant, a
privately-held Delaware corporation
that on May 17, 1996 filed a petition
for bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code in United States
Bankruptcy Court for the District of
Arizona.
-19-
<PAGE>
Director Principal Occupations During the Last
Name Age Since Five Years; Other Directorships
- ---- --- -------- -------------------------------------
Thomas J. Gochberg 57 1979 President of TJG Holdings, Inc., a New
York corporation which is the general
partner of various real estate
investment entities, since July 1991;
President and Chief Executive Officer
of the Company from its inception in
November 1979 until January 1990; a
former director or officer of various
present and former subsidiaries or
affiliates of the Company; and a
director of Smith Barney, Inc., New
York, New York, an investment banking
holding company, from February 1979
until March 1984.
Larry M. Karren 42 -- Vice President of the Company since
February 1990; Vice President and
Secretary of SCIGI for more than five
years; current or former officer or
underwriter of various present or
former subsidiaries or affiliates of
SCIGI.
Each director holds office until the next annual meeting of stockholders
and until his successor shall have been duly elected and qualified. Officers
serve at the pleasure of the Board of Directors.
The Board of Directors has an Audit Committee and a Stock Option
Committee. The Audit Committee, which is presently composed of Messrs.
Gebauer, Gochberg and Bozarth, selects the independent auditors, consults
with such auditors and management with regard to the adequacy of the
Company's internal accounting controls, considers any non-audit functions to
be performed by the independent auditors and carries out such activities
related to the financial statements of the Company as the Board of Directors
shall from time to time request.
The Stock Option Committee is composed of Messrs. Fitzgerald and Gebauer
and administers the Security Capital Corporation 1982 Incentive Stock Option
Plan. The Board of Directors does not have a nominating committee, compensation
committee or any committee performing similar functions.
-20-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
- ------- ----------------------
1. SUMMARY COMPENSATION TABLE
--------------------------
The following Summary Compensation Table sets forth certain
information about the cash and non-cash compensation earned by or awarded to the
chief executive officer of the Company, A. George Gebauer, President and
Secretary of the Company, and to the two other executive officers of the Company
for services rendered to the Company during the fiscal years ended September 30,
1996, September 30, 1995 and September 30, 1994.
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------
Name and Principal Position All Other
Fiscal Year Salary Bonus Compensation
----------- ------- ----- ------------
A. George Gebauer 1996 (1) (1) (1)
President and Secretary 1995 (1) (1) (1)
1994 (1) (1) (1)
Brian D. Fitzgerald 1996 (1) (1) (1)
Chairman of the Board 1995 (1) (1) (1)
1994 (1) (1) (1)
Larry M. Karren 1996 $121,250 $15,997 $5,237
Vice President (2) and Treasurer 1995 $110,000 $26,204 $3,938
1994 $107,500 $ 8,417 $3,081
_________________________
(1) Messrs. Fitzgerald and Gebauer receive no compensation for their services
as officers of the Company. CP Inc., a corporation controlled by Mr.
Fitzgerald and for which Mr. Gebauer serves as an officer, is paid a
management fee pursuant to the Advisory Agreement between the Company and
CP Inc. Pursuant to the Advisory Agreement, CP Inc. provides certain
advisory services to the Company in the areas of investments, general
administration, corporate development, strategic planning, stockholder
relations, financial matters and general business policy. The annual fee
for such services pursuant to the Advisory Agreement is $325,000 (due in
quarterly installments in advance) plus certain out-of-pocket costs (which
do not include rent and utilities of CP Inc. and compensation of CP Inc.
employees). Such fee is subject to appropriate adjustment should the scope
of operations of the Company change, whether from an acquisition or
otherwise. For example, when the Company acquired the assets of Possible
Dreams, Ltd. and Columbia National Corporation, the Advisory Agreement was
amended to increase the annual fee from $150,000 to $325,000. During
fiscal 1996, CP Inc. was paid a fee of $227,400 and was reimbursed for
expenses incurred by it of approximately $12,800. In addition, CP Inc. was
reimbursed for approximately $105,000 of legal, investment banking and
other expenses incurred by it on behalf of the Company in connection with
two prospective acquisitions that failed to close. See "Item 13. Certain
Relationships and Related Transactions."
(2) Includes $1,228 of insurance premiums paid by the Company on a term life
insurance policy for the benefit of Mr. Karren and approximately $4,009 of
Company contributions for the account of Mr. Karren under a Section 401(k)
plan.
-21-
<PAGE>
2. OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------
No Options or SARs were granted to any executive officer of the
Company during the fiscal year ended September 30, 1996.
3. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL
--------------------------------------------------------------
YEAR-END OPTION/SAR VALUE TABLE
- -------------------------------
No Options or SARs were exercised by any executive officer of the
Company during the fiscal year ended September 30, 1996. Set forth below are
the number of unexercised options and the value of unexercised, in-the-money
options held by executive officers of the Company at September 30, 1996.
OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Number of Unexercised Options Value of Unexercised In-the-Money
Shares Acquired Value Held at Fiscal Year End Options at Fiscal Year End(1)
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------ ---------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Larry M. Karren -- -- 2,250 -- -- --
____________________
</TABLE>
(1) Options are "in-the-money" if the closing market price of the Company's
Class A Common Stock on September 30, 1996 exceeded the exercise prices of
the options. There were no in-the-money options held by executive officers
of the Company at September 30, 1996.
4. LONG-TERM INCENTIVE PLAN ("LTIP") AWARDS IN LAST FISCAL YEAR
No LTIP Awards were made to any executive officer of the Company
during the fiscal year ended September 30, 1996.
5. COMPENSATION OF DIRECTORS
William T. Bozarth and Thomas J. Gochberg, who are not employees or
officers of the Company, receive an annual fee of $5,000 plus reasonable
expenses in connection with attendance at meetings of the Board of Directors or
any committee thereof, but do not receive any separate fee for attendance at
meetings. Messrs. Fitzgerald and Gebauer do not receive any annual fee, or any
fees for attendance at meetings.
-22-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table and the notes thereto set forth information, as of
December 13, 1996, with respect to the beneficial ownership of shares of each
class of equity securities of the Company by the only persons known to the
Company to have beneficial ownership of more than 5% of such class, by each
director of the Company, by each executive officer of the Company and by the
directors and executive officers of the Company as a group. Except as otherwise
indicated, each person is believed to exercise sole voting and dispositive power
over the shares reported.
<TABLE>
<CAPTION>
Amount of Beneficial Ownership
As of December 13, 1996
-------------------------------------------------
Percentage
Class A of Class A
Name and Address Common Percentage Common Percentage Common Preferred Percentage
of Beneficial Owner Stock of Class Stock of Class Equity Stock of Class
<S> <C> <C> <C> <C> <C> <C> <C>
Brian D. Fitzgerald 128 34.1% 2,766,614 68.2% 68.2% 27,978 93.3%
One Pickwick Plaza
Suite 310, Greenwich
CT 06830(1)(2)
FGS, Inc. 128 34.1% 2,711,177 66.8% 66.8% 4,160 13.9%
1105 North Market St.
Suite 1300, Wilmington,
DE 19894(1)(2)
Capital Partners, Inc. __ __ 2,356,388 58.1% 58.1% 650 2.2%
One Pickwick Plaza
Suite 310, Greenwich,
CT 06830(1)(2)
CP Acquisition, __ __ 2,356,388 58.1% 58.1% 23,168 77.2%
L.P. No. 1
1105 North Market St.
Suite 1300, Wilmington,
DE 19894(1)(2)
FGS Partners, L.P. __ __ 2,356,388 58.1% 58.1% __ __
One Pickwick Plaza
Suite 310, Greenwich,
CT 06830(1)(2)
William T. Bozarth __ __ __ __ __ __ __
A. George Gebauer(1)(2) __ __ 59,980 1.5% 1.5% 703 2.3%
Thomas J. Gochberg 1 * 8,709 * * __ __
Larry M. Karren __ __ 2,284(3) * * __ __
All Directors and 129 34.4% 2,837,587(3) 69.9% 69.9% 28,681 95.6%
Executive Officers as
a Group (5 persons)
* Less than one percent
(FOOTNOTES ON FOLLOWING PAGE)
</TABLE>
-23-
<PAGE>
__________________
(1) The following related entities are generally referred to as "Capital
Partners": (a) CP Inc., a Connecticut corporation, of which Brian D.
Fitzgerald is the sole stockholder and director, and A. George Gebauer
is an officer; (b) Fitzgerald and Partners, a Delaware general
partnership ("F&P"), of which Messrs. Fitzgerald and Gebauer are
partners; (c) Capital Partners I, L.P., a New York limited
partnership, of which CP Inc. and F&P are the general partners; and
(d) 13 related Delaware limited partnerships, known collectively as
"Capital Partners II," as follows: (i) CP Acquisition; (ii) CP
Acquisition, L.P. No. 2; (iii) CP Acquisition, L.P. No. 3; (iv) CP
Acquisition, L.P. No. 4A; (v) CP Acquisition, L.P. No. 4B; (vi) CP
Acquisition, L.P. No. 5A; (vii) CP Acquisition, L.P. No. 5B; (viii) CP
Acquisition, L.P. No. 6A; (ix) CP Acquisition, L.P. No. 6B; (x) CP
Acquisition, L.P. No. 7A; (xi) CP Acquisition, L.P. No. 7B; (xii) CP
Acquisition, L.P. No. 8A; and (xiii) CP Acquisition, L.P. No. 8B. CP
Inc., FGS, a Delaware corporation, of which Mr. Fitzgerald is the
controlling stockholder, president, treasurer and a director, and FGS
Partners, L.P., a Connecticut limited partnership, of which CP Inc. is
the general partner, are the general partners of the 13 related
partnerships.
Brian D. Fitzgerald owns of record 55,437 shares of the Class A Common
Stock. CP Inc. owns of record 650 shares of the Class A Preferred
Stock, CP Acquisition owns of record 2,356,388 shares of the Class A
Common Stock and 23,168 shares of the Class A Preferred Stock and FGS
owns of record 354,789 shares of the Class A Common Stock, 1,025
shares of the Common Stock and 4,160 shares of the Class A Preferred
Stock.
(2) Mr. Fitzgerald may be deemed to own beneficially the 55,437 shares of
the Class A Common Stock owned of record by him, the 650 shares of the
Class A Preferred Stock owned of record by CP Inc., the 2,356,388
shares of the Class A Common Stock and the 23,168 shares of the Class
A Preferred Stock owned of record by CP Acquisition and the 354,789
shares of the Class A Common Stock, the 128 shares of the Common Stock
and the 4,160 shares of the Class A Preferred Stock owned of record by
FGS. Mr. Fitzgerald has shared authority to vote and dispose of the
FGS-owned shares of the Class A Common Stock and the Common Stock and
the Class A Preferred Stock and disclaims beneficial ownership of such
FGS-owned shares for all other purposes. Mr. Gebauer is also a
stockholder, officer and director of FGS and an officer of CP Inc.,
but he disclaims beneficial ownership of shares of the Class A Common
Stock, the Common Stock and the Class A Preferred Stock owned of
record by such corporations for any purpose. The ownership noted
above excludes the 55,437 shares of the Class A Common Stock and the
Common Stock and the 650 shares of the Class A Preferred Stock owned
by the Fitzgerald Trust (of which Mr. Fitzgerald's brother is sole
trustee and Mr. Fitzgerald's minor children are sole beneficiaries),
as to which beneficial ownership is disclaimed for all purposes.
(3) Includes 2,250 shares subject to options exercisable within 60 days.
-24-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ------- ----------------------------------------------
ADVISORY SERVICES AGREEMENT; ACQUISITION CRITERIA AND PROCEDURES
On April 27, 1990, effective as of January 26, 1990, the Company entered
into the Advisory Agreement with CP Inc., an entity controlled by Mr. Fitzgerald
and for which Mr. Gebauer serves as an officer. Pursuant to the Advisory
Agreement, CP Inc. provides certain advisory services in the areas of
investments, general administration, corporate development, strategic planning,
stockholder relations, financial matters and general business policy. The
annual fee for such services pursuant to the Advisory Agreement was $150,000
(due in quarterly installments in advance) plus certain out-of-pocket costs
(which do not include rent and utilities of CP Inc. and compensation of CP Inc.
employees) prior to the acquisition of the assets of Possible Dreams, Ltd. and
Columbia National Corporation. In connection with such acquisition, the
Advisory Agreement was amended to increase the annual fee to $325,000. Such fee
is subject to appropriate adjustment should the scope of operations of the
Company change again, whether from an acquisition or otherwise. In this regard,
CP Inc. would likely be paid an annual fee for ongoing advisory services
following an acquisition of no more than 4% to 5% of the acquired company's
annual operating profit. Pursuant to the Advisory Agreement and otherwise, no
compensation is paid to the current Chairman of the Board (Mr. Fitzgerald),
President and Secretary (Mr. Gebauer) and Assistant Secretary (Grace Santacqua)
in their respective capacities as such. During fiscal 1996, CP Inc. was paid
$227,400 in fees and reimbursed for expenses incurred by it of approximately
$12,800. In addition, CP Inc. was reimbursed for approximately $105,000 of
legal, investment banking and other expenses incurred by it on behalf of the
Company in connection with two prospective acquisitions that failed to close.
The initial term of the Advisory Agreement was for one year commencing on
January 26, 1990; thereafter, the agreement 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. The Advisory Agreement was
automatically renewed for a one-year period commencing January 26, 1997.
The Advisory Agreement confirms 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 businesses. 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. This fee is likely to be in
the range of 1% to 1-1/2% of the aggregate purchase price for the acquisition.
While enterprises proposed for acquisition may be in any line of business,
to date the acquisitions in which CP Inc. and its affiliates have participated
have been primarily in the manufacturing, distribution and service fields.
Consistent with the investment strategies and principles utilized by CP Inc.,
the Company currently intends in general to focus upon, as potential targets,
established companies of medium size with histories of earnings and cash flow
stability, favorable earnings growth prospects, good management and strong
competitive positions. It is currently the Company's plan that acquisitions
will be undertaken directly or by one or more subsidiaries of the Company, with
financing achieved through equity contributed by the Company and debt and
subordinated debt raised at the subsidiary or parent level. It may be necessary
to issue preferred stock, common equity or warrants or options to purchase
common equity of the Company or of the acquired entity to one or more lenders in
order to obtain the financing. In some
-25-
<PAGE>
instances, it may be possible to obtain financing from the sellers of the
acquired entity in the form of subordinated notes or earn-outs. Such sellers
may also receive shares of common equity or warrants or options to purchase the
same of the Company or the acquired entity. Typically, certain members of
management of the acquired entity will be granted incentives (usually
equity-based) to remain with the acquired entity following the acquisition. The
companies targeted usually will have annual operating profits of $3,000,000 to
$10,000,000. Consequently, purchase prices should range from approximately
$10,000,000 to $75,000,000. Under such acquisition strategy, significant
uncertainties involving product life cycles, volatile market demand,
organization changes and other major turnaround aspects will generally
disqualify a prospect. The acquisition criteria set forth above are only
guidelines and may change from time to time in response to market conditions,
the Company's financial condition and results of operations and other factors.
In connection with its acquisition activities on behalf of the Company,
other portfolio companies and for its own account, CP Inc. maintains ongoing
relationships with hundreds of merger and acquisition intermediary firms,
ranging from large investment banks and accounting firms to small business
brokerages. In a typical year, CP Inc. receives over 1,000 leads on companies
which are or might be for sale. Of these, perhaps 100 are sufficiently close to
the Company's acquisition criteria set forth above to merit further
consideration.
CP Inc. may decide at some future date to present one of its portfolio
companies to the Company for possible acquisition. Any such acquisition would
be submitted to the Company's independent directors for their approval.
-26-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ------- ----------------------------------------------------------------
(a) (1) and (2). FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
------------------------------------------------------
See "Index to Financial Statements and Schedules" set forth in
Item 8 on page 17 of this Form 10-K.
(a) (3). EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K
-----------------------------------------------------------
The documents required to be filed as exhibits to this Form 10-K
are listed below. Each management contract or compensatory plan
or arrangement required to be filed as an exhibit to this Form
10-K pursuant to Item 14(c) of Form 10-K is marked with an
asterisk.
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ---------- -----------------------
3.1 - Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 2 to the Registrant's Form
8-K Current Report dated June 22, 1990), and amendment thereto
(incorporated by reference to Exhibit 1 to the Registrant's Form
8-K Current Report dated February 23, 1994).
3.1A - Certificate of Amendment dated March 27, 1996 to Restated
Certificate of Incorporation of the Registrant.
3.1B - Certificate of Amendment dated March 27, 1996 to Restated
Certificate of Incorporation of the Registrant.
3.2 - By-laws of the Registrant (incorporated by reference to Exhibit 3
to the Registrant's Form 8-K Current Report dated June 22, 1990).
4.2 - Reference is made to Exhibit 3.1.
*10.1 - Security Capital Corporation 1982 Incentive Stock Option
Plan, as amended through December 10, 1990 (incorporated by
reference to Exhibit (10)(A) to the Registrant's Form 10-K
Annual Report for the fiscal year ended September 30, 1990).
10.4 - Stock Purchase Agreement between Security Capital Corporation and
FGS, Inc. dated January 26, 1990, as amended May 14, 1990
(incorporated by reference to Exhibit (c) to the Registrant's
Form 8-K Current Report dated January 26, 1990 and Exhibit 10.7
to the Registrant's Registration Statement on Form S-4 (Reg.
33-34324) as filed on May 17, 1990).
10.5 - Agreement Regarding Adjustment of Purchase Price Pursuant to
Section 2 of Stock Purchase Agreement between Security Capital
Corporation and FGS, Inc., executed
-27-
<PAGE>
September 28, 1990, between and among the Corporation, FGS, Inc.,
CP Acquisition, L.P. No. 1 and Mr. John A. Bogardus, Jr.
(incorporated by reference to Exhibit 1 to the Registrant's Form
8-K Current Report dated September 28, 1990).
10.7 - Advisory Services Agreement dated as of April 27, 1990 and
effective as of January 26, 1990, between Security Capital
Corporation and Capital Partners, Inc. (incorporated by reference
to Exhibit (10)(B) to the Registrant's Form 10-Q Quarterly Report
for the period ended March 31, 1991).
10.10 - Agency and Management Services Agreement dated as of
September 1, 1992 (the "Agency Agreement") between Foster
Insurance Managers, Inc. ("FIM") and Foster Insurance
Services, Inc. ("FIS") (incorporated by reference to Exhibit
1 to the Registrant's Form 8-K Current Report dated October
16, 1992).
10.10A - Amendment, dated September 30, 1994, to the Agency Agreement
between FIM and FIS (incorporated by reference to Exhibit 10.10A
to the Registrant's Form 10-K Annual Report for the fiscal year
ended September 30, 1994).
10.11 - Buy-Sell Agreement dated as of September 1, 1992 between
FIM, Edward G. Britt, Jr., and FIS (incorporated by
reference to Exhibit 2 to the Registrant's Form 8-K Current
Report dated October 16, 1992).
10.12 - Agreement dated September 1, 1992 between FIS, Edward G.
Britt, Jr., FIM and Larry M. Karren (incorporated by
reference to Exhibit 10(O) to the Registrant's Form 10-K
Annual Report for the fiscal year ended September 30, 1992).
10.13 - Interim Agreement dated October 30, 1992 between FIS, FIM,
Bowen, Miclette & Descant, Inc. ("BMD"), Samuel F. Bowen,
David G. Miclette, D. Michael Descant, William G. Bowen,
Jr., Thomas C. Cook, and Edward G. Britt, Jr. (incorporated
by reference to Exhibit 10(P) to the Registrant's Form 10-K
Annual Report for the fiscal year ended September 30, 1992).
10.14 - Office Lease Agreement dated October 9, 1992 between
Telephone Real Estate Equity Trust, Karsten Realty Advisors,
FIS, BMD and Bowen, Miclette, Descant & Britt, Inc. ("BMD&B
Inc."), including Addendum One thereto (incorporated by
reference to Exhibit 10(Q) to the Registrant's Form 10-K
Annual Report for the fiscal year ended September 30, 1992).
10.14A - Addendum Two dated July 1, 1994 to Office Lease Agreement
dated October 9, 1992 between Telephone Real Estate Equity
Trust, Karsten Realty Advisors, FIS, BMD and BMD&B Inc.
(incorporated by reference to Exhibit 10.14A to the
Registrant's Form 10-K Annual Report for the fiscal year
ended September 30, 1995).
10.14B - Addendum Three dated January 9, 1995 to Office Lease
Agreement dated October 9, 1992 between Telephone Real
Estate Equity Trust, Karsten Realty Advisors, FIS, BMD and
BMD&B Inc. (incorporated by reference to Exhibit 10.14B to
the Registrant's Form 10-K Annual Report for the fiscal year
ended September 30, 1995).
-28-
<PAGE>
10.15 - Management Services Agreement dated August 10, 1994 between
FIS, BMD and BMD&B Inc. (incorporated by reference to
Exhibit 10.15 to the Registrant's Form 10-Q Quarterly Report
for the period ended June 30, 1994).
10.16 - Personnel Services and Clarification Agreement dated June
15, 1994 among BMD, FIS, BMD&B Inc. and Bowen, Miclette,
Descant & Britt (the "Partnership") (incorporated by
reference to Exhibit 10.16 to the Registrant's Form 10-Q
Quarterly Report for the period year ended June 30, 1994).
10.17 - Partnership Agreement of the Partnership dated June 15, 1994
between BMD and FIS (incorporated by reference to Exhibit 3
to the Registrant's Form 10-Q Quarterly Report for the
period ended June 30, 1994).
10.18 - Stock Purchase Agreement effective the 1st day of January,
1993 among Edward C. Britt, Patricia C. Britt, Larry M.
Karren, Jodi S. Karren, FIS, FIM and BMD&B Inc.
(incorporated by reference to Exhibit 10.18 to the
Registrant's Form 10-K Annual Report for the fiscal year
ended September 30, 1995).
10.19 - Subscription Agreement dated as of March 28, 1994 between
the Registrant and CP Acquisition, L.P. No. 1 ("CP
Acquisition") (incorporated by reference to Exhibit 10.19 to
the Registrant's Registration Statement on Form S-1 (Reg.
No. 33-74680)).
10.20 - Registration Rights Agreement and Amendment to Stock
Purchase Agreement dated as of March 28, 1994 among the
Registrant, CP Acquisition and FGS, Inc. (incorporated by
reference to Exhibit 10.20 to the Registrant's Registration
Statement on Form S-1 (Reg. No. 33-74680)).
10.21 - Undertaking dated March 28, 1994 from Brian D. Fitzgerald to
the Registrant. (incorporated by reference to Exhibit 10.21
to the Registrant's Registration Statement on Form S-1 (Reg.
No. 33-74680)).
10.22 - Shareholder Agreement effective as of the 1st day of
January, 1993 by and among BMD, David G. Miclette, Dennis
Michael Descant, Samuel F. Bowen, William G. Bowen, Larry M.
Karren, their respective spouses, BMD&B Inc., FIM and FIS
(incorporated by reference to Exhibit 10.22 to the
Registrant's Form 10-K Annual Report for the fiscal year
ended September 30, 1995).
10.23 - Asset Purchase Agreement dated as of May 17, 1996 by and
among Possible Dreams, Ltd., a Massachusetts corporation,
Columbia National Corporation, a Massachusetts corporation,
Leonard Miller, Richard L. Seegal, as trustee of the Samuel
C. Miller Trust u/d/t 8/5/85, Warren Stanley and Arnold Lee
and Possible Dreams, Ltd., a Delaware corporation ("Possible
Dreams") (incorporated by reference to Exhibit 1 to the
Registrant's Form 8-K Current Report dated May 17, 1996).
10.24 - Subordinated Promissory Note dated May 17, 1996 in the
amount of $2,128,000 from Possible Dreams to Possible
Dreams, Ltd., a Massachusetts corporation (incorporated by
reference to Exhibit 2 to the Registrant's Form 8-K Current
Report dated May 17, 1996).
-29-
<PAGE>
10.25 - Corrective Amendment dated November 25, 1996 to Subordinated
Promissory Note dated May 17, 1996 in the amount of
$2,128,000 from Possible Dreams to Possible Dreams, Ltd., a
Massachusetts corporation.
10.26 - Subordinated Promissory Note dated May 17, 1996 in the
amount of $332,000 from Possible Dreams to Columbia National
Corporation (incorporated by reference to Exhibit 3 to the
Registrant's Form 8-K Current Report dated May 17, 1996).
10.27 - Corrective Amendment dated November 25, 1996 to Subordinated
Promissory Note dated May 17, 1996 in the amount of $332,000
from Possible Dreams to Columbia National Corporation.
10.28 - Credit Agreement dated as of May 17, 1996 among Possible
Dreams, P.D. Holdings, Inc., a Delaware corporation
("Holdings"), the Lenders referred to therein and
NationsCredit Commercial Corporation ("NationsCredit"), as
Agent (incorporated by reference to Exhibit 4 to the
Registrant's Form 8-K Current Report dated May 17, 1996).
10.29 - Warrant dated May 17, 1996 from Possible Dreams to
NationsCredit (incorporated by reference to Exhibit 5 to the
Registrant's Form 8-K Current Report dated May 17, 1996).
10.30 - Warrantholders Rights Agreement dated as of May 17, 1996
among Possible Dreams, Holdings, Security Capital
Corporation ("Security Capital"), Warren Stanley and Arnold
Lee and NationsCredit (incorporated by reference to Exhibit
6 to the Registrant's Form 8-K Current Report dated May 17,
1996).
10.31 - Security Capital Pledge and Guarantee Agreement dated as of
May 17, 1996 between Security Capital and NationsCredit, as
Agent (incorporated by reference to Exhibit 7 to the
Registrant's Form 8-K Current Report dated May 17, 1996).
10.32 - Holdings Pledge Agreement dated as of May 17, 1996 among
Holdings and NationsCredit, as Agent (incorporated by
reference to Exhibit 8 to the Registrant's Form 8-K Current
Report dated May 17, 1996).
10.33 - Investors Subordination Agreement dated as of May 17, 1996
among Possible Dreams, the Subordinated Obligations Holders
(as defined therein) and NationsCredit, as Agent
(incorporated by reference to Exhibit 9 to the Registrant's
Form 8-K Current Report dated May 17, 1996).
10.34 - Sellers Subordination Agreement dated as of May 17, 1996
among Possible Dreams, the Subordinated Obligations Holders
(as defined therein) and NationsCredit, as Agent
(incorporated by reference to Exhibit 10 to the Registrant's
Form 8-K Current Report dated May 17, 1996).
10.35 - Stockholders' Agreement dated as of May 17, 1996 among
Holdings, Arnold Lee, Warren Stanley and Security Capital
(incorporated by reference to Exhibit 11 to the Registrant's
Form 8-K Current Report dated May 17, 1996).
-30-
<PAGE>
10.36 - Employment, Consulting and Non-Competition Agreement dated
May 17, 1996 by and between Possible Dreams and Warren
Stanley (incorporated by reference to Exhibit 12 to the
Registrant's Form 8-K Current Report dated May 17, 1996).
10.37 - Employment, Consulting and Non-Competition Agreement dated
May 17, 1996 by and between Possible Dreams and Arnold Lee
(incorporated by reference to Exhibit 13 to the Registrant's
Form 8-K Current Report dated May 17, 1996).
10.38 - First Amendment to Advisory Services Agreement dated as of
May 17, 1996 by and between Security Capital and Capital
Partners, Inc (incorporated by reference to Exhibit 14 to
the Registrant's Form 8-K Current Report dated May 17,
1996).
10.39 - Consolidated Income Tax Sharing Agreement dated as of May
17, 1996 among Possible Dreams, Holdings and Security
Capital (incorporated by reference to Exhibit 15 to the
Registrant's Form 8-K Current Report dated May 17, 1996).
21 - Subsidiaries of the Registrant.
23 - Consent of Deloitte & Touche LLP.
27 - Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
A Form 8-K/A, dated July 30, 1996, was filed on August 2, 1996
reporting under Items 2 and 7 of Form 8-K. The following combined
financial statements and notes thereto of Possible Dreams, Ltd. and
Columbia National Corporation, each a Massachusetts corporation, were
filed with such Form 8-K/A:
(i) Independent Auditors' Report.
(ii) Combined balance sheets as of December 31, 1994 and 1995
and as of March 31, 1996 (unaudited).
(iii) Combined statements of income (loss) for the years ended
December 31, 1993, 1994 and 1995 and for the three months ended
March 31, 1995 (unaudited) and 1996 (unaudited).
(iv) Combined statements of retained earnings for the years
ended December 31, 1993, 1994 and 1995 and for the three months
ended March 31, 1995 (unaudited) and 1996 (unaudited).
(v) Combined statements of cash flows for the years ended
December 31, 1993, 1994 and 1995 and for the three months ended
March 31, 1995 (unaudited) and 1996 (unaudited).
(vi) Notes to combined statements for the years ended December
31, 1993, 1994 and 1995 and for the three months ended March 31,
1995 (unaudited) and 1996 (unaudited).
-31-
<PAGE>
The following pro forma financial information and notes thereto of the
Company were filed with such Form 8-K/A:
(i) Introduction to pro forma financial information.
(ii) Pro forma combined balance sheet as of March 31, 1996
(unaudited).
(iii) Pro forma combined statement of operations for the fiscal
year ended September 30, 1995 (unaudited).
(iv) Pro forma combined statement of operations for the six
months ended March 31, 1996 (unaudited).
(v) Notes to pro forma financial information.
-32-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SECURITY CAPITAL CORPORATION
By: /S/ A. GEORGE GEBAUER
---------------------
A. George Gebauer
President
Date: January 10, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date or dates indicated.
SIGNATURE POSITION DATE
- --------- -------- ----
/S/ A. GEORGE GEBAUER President, Secretary and Director January 10,
- ------------------------- (Principal Executive Officer) 1997
A. George Gebauer
/S/ LARRY M. KARREN Vice President (Principal Financial January 10,
- ------------------------- and Accounting Officer) 1997
Larry M. Karren
/S/ BRIAN D. FITZGERALD Director and Chairman January 10,
- ------------------------- of the Board 1997
Brian D. Fitzgerald
/S/ WILLIAM T. BOZARTH Director January 10,
- ------------------------- 1997
William T. Bozarth
/S/ THOMAS J. GOCHBERG Director January 10,
- ------------------------- 1997
Thomas J. Gochberg
-33-
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description of Document Numbered Page
- ----------- ----------------------- --------------
<S> <C> <C>
3.1 - Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 2 to the Registrant's
Form 8-K Current Report dated June 22, 1990), and amendment
thereto (incorporated by reference to Exhibit 1 to the
Registrant's Form 8-K Current Report dated February 23,
1994).
3.1A - Certificate of Amendment dated March 27, 1996 to Restated
Certificate of Incorporation of the Registrant.
3.1B - Certificate of Amendment dated March 27, 1996 to Restated
Certificate of Incorporation of the Registrant.
3.2 - By-laws of the Registrant (incorporated by reference to
Exhibit 3 to the Registrant's Form 8-K Current Report dated
June 22, 1990).
4.2 - Reference is made to Exhibit 3.1.
*10.1- Security Capital Corporation 1982 Incentive Stock Option Plan, as
amended through December 10, 1990 (incorporated by reference to
Exhibit (10)(A) to the Registrant's Form 10-K Annual Report for
the fiscal year ended September 30, 1990).
10.4 - Stock Purchase Agreement between Security Capital
Corporation and FGS, Inc. dated January 26, 1990, as amended
May 14, 1990 (incorporated by reference to Exhibit (c) to
the Registrant's Form 8-K Current Report dated January 26,
1990 and Exhibit 10.7 to the Registrant's Registration
Statement on Form S-4 (Reg. 33-34324) as filed on May 17,
1990).
10.5 - Agreement Regarding Adjustment of Purchase Price Pursuant to
Section 2 of Stock Purchase Agreement between Security
Capital Corporation and FGS, Inc., executed September 28,
1990, between and among the Corporation, FGS, Inc., CP
Acquisition, L.P. No. 1 and Mr. John A. Bogardus, Jr.
(incorporated by reference to Exhibit 1 to the Registrant's
Form 8-K Current Report dated September 28, 1990).
10.7 - Advisory Services Agreement dated as of April 27, 1990 and
effective as of January 26, 1990, between Security Capital
Corporation and Capital Partners, Inc. (incorporated by reference
<PAGE>
Sequentially
Exhibit No. Description of Document Numbered Page
- ----------- ----------------------- --------------
to Exhibit (10)(B) to the Registrant's Form 10-Q Quarterly
Report for the period ended March 31, 1991).
10.10- Agency and Management Services Agreement dated as of September 1,
1992 (the "Agency Agreement") between Foster Insurance Managers,
Inc. ("FIM") and Foster Insurance Services, Inc. ("FIS")
(incorporated by reference to Exhibit 1 to the Registrant's Form
8-K Current Report dated October 16, 1992).
10.10A- Amendment, dated September 30, 1994, to the Agency Agreement
between FIM and FIS (incorporated by reference to Exhibit
10.10A to the Registrant's Form 10-K Annual Report for the
fiscal year ended September 30, 1994).
10.11 - Buy-Sell Agreement dated as of September 1, 1992 between
FIM, Edward G. Britt, Jr., and FIS (incorporated by
reference to Exhibit 2 to the Registrant's Form 8-K Current
Report dated October 16, 1992).
10.12 - Agreement dated September 1, 1992 between FIS, Edward G.
Britt, Jr., FIM and Larry M. Karren (incorporated by
reference to Exhibit 10(O) to the Registrant's Form 10-K
Annual Report for the fiscal year ended September 30, 1992).
10.13 - Interim Agreement dated October 30, 1992 between FIS, FIM,
Bowen, Miclette & Descant, Inc. ("BMD"), Samuel F. Bowen,
David G. Miclette, D. Michael Descant, William G. Bowen,
Jr., Thomas C. Cook, and Edward G. Britt, Jr. (incorporated
by reference to Exhibit 10(P) to the Registrant's Form 10-K
Annual Report for the fiscal year ended September 30, 1992).
10.14 - Office Lease Agreement dated October 9, 1992 between
TelephoneReal Estate Equity Trust, Karsten Realty Advisors,
FIS, BMD and Bowen, Miclette, Descant & Britt, Inc. ("BMD&B
Inc."), including Addendum One thereto (incorporated by
reference to Exhibit 10(Q) to the Registrant's Form 10-K
Annual Report for the fiscal year ended September 30, 1992).
10.14A- Addendum Two dated July 1, 1994 to Office Lease Agreement
dated October 9, 1992 between Telephone Real Estate Equity
Trust, Karsten Realty Advisors, FIS, BMD and BMD&B Inc.
(incorporated by reference to Exhibit 10.14A to the
Registrant's Form 10-K Annual Report for the fiscal year
ended September 30, 1995).
<PAGE>
Sequentially
Exhibit No. Description of Document Numbered Page
- ----------- ----------------------- --------------
10.14B - Addendum Three dated January 9, 1995 to Office Lease
Agreement dated October 9, 1992 between Telephone Real
Estate Equity Trust, Karsten Realty Advisors, FIS, BMD and
BMD&B Inc. (incorporated by reference to Exhibit 10.14B to
the Registrant's Form 10-K Annual Report for the fiscal year
ended September 30, 1995).
10.15- Management Services Agreement dated August 10, 1994 between
FIS, BMD and BMD&B Inc. (incorporated by reference to
Exhibit 10.15 to the Registrant's Form 10-Q Quarterly Report
for the period ended June 30, 1994).
10.16- Personnel Services and Clarification Agreement dated June
15, 1994 among BMD, FIS, BMD&B Inc. and Bowen, Miclette,
Descant & Britt (the "Partnership") (incorporated by
reference to Exhibit 10.16 to the Registrant's Form 10-Q
Quarterly Report for the period year ended June 30, 1994).
10.17- Partnership Agreement of the Partnership dated June 15, 1994
between BMD and FIS (incorporated by reference to Exhibit 3
to the Registrant's Form 10-Q Quarterly Report for the
period ended June 30, 1994).
10.18- Stock Purchase Agreement effective the 1st day of January,
1993 among Edward C. Britt, Patricia C. Britt, Larry M.
Karren, Jodi S. Karren, FIS, FIM and BMD&B Inc.
(incorporated by reference to Exhibit 10.18 to the
Registrant's Form 10-K Annual Report for the fiscal year
ended September 30, 1995).
10.19- Subscription Agreement dated as of March 28, 1994 between
the Registrant and CP Acquisition, L.P. No. 1 ("CP
Acquisition") (incorporated by reference to Exhibit 10.19 to
the Registrant's Registration Statement on Form S-1 (Reg.
No. 33-74680)).
10.20- Registration Rights Agreement and Amendment to Stock
Purchase Agreement dated as of March 28, 1994 among the
Registrant, CP Acquisition and FGS, Inc. (incorporated by
reference to Exhibit 10.20 to the Registrant's Registration
Statement on Form S-1 (Reg. No. 33-74680)).
10.21- Undertaking dated March 28, 1994 from Brian D. Fitzgerald to
the Registrant. (incorporated by reference to Exhibit 10.21
to the Registrant's Registration Statement on Form S-1 (Reg.
No. 33-74680)).
<PAGE>
Sequentially
Exhibit No. Description of Document Numbered Page
- ----------- ----------------------- --------------
10.22- Shareholder Agreement effective as of the 1st day of
January, 1993 by and among BMD, David G. Miclette, Dennis
Michael Descant, Samuel F. Bowen, William G. Bowen, Larry M.
Karren, their respective spouses, BMD&B Inc., FIM and FIS
(incorporated by reference to Exhibit 10.22 to the
Registrant's Form 10-K Annual Report for the fiscal year
ended September 30, 1995).
10.23- Asset Purchase Agreement dated as of May 17, 1996 by and
among Possible Dreams, Ltd., a Massachusetts corporation,
Columbia National Corporation, a Massachusetts corporation,
Leonard Miller, Richard L. Seegal, as trustee of the Samuel
C. Miller Trust u/d/t 8/5/85, Warren Stanley and Arnold Lee
and Possible Dreams, Ltd., a Delaware corporation ("Possible
Dreams") (incorporated by reference to Exhibit 1 to the
Registrant's Form 8-K Current Report dated May 17, 1996).
10.24- Subordinated Promissory Note dated May 17, 1996 in the
amount of $2,128,000, from Possible Dreams to Possible
Dreams, Ltd., a Massachusetts corporation (incorporated by
reference to Exhibit 2 to the Registrant's Form 8-K Current
Report dated May 17, 1996).
10.25- Corrective Amendment dated November 25, 1996 to Subordinated
Promissory Note dated May 17, 1996 in the amount of
$2,128,000 from Possible Dreams to Possible Dreams, Ltd., a
Massachusetts corporation.
10.26- Subordinated Promissory Note dated May 17, 1996 in the
amount of $332,000, from Possible Dreams to Columbia
National Corporation (incorporated by reference to Exhibit 3
to the Registrant's Form 8-K Current Report dated May 17,
1996).
10.27- Corrective Amendment dated November 25, 1996 to Subordinated
Promissory Note dated May 17, 1996 in the amount of $332,000
from Possible Dreams to Columbia National Corporation.
10.28- Credit Agreement dated as of May 17, 1996 among Possible
Dreams, P.D. Holdings, Inc., a Delaware corporation
("Holdings"), the Lenders referred to therein and
NationsCredit Commercial Corporation ("NationsCredit"), as
Agent (incorporated by reference to Exhibit 4 to the
Registrant's Form 8-K Current Report dated May 17, 1996).
10.29- Warrant dated May 17, 1996 from Possible Dreams to
NationsCredit
<PAGE>
Sequentially
Exhibit No. Description of Document Numbered Page
- ----------- ----------------------- --------------
(incorporated by reference to Exhibit 5 to the
Registrant's Form 8-K Current Report dated May 17,
1996).
10.30- Warrantholders Rights Agreement dated as of May 17, 1996
among Possible Dreams, Holdings, Security Capital
Corporation ("Security Capital"), Warren Stanley and Arnold
Lee and NationsCredit (incorporated by reference to Exhibit
6 to the Registrant's Form 8-K Current Report dated May 17,
1996).
10.31- Security Capital Pledge and Guarantee Agreement dated as of
May 17, 1996 between Security Capital and NationsCredit, as
Agent (incorporated by reference to Exhibit 7 to the
Registrant's Form 8-K Current Report dated May 17, 1996).
10.32- Holdings Pledge Agreement dated as of May 17, 1996 among
Holdings and NationsCredit, as Agent (incorporated by
reference to Exhibit 8 to the Registrant's Form 8-K Current
Report dated May 17, 1996).
10.33- Investors Subordination Agreement dated as of May 17, 1996
among Possible Dreams, the Subordinated Obligations Holders
(as defined therein) and NationsCredit, as Agent
(incorporated by reference to Exhibit 9 to the Registrant's
Form 8-K Current Report dated May 17, 1996).
10.34- Sellers Subordination Agreement dated as of May 17, 1996
among Possible Dreams, the Subordinated Obligations Holders
(as defined therein) and NationsCredit, as Agent
(incorporated by reference to Exhibit 10 to the Registrant's
Form 8-K Current Report dated May 17, 1996).
10.35- Stockholders' Agreement dated as of May 17, 1996 among
Holdings, Arnold Lee, Warren Stanley and Security Capital
(incorporated by reference to Exhibit 11 to the Registrant's
Form 8-K Current Report dated May 17, 1996).
10.36- Employment, Consulting and Non-Competition Agreement dated
May 17, 1996 by and between Possible Dreams and Warren
Stanley (incorporated by reference to Exhibit 12 to the
Registrant's Form 8-K Current Report dated May 17, 1996).
10.37- Employment, Consulting and Non-Competition Agreement dated
<PAGE>
Sequentially
Exhibit No. Description of Document Numbered Page
- ----------- ----------------------- --------------
May 17, 1996 by and between Possible Dreams and Arnold Lee
(incorporated by reference to Exhibit 13 to the Registrant's
Form 8-K Current Report dated May 17, 1996).
10.38- First Amendment to Advisory Services Agreement dated as of
May 17, 1996 by and between Security Capital and Capital
Partners, Inc (incorporated by reference to Exhibit 14 to
the Registrant's Form 8-K Current Report dated May 17,
1996).
10.39- Consolidated Income Tax Sharing Agreement dated as of May
17, 1996 among Possible Dreams, Holdings and Security
Capital (incorporated by reference to Exhibit 15 to the
Registrant's Form 8-K Current Report dated May 17, 1996).
21 - Subsidiaries of the Registrant.
23 - Consent of Deloitte & Touche LLP.
27 - Financial Data Schedule.
</TABLE>
<PAGE>
Exhibit 3.1A
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
SECURITY CAPITAL CORPORATION
Pursuant to Section 242 of the Delaware
General Corporation Law
Security Capital Corporation, a Delaware corporation (the
"Corporation"), hereby certifies as follows:
FIRST: The name of the Corporation is Security Capital Corporation.
SECOND: The Restated Certificate of Incorporation of the Corporation
is hereby amended to effect a one-for-eight reverse split of the Common Stock
and of the Class A Common Stock by adding a new paragraph after the first
paragraph of Article FOURTH to read as follows:
"Simultaneously with the effective date of this amendment (the
"Effective Date"), each share of the Common Stock issued and
outstanding immediately prior to the Effective Date and each such
share held in the Corporation's treasury (the "Old Common Stock")
shall automatically and without any action on the part of the holder
thereof be reclassified as and changed into one-eighth (1/8) of a
share of the Common Stock, par value $.01 per share (the "Common
Stock"), subject to the treatment of fractional share interests as
described below, and each share of the Class A Common Stock issued and
outstanding immediately prior to the Effective Date and each such
share held in the Corporation's treasury (the "Old Class A Common
Stock") shall automatically and without any action on the part of the
holder thereof be reclassified and changed into one-eighth (1/8) of a
share of the Class A Common Stock, par value $.01 per share (the
"Class A Common Stock"), subject to the treatment of fractional share
interests as described below. Each holder of a certificate or
certificates which immediately prior to the Effective Date represented
outstanding shares of the Old Common Stock (the "Old Common
Certificates," whether one or more) or the Old Class A Common Stock
(the "Old Class A Common Certificates," whether one or more) shall be
entitled to receive upon surrender of the Old Common Certificates or
the Old Class A Common Certificates, as the case may be, to the
Corporation's Transfer Agent for cancellation, a certificate or
certificates representing the number of whole shares of the Common
Stock (the "Common Certificates") or the Class A Common Stock (the
"Class A Common Certificates") into which and for which the shares of
the Old Common Stock or the Old Class A Common Stock, as the case may
be, formerly represented by the Old
<PAGE>
Common Certificates or the Old Class A Common Certificates, as the
case may be, so surrendered are reclassified under the terms hereof.
From and after the Effective Date, the Old Common Certificates shall
represent only the right to receive the Common Certificates (and,
where applicable, cash in lieu of fractional shares, as provided
below) pursuant to the provisions hereof, and the Old Class A Common
Certificates shall represent only the right to receive the Class A
Common Certificates (and, where applicable, cash in lieu of fractional
shares, as provided below). No certificate or scrip representing
fractional share interests in the Common Stock or the Class A Common
Stock will be issued, and no such fractional share interest will
entitle the holder thereof to vote or to any rights of a stockholder
of the Corporation. A holder of Old Common Certificates or Old Class
A Common Certificates shall receive, in lieu of any fraction of a
share of the Common Stock or the Class A Common Stock to which the
holder otherwise would be entitled, a cash payment equal to the
product of the number of shares of the Old Common Stock or the Old
Class A Common Stock which have not been reclassified into a whole
share of the Common Stock or the Class A Common Stock multiplied by
the average closing price of the Old Class A Common Stock on the
Pacific Stock Exchange, Inc. on the five most recent business days
preceding the Effective Date that the Old Class A Common Stock was
traded. If more than one Old Common Certificate or Old Class A Common
Certificate shall be surrendered at one time for the account of the
same stockholder, the number of full shares of the Common Stock or the
Class A Common Stock for which Common Certificates or Class A Common
Certificates shall be issued shall be computed on the basis of the
aggregate number of shares represented by the Old Common Certificates
or Old Class A Common Certificates so surrendered.
In the event that the Corporation's Transfer Agent determines
that a holder of Old Common Certificates or Old Class A Common
Certificates has not tendered all of his or her certificates for
exchange, the Transfer Agent shall carry forward any fractional share
until all certificates of such holder have been presented for exchange
so that payment for fractional shares to such holder shall not exceed
the value of one (1) whole share of the Common Stock or the Class A
Common Stock as a result of the rounding up of fractional shares. If
any Common Certificate or Class A Common Certificate is to be issued
in a name other than that in which the Old Common Certificates or the
Old Class A Common Certificates surrendered for exchange are issued,
the Old Common Certificates or the Old Class A Common Certificates so
surrendered shall be properly endorsed and otherwise in proper form
for transfer, and the person or persons requesting such exchange shall
affix any requisite stock transfer tax stamps to the Old Common
Certificates or the Old Class A Common Certificates surrendered, or
provide funds for their purchase, or establish to the satisfaction of
the Transfer Agent that such taxes are not payable."
2
<PAGE>
THIRD: This Certificate of Amendment of Restated Certificate of
Incorporation shall be effective as of March 27, 1996.
FOURTH: This Certificate of Amendment of Restated Certificate of
Incorporation was duly adopted by the requisite vote of the Board of Directors
and by the vote of the holders of a majority of the outstanding shares of the
Corporation entitled to vote thereon in accordance with Section 242 of the
Delaware General Corporation Law.
IN WITNESS WHEREOF, Security Capital Corporation has caused this
Certificate of Amendment of Restated Certificate of Incorporation to be executed
by its President and attested by its Assistant Secretary this 27th day of March,
1996.
SECURITY CAPITAL CORPORATION
By /s/A. George Gebauer
-------------------------------------------
A. George Gebauer
President
ATTEST:
/s/Grace Santacqua
- ------------------------------
Grace Santacqua
Assistant Secretary
3
<PAGE>
Exhibit 3.1B
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
SECURITY CAPITAL CORPORATION
Pursuant to Section 242 of the Delaware
General Corporation Law
Security Capital Corporation, a Delaware corporation (the
"Corporation"), hereby certifies as follows:
FIRST: The name of the Corporation is Security Capital Corporation.
SECOND: The Restated Certificate of Incorporation hereby is amended
to decrease the number of authorized shares of the Class A Common Stock of the
Corporation from 60,000,000 shares to 10,000,000 shares by striking the first
paragraph of Article FOURTH of the Restated Certificate of Incorporation and
inserting the following paragraph in its place:
"FOURTH: the total number of shares of all classes of stock
which the Corporation shall have authority to issue is
twelve million five hundred fifty-seven thousand five
hundred (12,557,500) shares, of which two million five
hundred thousand (2,500,000) shares shall be designated as
Preferred Stock (the "PREFERRED STOCK"), with a par value of
One Cent ($0.01) per share, fifty thousand (50,000) shares
shall be designated as Class A Preferred Stock (the "CLASS A
PREFERRED STOCK"), with a par value of One Cent ($0.01) per
share, seven thousand five hundred (7,500) shares shall be
designated as Common Stock (the "COMMON STOCK"), with a par
value of One Cent ($0.01) per share, and ten million
(10,000,000) shares shall be designated as Class A Common
Stock (the "CLASS A COMMON STOCK"), with a par value of One
Cent ($0.01) per share."
THIRD: This Certificate of Amendment of Restated Certificate of
Incorporation shall be effective as of March 27, 1996.
<PAGE>
FOURTH: This Certificate of Amendment of Restated Certificate of
Incorporation was duly adopted by the requisite vote of the Board of Directors
and by the vote of the holders of a majority of the outstanding shares of the
Corporation entitled to vote thereon in accordance with Section 242 of the
Delaware General Corporation Law.
2
<PAGE>
IN WITNESS WHEREOF, Security Capital Corporation has caused this
Certificate of Amendment of Restated Certificate of Incorporation to be executed
by its President and attested by its Assistant Secretary this 27th day of March,
1996.
SECURITY CAPITAL CORPORATION
By /s/A. George Gebauer
------------------------------------------
A. George Gebauer
President
ATTEST:
/s/Grace Santacqua
- ---------------------------------------
Grace Santacqua
Assistant Secretary
3
<PAGE>
Exhibit 10.25
CORRECTIVE AMENDMENT
TO
SUBORDINATED PROMISSORY NOTE
This Corrective Amendment to the Subordinated Promissory Note (the
"Amendment") made as of the 25th day of November, 1996, by and between
POSSIBLE DREAMS, LTD., a Delaware corporation having a principal address of
Six Perry Drive, Foxboro, Massachusetts 02035 ("Maker") and GBNF, Inc., a
Massachusetts corporation f/k/a Possible Dreams, Ltd. with an address of 15
Lorna Road, Newton, Massachusetts 02159 ( the "Payee").
W I T N E S S E T H
WHEREAS, pursuant to the terms and conditions of that certain Asset
Purchase Agreement among Maker, Payee, Columbia National Corporation, a
Massachusetts corporation ("Columbia"), Leonard I. Miller, the Samuel C. Miller
Trust u/d/t 8/5/85, Warren Stanley and Arnold Lee (the "Purchase Agreement"),
Maker purchased substantially all of the assets of Payee and Columbia;
WHEREAS, at the closing Maker issued to Payee a Subordinated Promissory
Note dated as of May 17, 1996 in the original principal amount of Two Million
One Hundred Twenty-Eight Thousand Dollars ($2,128,000) as part of the
consideration paid by Maker to Payee pursuant to the Purchase Agreement (the
"Note");
WHEREAS, the fourth paragraph of the Note contained an error regarding the
mandatory reduction of the principal amount of the Note in the event the
"Maker's EBITDA" (as defined in the Note) for the year ending December 31, 1996
is less than $3,500,000;
WHEREAS, the Maker and the Payee have agreed to amend the Note in order to
correct the fourth paragraph as hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. The fourth paragraph of the Note, beginning on the first page of the
Note, is amended to read in its entirety as follows:
"The principal amount of this Note is subject to mandatory reduction by an
amount equal to $432,500 in the event the "Maker's EBITDA" (as hereinafter
defined) for year ending December 31, 1996 is less than $3,500,000. For
purposes of this Note, (i) the term "Maker's EBITDA" shall mean an amount equal
to the sum of (x) EBITDA of the Payee and Columbia ("Sellers"), determined on a
combined basis in accordance with generally accepted accounting principles
consistently applied ("GAAP"), for the period from January 1, 1996 to and
including the day preceding the date hereof, PLUS (y) EBITDA of the Maker,
determined in accordance with
<PAGE>
GAAP, for the period from the date hereof to and including December 31, 1996,
and (ii) the term "EBITDA" shall mean, for the appropriate period, the net
income (or loss) of the applicable entity for such period, PLUS the sum of (A)
interest expense, (B) depreciation, (C) amortization of goodwill, (D) income
taxes paid or accrued, and, with respect to Maker only for the period from the
date hereof to and including December 31, 1996, (E) increases in other expenses
directly resulting from the transactions contemplated by the Purchase Agreement,
including amortization of original issue discount and capitalized acquisition
expenses, management fees and inventory write-up (but exclusive of increases in
executive salaries), (F) bonuses to executive management of Maker paid or
accrued in accordance with employment agreements dated the date hereof, and (G)
payments made by Maker to its direct and indirect corporate shareholders
pursuant to a tax sharing agreement dated the date hereof, and, with respect to
Payee only for the period from January 1, 1996 to and including the day
preceding the date hereof, (H) salaries paid to Leonard Miller and to members of
his direct family and payroll taxes and fringe benefits paid or accrued in
respect of such persons during such period, (I) expenses incurred during such
period which are specifically attributable to Leonard Miller's automobile lease,
(J) travel and entertainment expenses incurred by Leonard Miller during such
period for the account of Sellers in the course of his employment with the
Sellers but which are not directly related to their business, (K) legal and
accounting fees and expenses incurred during such period which are specifically
attributable to the asset purchase transaction contemplated by the Purchase
Agreement and (L) the loss suffered during such period on the "Artiva" and
"Sunrise" inventory close-out in the amount of $93,000, LESS the sum of (X)
interest income and (Y) income tax credits received or accrued, in each case to
the extent included in arriving at such net income (or loss) for the applicable
period and determined in accordance with GAAP. Any such reduction shall be
effective automatically, retroactive to the date of issue hereof, immediately
after the later of (1) acceptance by Maker of the Sellers' combined financial
statements pursuant to and in accordance with Section 2.6 of the Purchase
Agreement and (2) acceptance by Sellers' of the Maker's audited financial
statements for the fiscal period ending December 31, 1996 pursuant to and in
accordance with Section 2.7 of the Purchase Agreement, with interest theretofore
accrued on this Note at the rate hereinabove provided to be recomputed as if the
principal amount of this Note from the date of issue hereof had been $1,695,500.
Any interest theretofore paid on the principal amount hereof in excess of the
interest hereon as so recomputed shall be credited against the next two
semi-annual payments of interest due hereunder, with each such credit to be
equal to 50% of such excess. Any reduction of this Note pursuant to the terms
of this paragraph shall be deemed a reduction of the purchase price paid
pursuant to the Purchase Agreement."
2. Maker and Payee hereby ratify and confirm all of their respective
obligations, covenants, duties and agreements set forth in the Note, as amended
by the terms hereof.
3. This Amendment shall be governed by and construed in accordance with
the laws of the State of Rhode Island applicable to contracts made and to be
performed within such state without resort to its conflict of law rules.
* * * * * * *
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed under seal as of the day and year first written above.
PAYEE
GBNF, INC. F/K/A
Possible Dreams, Ltd.,
a Massachusetts corporation
By: /s/Leonard I. Miller
------------------------------
Leonard I. Miller
Chief Executive Officer
MAKER
POSSIBLE DREAMS, LTD.,
a Delaware corporation
By: /s/Philip L. Fitting
-------------------------------
Philip L. Fitting
Chairman
<PAGE>
Exhibit 10.27
CORRECTIVE AMENDMENT
TO
SUBORDINATED PROMISSORY NOTE
This Corrective Amendment to the Subordinated Promissory Note (the
"Amendment") made as of the 25th day of November, 1996, by and between POSSIBLE
DREAMS, LTD., a Delaware corporation having a principal address of Six Perry
Drive, Foxboro, Massachusetts 02035 ("Maker") and Ascensions, Inc., a
Massachusetts corporation f/k/a Columbia National Corporation with an address of
15 Lorna Road, Newton, Massachusetts 02159 ( the "Payee").
W I T N E S S E T H
WHEREAS, pursuant to the terms and conditions of that certain Asset
Purchase Agreement among Maker, Payee, Possible Dreams, Ltd., a Massachusetts
corporation ("PDL"), Leonard I. Miller, the Samuel C. Miller Trust u/d/t 8/5/85,
Warren Stanley and Arnold Lee (the "Purchase Agreement"), Maker purchased
substantially all of the assets of Payee and Columbia;
WHEREAS, at the closing Maker issued to Payee a Subordinated Promissory
Note dated as of May 17, 1996 in the original principal amount of Three Hundred
Thirty-Two Thousand Dollars ($332,000) as part of the consideration paid by
Maker to Payee pursuant to the Purchase Agreement (the "Note");
WHEREAS, the fourth paragraph of the Note contained an error regarding the
mandatory reduction of the principal amount of the Note in the event the
"Maker's EBITDA" (as defined in the Note) for the year ending December 31, 1996
is less than $3,500,000;
WHEREAS, the Maker and the Payee have agreed to amend the Note in order to
correct the fourth paragraph as hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. The fourth paragraph of the Note, beginning on the first page of the
Note, is amended to read in its entirety as follows:
"The principal amount of this Note is subject to mandatory reduction by an
amount equal to $67,500 in the event the "Maker's EBITDA" (as hereinafter
defined) for year ending December 31, 1996 is less than $3,500,000. For
purposes of this Note, (i) the term "Maker's EBITDA" shall mean an amount equal
to the sum of (x) EBITDA of the Payee and PDL ("Sellers"), determined on a
combined basis in accordance with generally accepted accounting principles
consistently applied ("GAAP"), for the period from January 1, 1996 to and
including the day preceding the date hereof, PLUS (y) EBITDA of the Maker,
determined in accordance with GAAP, for the period from the date hereof to and
including December 31, 1996, and (ii) the term
<PAGE>
"EBITDA" shall mean, for the appropriate period, the net income (or loss) of the
applicable entity for such period, PLUS the sum of (A) interest expense, (B)
depreciation, (C) amortization of goodwill, (D) income taxes paid or accrued,
and, with respect to Maker only for the period from the date hereof to and
including December 31, 1996, (E) increases in other expenses directly resulting
from the transactions contemplated by the Purchase Agreement, including
amortization of original issue discount and capitalized acquisition expenses,
management fees and inventory write-up (but exclusive of increases in executive
salaries), (F) bonuses to executive management of Maker paid or accrued in
accordance with employment agreements dated the date hereof, and (G) payments
made by Maker to its direct and indirect corporate shareholders pursuant to a
tax sharing agreement dated the date hereof, and, with respect to Payee only for
the period from January 1, 1996 to and including the day preceding the date
hereof, (H) salaries paid to Leonard Miller and to members of his direct family
and payroll taxes and fringe benefits paid or accrued in respect of such persons
during such period, (I) expenses incurred during such period which are
specifically attributable to Leonard Miller's automobile lease, (J) travel and
entertainment expenses incurred by Leonard Miller during such period for the
account of Sellers in the course of his employment with the Sellers but which
are not directly related to their business, (K) legal and accounting fees and
expenses incurred during such period which are specifically attributable to the
asset purchase transaction contemplated by the Purchase Agreement and (L) the
loss suffered during such period on the "Artiva" and "Sunrise" inventory
close-out in the amount of $93,000, LESS the sum of (X) interest income and (Y)
income tax credits received or accrued, in each case to the extent included in
arriving at such net income (or loss) for the applicable period and determined
in accordance with GAAP. Any such reduction shall be effective automatically,
retroactive to the date of issue hereof, immediately after the later of (1)
acceptance by Maker of the Sellers' combined financial statements pursuant to
and in accordance with Section 2.6 of the Purchase Agreement and (2) acceptance
by Sellers' of the Maker's audited financial statements for the fiscal period
ending December 31, 1996 pursuant to and in accordance with Section 2.7 of the
Purchase Agreement, with interest theretofore accrued on this Note at the rate
hereinabove provided to be recomputed as if the principal amount of this Note
from the date of issue hereof had been $264,500. Any interest theretofore paid
on the principal amount hereof in excess of the interest hereon as so recomputed
shall be credited against the next two semi-annual payments of interest due
hereunder, with each such credit to be equal to 50% of such excess. Any
reduction of this Note pursuant to the terms of this paragraph shall be deemed a
reduction of the purchase price paid pursuant to the Purchase Agreement."
2. Maker and Payee hereby ratify and confirm all of their respective
obligations, covenants, duties and agreements set forth in the Note, as amended
by the terms hereof.
3. This Amendment shall be governed by and construed in accordance with
the laws of the State of Rhode Island applicable to contracts made and to be
performed within such state without resort to its conflict of law rules.
* * * * * * *
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed under seal as of the day and year first written above.
PAYEE
ASCENSIONS, INC.
Columbia National Corporation,
a Massachusetts corporation
By: /s/Leonard I. Miller
----------------------------
Leonard I. Miller
President
MAKER
POSSIBLE DREAMS, LTD.,
a Delaware corporation
By: /s/Philip L. Fitting
----------------------------
Philip L. Fitting
Chairman
<PAGE>
Exhibit 21
SUBSIDIARIES OF SECURITY CAPITAL CORPORATION
NAME JURISDICTION OF INCORPORATION
Security Capital Insurance Group, Inc. Delaware
Foster Insurance Managers, Inc. Delaware
Lloyd's Management Corporation Texas
Foster Insurance Services of Colorado, Inc. Colorado
Possible Dreams, Ltd. Delaware
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
- -----------------------------------------
Security Capital Corporation:
We hereby consent to the incorporation by reference in Post-Effective
Amendment No. 2 to Registration Statement No. 2-91703 (which is also
Post-Effective Amendment No. 3 to Registration Statement No. 2-82443) on Form
S-8 of our report dated December 6, 1996, appearing in this annual report on
Form 10-K of Security Capital Corporation for the year ended September 30,
1996.
DELOITTE & TOUCHE LLP
Houston, Texas
January 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1.00
<CASH> 8,706
<SECURITIES> 0
<RECEIVABLES> 9,793
<ALLOWANCES> 412
<INVENTORY> 5,010
<CURRENT-ASSETS> 23,787
<PP&E> 1,105
<DEPRECIATION> 200
<TOTAL-ASSETS> 34,502
<CURRENT-LIABILITIES> 12,006
<BONDS> 0
4,425
0
<COMMON> 44
<OTHER-SE> 6,840
<TOTAL-LIABILITY-AND-EQUITY> 34,502
<SALES> 9,854
<TOTAL-REVENUES> 9,854
<CGS> 4,764
<TOTAL-COSTS> 4,086
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 731
<INCOME-PRETAX> 1,071
<INCOME-TAX> 58
<INCOME-CONTINUING> 1,013
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,013
<EPS-PRIMARY> .14
<EPS-DILUTED> 0
</TABLE>
