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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
COMMISSION FILE NUMBER 1-4923
WESTMINSTER CAPITAL, INC.
(Exact name of the Registrant as Specified in its Charter)
DELAWARE 95-2157201
(State or Other Jurisdiction of
Incorporation or Organization) (I.R.S. Employer Identification No.)
9665 WILSHIRE BOULEVARD, M-10, BEVERLY HILLS, CALIFORNIA 90212
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 278-1930
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
COMMON STOCK, Name of Each Exchange on which Registered
$1.00 PAR VALUE PER SHARE PACIFIC STOCK EXCHANGE
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 / /
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 ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing sale price on the Pacific Stock Exchange
of its common stock on March 1, 1999 was approximately $7,794,366. For
purposes of the foregoing calculation, certain persons that have filed
reports on Schedule 13D with the Securities and Exchange Commission with
respect to the beneficial ownership of more than 5% of the Registrant's
outstanding voting stock and directors and executive officers of the
Registrant have been excluded from the group of stockholders deemed to be
nonaffiliates of the Registrant.
The number of shares of common stock, $1.00 par value per share, of the
Registrant outstanding as of March 1, 1999, was 7,834,607.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement relating to the
Registrant's Annual Meeting of Shareholders scheduled to be held on May 27, 1999
are incorporated by reference in Part III of this Form 10-K.
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WESTMINSTER CAPITAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
CONTENTS
PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 12
PART II
ITEM 5. MARKET FOR THE CORPORATION'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 13
ITEM 6. SELECTED FINANCIAL DATA 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
CORPORATION 56
ITEM 11. EXECUTIVE COMPENSATION 56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 56
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 57
Index of Exhibits 60
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PART I
ITEM 1. BUSINESS
THROUGHOUT THIS ANNUAL REPORT, WESTMINSTER CAPITAL, INC. (THE
"CORPORATION") MAKES FORWARD LOOKING STATEMENTS REGARDING VARIOUS ASPECTS OF
ITS BUSINESS AND AFFAIRS, INCLUDING STATEMENTS IN ITEM 1 - "BUSINESS"
REGARDING BUSINESS STRATEGY; STATEMENTS IN ITEM 3 -"LEGAL PROCEEDINGS"
REGARDING THE MERITS OF CLAIMS AND DEFENSES IN LITIGATION; AND STATEMENTS IN
ITEM 7 -"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" ABOUT FUTURE REVENUES AND INCOME OF WESTLAND
ASSOCIATES AND GLOBAL TELECOMMUNICATIONS LTD, THE ADEQUACY OF COLLATERAL FOR
LOANS IN DEFAULT, THE FUTURE CASH NEEDS OF THE CORPORATION AND YEAR 2000
COMPLIANCE OF THE CORPORATION'S COMPUTER SYSTEMS. THESE FORWARD LOOKING
STATEMENTS INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD LOOKING
STATEMENTS. STATEMENTS ABOUT BUSINESS STRATEGY MAY NOT BE ACCURATE BECAUSE
THE CORPORATION MAY NOT IDENTIFY ATTRACTIVE ACQUISITION CANDIDATES OR BE ABLE
TO COMPLETE ACQUISITIONS ON ACCEPTABLE TERMS. STATEMENTS ABOUT CLAIMS AND
DEFENSES IN LITIGATION MAY TURN OUT TO BE INCORRECT BECAUSE ALL OF THE FACTS
THAT WILL BE PRESENTED AT TRIAL ARE NOT KNOWN NOW, CERTAIN ASPECTS OF THE
APPLICABLE LAW MAY BE UNCERTAIN AND THE JUDGEMENT OF THE JUDGE OR JURY IS
SUBJECTIVE AND INCAPABLE OF BEING PREDICTED ACCURATELY. STATEMENTS ABOUT
FUTURE EARNINGS AND REVENUES AND THE ADEQUACY OF CASH RESOURCES FOR FUTURE
NEEDS ARE UNCERTAIN BECAUSE OF THE UNPREDICTABILITY OF FUTURE EVENTS
AFFECTING SUCH STATEMENTS. STATEMENTS ABOUT THE ADEQUACY OF REAL ESTATE
COLLATERAL INVOLVE PREDICTIONS AS TO WHAT A BUYER WILL BE WILLING TO PAY FOR
THE PROPERTY IN THE FUTURE, WHICH CANNOT BE KNOWN WITH CERTAINTY. STATEMENTS
ABOUT YEAR 2000 COMPLIANCE ARE IN PART DEPENDENT UPON PERFORMANCE BY THIRD
PARTIES OVER WHOM THE CORPORATION DOES NOT HAVE CONTROL.
GENERAL
The Corporation owns all or a substantial interest in several operating
businesses and also engages in the secured lending business. The Corporation
classifies its enterprise into three segments, namely (i) finance and secured
lending (ii) group purchasing services and (iii) other business.
FINANCE AND SECURED LENDING - The Corporation engages in lending activity,
originating or purchasing loans that are generally secured and do not exceed
thirty-six months in duration. Assets not employed in its operations are
invested in securities available-for-sale. These securities consist
principally of U.S. Government securities, but to a limited extent include
investments in common and preferred stocks, warrants, convertible debentures
and investments in limited partnerships that invest in securities.
GROUP PURCHASING SERVICES - The Corporation owns a 100% interest in a company
which provides group purchasing of goods and services for new car dealers
(See "Westland Associates" below).
OTHER BUSINESS - This segment comprises all other business activity and
includes the ownership of a majority interest in a telephone company serving
military personnel (See "Telephone Company," below), and the results of a
one-time settlement from the Franchise Tax Board of the State of California
and other settlement income (See Item 7 - "Management's Discussion and
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Analysis of Financial Condition and Results of Operations" for further
information on the Franchise Tax Board settlement and other settlement
income).
Revenues, operating profits and other financial data of the
Corporation's industry segments for the three years ending December 31, 1998,
are set forth in Note 9 of Notes to Consolidated Financial Statements.
The Corporation is a Delaware corporation formed in 1959. The executive
office of the Corporation is located at 9665 Wilshire Boulevard, Suite M-10,
Beverly Hills, California 90212 and its telephone number is (310) 278-1930.
BUSINESS STRATEGY
The Corporation intends to pursue the acquisition of controlling
interests in additional operating businesses. However, no assurances can be
given that the Corporation will be able to identify attractive opportunities,
or if it does, that it will be able to complete acquisitions on acceptable
terms.
As the Corporation acquires interests in other operating businesses or
originates or purchases loans, it intends to liquidate securities
available-for-sale as may be necessary to consummate acquisitions or fund
loans.
RECENT ACQUISITIONS
Effective January 1, 1999, the Corporation exercised its option to
convert a convertible debt obligation into a 50% equity interest in Touch
Controls, Inc (see below).
On January 11, 1999, the Corporation entered into a Membership Interest
Purchase Agreement to acquire an 80% interest in One Source Industries, LLC
("One Source") for cash consideration of $4.8 million paid at closing,
deferred consideration of $196,000, plus up to an additional $2.15 million in
deferred contingent cash consideration that may be paid over the next four
years based on the performance of One Source during such period. One Source
provides turn-key packaging and point-of-sale displays for a broad spectrum
of consumer products ranging from computer software to food products. The
acquisition was financed using existing cash reserves.
BUSINESS SEGMENTS
FINANCE AND SECURED LENDING
LOANS
The Corporation originates and, from time to time, purchases loans that
are generally secured by real estate, personal property or other collateral.
In connection with each loan proposal, the Corporation considers the value
and quality of the real estate or other collateral available to secure the
loan compared to the loan amount requested, the borrower's source of
repayment, the proposed interest rate and repayment terms and the quality of
the borrower. The Corporation holds the loans it originates or purchases in
its portfolio to maturity or earlier payoff.
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At December 31, 1998, the Corporation's loans outstanding consisted of
loans secured by trust deeds or mortgages in the principal amount of
$2,643,000, loans secured by real estate and other collateral in the
principal amount of $7,140,000.
During 1998, loan activity included originations, advances under
existing commitments, refinancings, pay-offs and foreclosure proceedings on
defaulted loans. The Corporation originated a loan in the amount of
$1,100,000 in August 1998, bearing interest at 15% per annum which is secured
by real estate and other collateral. This loan requires monthly payments of
interest only and the repayment of principal on August 1, 1999. In connection
with the sale of the Corporation's investment in Pink Dot, the loans
outstanding to Pink Dot in the principal amounts of $2,500,000 and $415,000,
plus accrued interest, were replaced by two new promissory notes, in the
amounts of $2,478,000, net of discount of $324,000, and $382,000, net of
discount of $54,000, respectively. Both notes provide for the payment of
monthly interest and are due in their entirety in March 2000. Both of the
replacement notes are secured by all of the tangible and intangible assets of
Pink Dot.
During 1998, loans secured by automobile leases of $132,000 net of
purchase discount were repaid in full, representing repayment of the
remaining outstanding balance of loans which were originally purchased in
1995 for a purchase price of $3,551,000 net of a discount of $742,000. The
loans secured by trust deeds or mortgages outstanding at December 31, 1998,
include two unrelated notes of $1,050,000 net of discount of $25,000 and
$520,000 net of discount of $2,000 that were originated in 1996, were
originally due in 1998, and are in default. The Corporation commenced
foreclosure proceedings in October 1997 on the loan in the principal amount
of $1,050,000, and commenced foreclosure proceedings in February 1998 on the
loan in the principal amount of $520,000. See Item 3 - "Legal Proceedings"
for further information concerning foreclosure proceedings on these loans.
A short-term loan secured by a second trust deed in the amount of
$225,000 made in June 1997 went into default in August 1997. The loan was
foreclosed in December 1997 and, as a result, the Corporation became the
owner of the collateral, a single-family residence located in Newport Beach,
California. The residence was subject to a first mortgage in the amount of
$655,000, which the Corporation paid off in January 1998. The property, which
had a carrying value of $833,000 at December 31, 1998, was subsequently sold
in January 1999 for a sale price, net of commissions and closing costs, of
$945,000.
CONVERTIBLE LOANS
During 1997, the Corporation executed two convertible loan agreements.
One agreement was with Touch Controls, Inc., ("Touch Controls"), and provides
for a secured convertible loan of up to $800,000, bearing interest at a
variable rate of interest equal to the "prime rate" of Wells Fargo Bank,
compounded monthly, that is convertible into 50% of the common stock of Touch
Controls. At December 31, 1998, the loan principal was fully funded. Touch
Controls used the loan proceeds to expand its sales and marketing activities,
finance accounts receivable and refine products. Effective January 1, 1999,
the Corporation elected to convert the principal amount of the loan plus
accrued interest of $56,584 into 50% of the common stock of Touch Controls.
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Touch Controls, headquartered in Fallbrook, California, is a
privately-held company that specializes in the design, development and
manufacture of enhanced infrared touch displays and workstations for
industrial and public access environments. Touch Controls' products provide a
simple and intuitive man/machine interface with customers' personal computers
and/or operating systems in a wide range of industries and applications.
Touch Controls' customers include end users, original equipment manufacturers
and systems integrators.
The second convertible loan was made to Physician Advantage LLC
("Physician Advantage") and provides for a partially secured convertible loan
of up to $2,000,000 of which $270,000 is convertible into a 55% ownership
interest in Physician Advantage. The loan bears interest at a variable rate
equal to the "prime rate" plus one percent per annum, compounded monthly. The
principal balance and all unpaid accrued interest are due in twenty-four
equal monthly installments beginning November 20, 2000. The loan is secured
by a security interest in all tangible and intangible assets of Physician
Advantage.
Westminster Capital's obligation to make advances on the loan is
conditioned on Physician Advantage's ability to achieve enrollment of
prescribed numbers of physicians and certain levels of net income before
taxes as of the close of each calendar quarter. As of December 31, 1998,
Physician Advantage had enrolled the prescribed number of physicians, but had
not satisfied the required levels of net income before taxes at that date or
as of the close of any calendar quarter during 1998. For the year ended
December 31, 1998, Physician Advantage incurred an unaudited net loss of
$908,000 versus a required milestone net income before taxes of $300,000.
Notwithstanding the losses incurred by Physician Advantage, the Corporation
has continued to make advances to that company and had advanced $1,442,000 at
December 31, 1998. On March 1, 1999 advances to Physician Advantage totaled
$1,506,000.
On March 1, 1999, the Corporation granted Physician Advantage and its
two shareholders an option to purchase the Corporation's convertible secured
note at any time prior to May 17, 1999, for a purchase price equal to the
then outstanding principal and accrued interest plus $600,000. As
consideration for granting the option, the shareholders of Physician
Advantage have agreed to transfer 15% of their equity interest in Physician
Advantage to the Corporation effective May 17, 1999, in the event that the
option is not exercised by that date.
Physician Advantage, located in Encino California, was formed in
November 1997 to carry on the business of providing group purchasing services
for physicians originally started in September 1996 by Access Managed Care,
Inc., now a wholly owned subsidiary of Physician Advantage. Physician
Advantage has an exclusive, five year contract with a major national hospital
operator, pursuant to which the hospital operator identifies for Physician
Advantage the hospital operator's staff physicians and Physician Advantage
solicits them to purchase medical supplies, office supplies and other
products and services. The hospital operator has arranged for Physician
Advantage to offer those products to physicians at discounts available to the
hospital operator which are not otherwise available to physicians. Physician
Advantage also has contracts with other physician affinity groups, such as
preferred provider organizations and health maintenance organizations, to
offer group purchasing services to their member-physicians. Physician
Advantage is in the early stages of operations. It is in the process of
enrolling physicians to use its group purchasing services and has advised the
Corporation that approximately 30,000 physicians were enrolled at February
28, 1999. Physician Advantage does not maintain inventories or handle billing
or collections, but monitors transactions between the
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physicians and the vendors and is paid a rebate related to the volume of
business that is done. Revenues earned by Physician Advantage have been
approximately $300,000 from inception to December 31, 1998.
SECURITIES AVAILABLE-FOR-SALE AND OTHER INVESTMENTS
The Corporation invests its assets not employed in its operations in
securities available-for-sale. These securities consist principally of U.S.
Government and Agency securities, but also include investments in common and
preferred stocks, warrants, and convertible debentures. The Corporation does
not actively engage in investing in equity securities, but from time to time
makes investments as opportunities arise which the Corporation believes are
consistent with its operations. Certain of the equity securities owned by the
Corporation were received by it as additional compensation for loans extended
by the Corporation.
INVESTMENTS IN LIMITED PARTNERSHIPS THAT INVEST IN SECURITIES
The Corporation has invested in limited partnerships that invest in
securities. Each of the partnerships seeks to achieve returns through
investments in equity and debt securities following identified strategies.
The Corporation invests in limited partnerships based on their past
performance, the past performance of their general partners, and
diversification of identified strategies.
FINANCING OF PINK DOT
Pink Dot, Inc. ("Pink Dot") provides home delivery service of grocery,
delicatessen, bakery, salad bar, pasta bar, liquor, video and
non-prescription pharmacy items through company-owned stores.
The Corporation and Pink Dot entered into a Loan and Stock Purchase
Agreement in November, 1995, which was amended in September, 1996. Under the
agreement, the Corporation provided $3,000,000 in financing to Pink Dot to
open stores in the Los Angeles area and to establish infrastructure necessary
for the growth of Pink Dot. The financing consisted of loans of $2,500,000
and an investment of $500,000 in common stock representing 40% of the issued
and outstanding shares of Pink Dot. In July 1997, the Corporation committed
to loan an additional $1,000,000 to Pink Dot, of which $415,000 had been
advanced at December 31, 1997.
The consolidated financial statements include the results of this equity
investment on the equity method until it was sold in February 1998. The
Corporation recorded a loss of $686,000 in 1997 in connection with its 40%
equity investment in Pink Dot. As this loss exceeded the carrying amount of
the Corporation's investment account and goodwill related to Pink Dot, the
carrying amount of the loans receivable from Pink Dot was reduced by $391,000.
On February 26, 1998, the Corporation sold its 40% investment in Pink
Dot to the owner of the other 60% of the common stock of Pink Dot, for a
purchase price of $6,000,000. The purchase price originally evidenced by the
buyer's promissory note in the principal amount of $6,000,000 was paid in
full together with accrued interest of $101,821 on June 2, 1998. The
Corporation recorded a gain of $5,887,000 from the sale of this investment
during the year ended December 31, 1998.
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In connection with the sale of the Corporation's investment in Pink Dot,
the loans outstanding to Pink Dot in the principal amounts of $2,500,000 and
$415,000, plus accrued interest, were replaced by two new promissory notes,
in the amounts of $2,478,000, net of discount of $324,000, and $382,000, net
of discount of $54,000, respectively. Both notes provide for the payment of
monthly interest and are due in their entirety in March 2000. Both of the
replacement notes are secured by all of the tangible and intangible assets of
Pink Dot.
GROUP PURCHASING SERVICES
WESTLAND ASSOCIATES
The Corporation acquired 100% of the common stock of Westland Associates
in 1997. Westland Associates was founded in 1957 and provides group
purchasing of goods and services for new car dealers in California, Arizona,
and Nevada. Westland Associates sells to more than 550 dealers and has
relationships with over 80 vendors. Included on Westland Associates' list of
vendors are nationally recognized companies such as Reynolds & Reynolds,
Safety-Kleen, Sherwin Williams and National Sanitary.
Westland Associates reviews new products, negotiates competitive pricing
for its dealers, and assists in the introduction of new products to its
dealers. For most vendors, Westland Associates also acts as the accounts
receivable agency. Products are shipped directly to dealers by the vendors
and Westland Associates is billed by the vendors for the items ordered by the
dealers. Westland Associates then consolidates all vendor bills and sends a
single statement to each dealer.
The acquisition of Westland Associates has been accounted for using the
purchase method of accounting and the consolidated financial statements
include the results of Westland Associates from the date of the acquisition,
November 12, 1997 through December 31, 1998, on a consolidated basis.
OTHER BUSINESS
TELEPHONE COMPANY
Pursuant to existing contracts with three military bases, Global
Telecommunications Systems, LTD ("Global Telecommunications") operates
telephone network systems to serve officers and enlisted personnel with local
and long distance telephone service. Global Telecommunications installed and
owns the switches, wiring and individual telephone equipment at each of the
bases, and maintains and operates that equipment with its personnel.
Telephone system revenue is generated through the use of the system by the
individual military personnel who are subscribers. Revenue is partially
offset by time charges from the long distance telephone provider to Global
Telecommunications.
The Corporation acquired a limited partnership interest in Global
Telecommunications in 1993. Under the Global Telecommunications partnership
agreement the Corporation is entitled to 75% of the partnership distributions
(which is proportional to its investment). The consolidated financial
statements include this investment on a consolidated basis.
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Prior to June 30, 1998, Global Telecommunications operated telephone
systems at four military basis. Effective that date, the Navy terminated
Global Telecommunication's service to the Miramar Naval Air Station due to
conversion of that base from a Navy to a Marine facility. Global
Telecommunications reached a settlement with the Navy for the cancellation of
the service contract at the Miramar Naval Air Station, in exchange for a
payment of approximately $363,000 from the Navy plus additional sums of
$46,000 from the sale of related assets. The assets of Global
Telecommunications at Miramar Naval Air Station had a book value of $180,000
as of June 30, 1998. See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations," for further information on
cancellation of the service contract for Miramar.
Other business also includes settlement recoveries from a class action
lawsuit filed against Drexel Burnham Lambert Inc. and various other parties
in 1989 (See Item 3 - "Legal Proceedings"), and interest on a California
Franchise Tax refund claim settlement received in 1998. For further
information on income taxes see Note 13 of Notes to Consolidated Financial
Statements.
EMPLOYEES
As of December 31, 1998, the Corporation had twenty-one salaried
employees, including six employees of Global Telecommunications and ten
employees of Westland Associates. Three of the Corporation's employees are
executive officers.
Employee distribution by industry segment is as follows:
<TABLE>
<CAPTION>
Number
Segment of employees
<S> <C>
Finance and lending 5
Group purchasing services 10
Other business 6
</TABLE>
ITEM 2. PROPERTIES
The executive office of the Corporation is located at 9665 Wilshire
Boulevard, Suite M-10, Beverly Hills, California 90212, telephone (310)
278-1930. The Corporation's executive office is leased for a five year term
ending in October 2002. These facilities also serve as the business location
for all finance and lending activities.
The Corporation's wholly-owned subsidiary, Westland Associates, conducts
its operations from a 3,528 square-foot leased office suite located in
Anaheim, California. The lease is for a five year term expiring in April
2003. Westland Associates previously owned and occupied an 11,000 square-foot
facility in Santa Fe Springs, California used for office and warehouse space.
This facility was sold in March 1998.
The Corporation considers its facilities adequate to meet its current
needs.
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ITEM 3. LEGAL PROCEEDINGS
During 1998, the Corporation received $52,000 in net proceeds from a
settlement of claims asserted on behalf of the Corporation and similarly
situated parties, in a class action lawsuit against Drexel Burnham Lambert
Inc., Michael Milken and other related parties in an action filed in the Los
Angeles County Superior Court in 1989. The action involved claims of various
violations of federal and state securities laws by the defendants. The
$52,000 represents a recovery of approximately $80,000, less court directed
attorneys' fees of approximately $28,000. From 1993 through 1997, the
Corporation received approximately $23.3 million in net proceeds, which
represents a recovery of approximately $35.9 million, less court directed
attorneys' fees of approximately $12.6 million.
A wholly-owned subsidiary of the Corporation was a party to litigation
entitled BURES V. SILVER RIDGE APARTMENTS, LTD. filed in 1993 in the Eighth
Judicial District Court of Clark County, Nevada. The case related to an
apartment project that was sold in October, 1993 by a wholly-owned subsidiary
of the Corporation, as successor general partner. The prior general partner
had conveyed a security interest in its partnership interest to the
Corporation's wholly-owned subsidiary. After a default on the secured
obligation, the Corporation's wholly-owned subsidiary exercised its rights as
a secured creditor, and, as a result, the partnership interest was acquired
by the Corporation's wholly-owned subsidiary, which became the successor
general partner. The plaintiff, who was a creditor of the prior general
partner, alleged that he acquired a 69% interest in the partnership prior to
the sale of the project as a result of judgment enforcement proceedings
against the prior general partner. The lawsuit was dismissed for lack of
prosecution in August, 1998 and cannot be refiled.
In November 1996, the Corporation made a loan of $1,050,000 to a
borrower and took as security for the loan a mortgage on certain real
property, title to which was held by a trust of which the borrower was
trustee. On October 9, 1997, the Corporation commenced foreclosure
proceedings on the collateral, in an action entitled WESTMINSTER CAPITAL,
INC. V. SUSAN WAGNER TRENHAM, INDIVIDUALLY, AND SUSAN WAGNER TRENHAM, AS
TRUSTEE, in the Court of Common Pleas, County of Berkeley, South Carolina,
seeking to sell the collateral and apply the proceeds of sale to pay the
principal and unpaid interest on the note. On January 2, 1998, certain
beneficiaries of the trust that holds title to the collateral filed a Motion
to Intervene seeking to prevent the foreclosure, alleging that the
Corporation acted improperly in lending money to the borrower, and accepting
as security real property owned by the trust of which the borrower was the
trustee. In a separate action entitled JOSEPH READ, PAUL READ, SEPHRA READ
AND LEAH READ BARKOWITZ, AS BENEFICIARIES OF THE READ FAMILY TRUST V. SUSAN
WAGNER TRENHAM, INDIVIDUALLY, AND SUSAN WAGNER TRENHAM, AS TRUSTEE OF THE
READ FAMILY TRUST, AND WESTMINSTER CAPITAL, INC., filed January 2, 1998 in
the Court of Common Pleas, County of Berkeley, South Carolina, the
beneficiaries asserted causes of action similar to those set forth in the
Motion to Intervene in the foreclosure action. The beneficiaries subsequently
filed a motion to consolidate the foreclosure proceedings with the case
initiated by the beneficiaries. The Corporation agreed to allow the
beneficiaries to intervene in the foreclosure action in exchange for the
beneficiaries' agreement to dismiss the companion case filed by the
beneficiaries and to submit to the jurisdiction of the court hearing the
foreclosure case. Thereafter, the parties filed various motions. On January
29, 1999, the court hearing the foreclosure action acted upon the motions and
denied Mrs. Trenham's motion to set aside the default previously entered
against her, denied the beneficiaries' motion
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for a jury trial and denied the Corporation's motion for summary judgment. A
date for trial of the claims asserted by the beneficiaries has not yet been
set.
In accepting the collateral as security for the note, the Corporation
relied on the trust documents granting the borrower absolute authority to
mortgage the collateral and obtained title insurance for the mortgage it
received. The Corporation believes that it acted properly in dispersing the
loan proceeds to the borrower. The Corporation intends to pursue vigorously
its right to the collateral. The title insurance company which insured the
mortgage has appeared in the pending actions to defend on the issue of the
trustee's lack of authority.
In connection with the Corporation's efforts to foreclose on real estate
collateral for a defaulted loan in the principal amount of $520,000, the
debtor, Rousey Real Estate Investments, Inc., filed for protection under
Chapter XI of the Bankruptcy Act on June 10, 1998 and a stay was issued
preventing the Corporation from proceeding with a trustee's sale of the real
estate collateral. On February 23, 1999, the Bankruptcy court rejected the
debtor's plan of reorganization and lifted the stay, thus permitting the
trustee's sale to proceed. On March 15, 1999, the debtor filed an appeal of
the Bankruptcy Court's decision with the Federal District Court. No date has
been set for a hearing with respect to the appeal.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
EXECUTIVE OFFICERS OF REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following
information is included as an unnumbered item in Part I of the Report in lieu of
being included in the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 27, 1999.
The following table sets forth certain information with respect to the
executive officers of the Corporation:
NAME AGE POSITION
---- --- --------
William Belzberg 66 Chairman of the Board
Chief Executive Officer
Keenan Behrle 56 Executive Vice President
Chief Financial Officer
Rui Guimarais 38 Vice President - Finance
The term of office of the officers may be terminated at any time by the
Board of Directors.
Mr. William Belzberg has served as Chairman of the Board of Directors of
the Corporation since 1977. Mr. Belzberg was also President and Chief Executive
Officer of the Corporation in 1987 and 1988 and has served as Chief Executive
Officer since September 1990.
Mr. Keenan Behrle became Executive Vice President and Chief Financial
Officer of the Corporation in February 1997. From November 1993 to February
1997, Mr. Behrle was engaged in real estate development activities for his own
account. From 1991 to November 1993, Mr. Behrle was President and Chief
Executive Officer of Metropolitan Development, Inc., a real estate development
company located in Los Angeles, California. Mr. Behrle has been a director of
the Corporation since 1985.
Mr. Rui Guimarais has served as Vice President - Finance of the Corporation
since May 1998. From February 1993 until he joined the Corporation, Mr.
Guimarais was a Vice President at Showscan Entertainment Inc., ("Showscan") a
public company. Mr. Guimarais held several management positions at Showscan
including Vice President of Film and Theatre Operations and Financial Controller
and Director of Theatre Operations. Mr. Guimarais is a Certified Public
Accountant and Chartered Accountant (South Africa).
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE CORPORATION'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Corporation's common stock is traded on the Pacific Stock Exchange
under the symbol "WI." The following table sets forth the range of high and low
sales prices for the common stock of the Corporation for the periods indicated,
as reported by the Pacific Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
----
Fourth Quarter $ 2 13/16 $2 5/8
Third Quarter 3 0/8 2 5/8
Second Quarter 3 0/8 2 5/8
First Quarter 3 5/8 2 3/8
1997
----
Fourth Quarter $ 2 1/2 $2 1/4
Third Quarter 2 3/8 2 1/4
Second Quarter 2 5/16 1 13/16
First Quarter 2 5/8 2 1/8
</TABLE>
The Corporation had approximately 967 holders of record of its common stock
as of February 24, 1999.
The Corporation has not paid cash dividends since 1989 and intends to
retain all excess cash resulting from its business operations, if any, for
future acquisitions and investments.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Total assets $42,597 $34,870 $33,212 $28,199 $29,473
Cash and cash equivalents 291 1,738 2,310 1,715 845
Loans receivable, net 9,783 7,081 4,636 2,513 716
Securities available-for-sale 25,982 17,655 22,502 21,747 25,402
Telephone systems, net 392 834 1,080 1,333 1,579
Total liabilities 10,750 8,902 7,745 5,099 7,990
Shareholders' equity 31,847 25,968 25,467 23,100 21,483
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
EARNINGS DATA:
Total revenues $ 30,925 $ 7,996 $ 5,234 $ 4,596 $ 6,706
Interest income 2,502 2,026 2,228 1,467 1,139
Loan fees 49 639 751 320 75
Lawsuit settlement, net 52 950 813 1,209 3,528
Sales to auto dealers 18,851 2,711 - - -
Telephone system revenue 1,394 1,444 1,528 1,522 1,102
Gain (loss) on sale of securities 66 332 (3) 15 -
Interest on tax refund 2,644 - - - -
Gain (loss) from equity investment 5,887 (686) (169) - -
Refund of litigation costs - - - - 757
Net income (loss) 5,827 1,371 1,571 1,308 (1,608)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PER SHARE DATA:
Net income (loss) per share $ .74 $ .17 $ .20 $ .17 $ (.21)
Book value per share (end of period) $4.06 $3.31 $3.25 $2.96 $2.75
Weighted average diluted
shares outstanding 7,928 7,866 7,822 7,840 7,815
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
At December 31, 1998, the Corporation's principal assets identified by
segment consisted of the following:
FINANCE AND SECURED LENDING - Securities available-for-sale; loans which are
generally secured by real estate, personal property or other collateral; limited
partnerships that invest in securities; and cash and cash equivalents.
GROUP PURCHASING - A 100% ownership interest in the capital stock of Westland
Associates, a company which performs group purchasing of goods and services for
new car dealers in California, Arizona, and Nevada (See "Business - Westland
Associates"). Westland Associates' assets include accounts receivable from
customers, office furniture and equipment and other assets including cash and
cash equivalents.
OTHER BUSINESS - A majority ownership interest in Global Telecommunications, a
limited partnership engaged in constructing and operating local and long
distance telephone services for military residential quarters (See
"Business-Telephone Company"). Global Telecommunications assets include
telephone systems, accounts receivable and cash and cash equivalents.
Revenues, operating profits and other financial data of the Corporation's
industry segments for the three years ended December 31, 1998, are set forth in
Note 9 of Notes to Consolidated Financial Statements.
The Corporation's primary sources of income during the year ended December
31, 1998 included proceeds from the sale of the Corporation's equity investment
in Pink Dot, the receipt of a one-time settlement from the Franchise Tax Board
of the State of California, interest on securities available-for-sale, interest
earned on its loan portfolio, income from Global Telecommunications and income
from a lawsuit settlement. The Corporation's wholly-owned subsidiary, Westland
Associates, generated a loss before income taxes of $716,000 for the year ended
December 31, 1998, inclusive of goodwill amortization. The Corporation also
incurred a loss from partnerships that invest in securities.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues were $30,925,000 for the year ended December 31, 1998 compared to
$7,996,000 for the year ended December 31, 1997. The increase in revenues of
$22,929,000 was due to several factors, including the acquisition of Westland
Associates in 1997 which generated revenues of $18,851,000 for 1998, compared to
$2,711,000 for the period from date of acquisition on November 12, 1997 through
December 31, 1997, the sale of the Corporation's equity interest in Pink Dot
which generated a gain in the amount of $5,887,000, and the California Franchise
Tax refund claim settlement which resulted in interest received of $2,644,000.
15
<PAGE>
Interest on loans was $1,167,000 for the year ended December 31, 1998
compared to $1,094,000 during the year ended December 31, 1997 because of the
increase in average loans outstanding. Interest on securities available-for-sale
and money market funds was $1,335,000 for the year ended December 31, 1998
compared to $932,000 for the prior year due to the higher average invested funds
during the current year. Loan fee revenue was $49,000 for the year ended
December 31, 1998 compared to $639,000 during the year ended December 31, 1997.
In 1997, loan fees included a fee of $350,000 received in connection with the
early payoff of a loan and a fee of $187,000 received in connection with a
financing accommodation.
For the year ended December 31, 1998, the Corporation recorded unrealized
losses on limited partnerships that invest in securities of $299,000 as compared
to unrealized profits of $529,000 for the year ended December 31, 1997. These
limited partnerships invest in equity and debt securities and the Corporation
records gains and losses on these investments based upon the equity method of
accounting.
The Corporation realized gains on the sale of securities of $66,000 for the
year ended December 31, 1998 compared to gain of $332,000 in the prior year.
Lawsuit settlement recoveries net of court directed attorney's fees in the
class action lawsuit against Drexel Burnham Lambert, Inc. were $52,000 for the
year ended December 31, 1998 compared to $950,000 for the year ended December
31, 1997. While additional settlement payments may be received in this
litigation over time, there is diminishing likelihood that any such payments
will be received and if received, that the amounts received will be as great as
amounts previously received.
Telephone system revenues decreased from $1,444,000 for the year ended
December 31, 1997 to $1,394,000 for the year ended December 31, 1998. Revenues
for 1998 included a gain of $229,000 arising from receipt of a settlement
payment on cancellation of the service contract for the Miramar Naval Air
Station effective June 30, 1998. Revenues for the remaining three bases were
$893,000 for the year ended December 31, 1998 compared to $965,000 for the year
earlier period. Lower long distance rates and the loss of business due to
competition from prepaid calling cards were the significant reasons for this
decline. Operating expenses decreased from $1,338,000 for the year ended
December 31, 1997 to $1,141,000 for the year ended December 31, 1998, due
primarily to the termination of the contract for the Miramar base effective June
30, 1998. Operating expenses for the remaining three bases were $881,000 for
the year ended December 31, 1998 compared to $918,000 for the year earlier
period. This reduction was due to lower repair charges and cost efficiencies.
Revenues of $18,851,000 generated by Westland Associates for the year ended
December 31, 1998 were offset by direct costs of $17,817,000, resulting in gross
profit before operating expenses of $1,034,000. Operating expenses for the year
were $1,750,000 and are included in general and administrative expenses. The net
operating loss of $716,000 includes restructuring related expenses of
approximately $500,000, operating costs associated with the introduction of a
new product line of $83,000, and amortization of acquisition related goodwill of
$93,000.
Other (loss) income includes a permanent impairment write-down of $250,000
on an investment for the year ended December 31, 1998. Excluding this
write-down, other income
16
<PAGE>
was $29,000 for the year ended December 31, 1998 compared to $51,000 for the
year ended December 31, 1997.
General and administrative expenses increased $2,259,000 from $1,790,000
for the year ended December 31, 1997 to $4,049,000 for the year ended December
31, 1998. A significant portion of this increase, or $1,517,000, was
attributable to Westland Associates, which was acquired by the Corporation in
November 1997. Legal, accounting and tax advice relating to the sale of the
Corporation's interest in Pink Dot, collection of the promissory note evidencing
the purchase price, evaluation of potential business transactions and planning,
totaling $373,000, increased payroll costs due to increases in compensation,
bonuses paid and the addition of a financial executive totaling $206,000, and an
increase in bad debt expense of $85,000, contributed to this increase. The
balance related to the Corporation's expanded business activities.
Although the Corporation had income before taxes of $7,918,000 for the year
ended December 31, 1998, an income tax provision of $2,040,000 was recorded for
this period, representing a 25.8% effective tax rate compared to an effective
tax rate of 40% in 1997. The difference between the tax provision recorded and
the amount based on statutory rates is mainly due to the $1,686,000 tax refund
received from the California Franchise Tax Board in settlement of the
Corporation's refund claim, which was recorded as a reduction to the income tax
provision.
Net income for the year ended December 31, 1998 was $5,827,000 compared to
$1,371,000 for the year ended December 31, 1997. Basic earnings per share were
$0.74 for the year ended December 31, 1998 compared to $0.17 for the year ended
December 31, 1997. Diluted earnings per share were $0.73 for the year ended
December 31, 1998 versus $0.17 for the year ended December 31, 1997. Weighted
average basic shares were 7,835,000 for both 1998 and 1997. The weighted average
diluted shares outstanding were 7,928,000 for the year ended December 31, 1998
compared to 7,866,000 for the prior year.
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues for the year ended December 31, 1997 were $7,996,000 as compared
to $5,234,000 for the year ended December 31, 1996. The increase in revenues
resulted primarily from the Corporation's acquisition of Westland Associates on
November 12, 1997, which generated revenues of $2,711,000 during the period from
the date of acquisition through December 31, 1997. In addition, there were gains
on sales of securities of $332,000 in 1997 versus a loss of $3,000 in 1996;
there were unrealized gains on limited partnerships that invest in securities of
$529,000 in 1997 with no such gains recorded in 1996; and there was an increase
of $137,000 in lawsuit settlement recoveries in the year ended December 31,
1997. Partially offsetting these favorable impacts on revenues in 1997, were a
$517,000 greater loss recorded in 1997 compared to 1996 on the Corporation's
equity investment in Pink Dot, a $112,000 decrease in loan fees, a $112,000
decrease in interest on securities available-for-sale and money market funds, a
$90,000 decrease in interest on loans, an $84,000 decrease in telephone system
revenue and a $35,000 decrease in other income.
17
<PAGE>
The revenues of $2,711,000 generated by Westland Associates were offset
by direct costs of $2,539,000, resulting in gross profit before operating
expenses of $172,000. Operating expenses for the period were $233,000 and are
included in general and administrative expenses.
The $332,000 gain on sale of securities in 1997 resulted from a gain of
$186,000 on the sale of a convertible debenture, gains of $146,000 on sales
of stock, and gains of $100,000 from the sales of certain of the
Corporation's U.S. Treasury and Agency securities. These gains were partially
offset by the recording of a permanent impairment write-down of $100,000 on
an equity security. In 1996, gains of $147,000 on the sale of various
securities were more than offset by the recording of a permanent impairment
write-down of $150,000 on an equity security.
During 1997, the Corporation recorded unrealized gains on limited
partnerships that invest in securities of $529,000 with no such gains
recorded in 1996. These limited partnerships invest in equity and debt
securities and the Corporation records gains and losses on these investments
based upon the equity method of accounting.
The increase of $137,000 in lawsuit settlement recoveries reflects
receipt of $950,000, net of court related legal costs, from the Drexel
Burnham Lambert, Inc. litigation during the year ended December 31, 1997, as
compared to $813,000, net of court related legal costs, received during the
year ended December 31, 1996.
The Corporation recorded a loss of $686,000 in 1997 in connection with
its 40% equity investment in Pink Dot as compared to a loss of $169,000 in
1996. As this loss exceeded the carrying amount of the Corporation's
investment account and goodwill related to Pink Dot, the carrying amount of
the loans receivable from Pink Dot was reduced by $391,000.
Loan fees of $639,000 in 1997 included a fee of $350,000 received in
connection with the early payoff of a loan and a fee of $187,000 received in
connection with a financing accommodation. Loan fees of $751,000 in the year
earlier period included fees of approximately $700,000 that actually related
to fees due in 1995 and 1994 but that were not recognized as income until
1996 because of severe delinquency problems and doubt as to ultimate
collectibility.
Interest on loans decreased from $1,184,000 in 1996 to $1,094,000 in
1997. Although the balance of loans receivable increased significantly from
December 31, 1996 to December 31, 1997, the amount of interest earned by the
Corporation during 1996 was higher than in 1997 primarily because the
effective interest rates on certain loans outstanding in 1996 were
significantly higher than interest rates on loans outstanding during 1997. In
addition, a significant portion of the loans that were outstanding as of
December 31, 1997 were funded during the latter part of the year.
Interest on securities available-for-sale and money market funds
decreased from $1,044,000 during 1996 to $932,000 during 1997. Although the
amortized cost of U.S. Treasury and Agency securities held by the Corporation
increased from $16,723,000 as of December 31, 1996 to $17,387,000 as of
December 31, 1997, the average monthly balance of such securities held
decreased from $19,380,000 in 1996 to $16,084,000 in 1997.
18
<PAGE>
The $84,000 decline in telephone system revenues resulted primarily from
a temporary loss of some of the military personnel while residential quarters
were being rebuilt by the Navy at two of the bases served by Global
Telecommunications. Although Global Telecommunication's revenues declined
from 1996 to 1997, its expenses remained relatively unchanged due to the fact
that the most significant decline in revenues occurred at a base where long
distance royalties are not incurred.
General and administrative expenses increased $366,000 from $1,424,000
in 1996 to $1,790,000 in 1997. The major portion of this increase, or
$233,000, resulted from the Corporation's acquisition of Westland Associates.
The remaining $133,000 of the increase resulted from the Corporation's
increased operating activities and the corresponding need to increase its
overhead.
The Corporation's effective tax rate increased from 34% in 1996 to 40%
in 1997. The increase in the effective tax rate was due to increased taxable
interest income in 1997 as compared to 1996 because the Corporation held
tax-free state and municipal securities for a portion of 1996 and did not
during any of 1997.
Net income for the year ended December 31, 1997 was $1,371,000 as
compared to $1,571,000 for the year ended December 31, 1996. Both basic and
diluted earnings per share were $0.17 for the year ended December 31, 1997 as
compared to $0.20 for the year ended December 31, 1996. The lower earnings
per share in 1997 reflects the lower net income in 1997, as well as higher
weighted average shares outstanding in 1997.
LOANS RECEIVABLE AND PAST DUE LOANS
The Corporation's loans receivable at December 31, 1998 were $9,783,000
as compared to $7,081,000 at December 31, 1997. During the year, $1,584,000
was advanced on existing loan commitments. Additionally on August 6, 1998,
the Corporation made a loan of $1,100,000, secured both by a second trust
deed on certain real estate, and by certain other collateral. The loan
requires monthly payments of interest only at 15% per annum and the repayment
of principal on August 1, 1999.
On February 26, 1998, the Corporation sold the 40% of the issued and
outstanding stock of Pink Dot owned by the Corporation to the majority owner
of Pink Dot ("the buyer") for a purchase price of $6,000,000. The purchase
price originally evidenced by the buyer's promissory note in the principal
amount of $6,000,000 was paid in full together with accrued interest of
$102,000 on June 2, 1998. In connection with the sale of the Corporation's
Pink Dot stock, two outstanding promissory notes payable to the Corporation
by Pink Dot were replaced by two new promissory notes. One outstanding
promissory note in the original principal amount of $2,500,000 together with
accrued but unpaid interest through February 26, 1998 in the amount of
$303,000, was replaced by a note in the principal amount of $2,478,000 net of
discount of $324,000. The second outstanding promissory note in the nominal
original principal amount of $1,000,000, of which $415,000 had been advanced
through February 26, 1998, together with accrued but unpaid interest in the
amount of $21,000, was replaced with a note in the principal amount of
$382,000 net of discount of $54,000.
19
<PAGE>
Partially offsetting these increases in the Corporation's loans
receivable portfolio, were principal collected on existing loans of $233,000
and loan payoffs of $159,000 on loans secured by auto leases.
At December 31, 1998, certain loans were in default as to the payment of
principal and interest. Once a loan goes into default, the Corporation ceases
to accrue interest on the loan. When necessary, the Corporation also records
reserves for impaired principal, as well as previously accrued interest.
At December 31, 1998, two loans secured by trust deeds or mortgages in
the principal amounts of $1,050,000 and $520,000, respectively, were in
default. The Corporation commenced foreclosure proceedings in October 1997 on
the loan in the principal amount of $1,050,000, and commenced foreclosure
proceedings in February 1998 on the loan in the principal amount of $520,000.
The Corporation has discontinued the accrual of interest on these loans since
the respective foreclosures were commenced. Management believes that the real
estate collateral for the respective loans will be sufficient to cover the
Corporation's recorded investment on each loan. See Item 3 - "Legal
Proceedings", for additional information on these loans.
Loan originations occur as opportunities arise which management of the
Corporation believes to be attractive after considering the proposed terms,
including yield, duration, collateral coverage and qualifications of the
borrower. For further information on loan collateral see Note 5 of Notes to
Consolidated Financial Statements.
LIQUIDITY
The Corporation's cash and cash equivalents decreased by $1,447,000
during the year ended December 31, 1998. The Corporation's sources of cash
during 1998 were $7,843,000 from operating activities, $1,069,000 from the
sale of property and equipment including $605,000 from the sale of a building
owned by Westland Associates and $409,000 from the termination and settlement
of the service contract for the Miramar Naval Air Station, and $6,458,000
from principal collected on loans receivable. The Corporation's primary uses
of cash during 1998 were $8,190,000 for the net change in its investment
security portfolio in that purchases of securities of $41,668,000 exceeded
sales of securities of $33,478,000; $8,592,000 for loan originations and
advances; and $19,000 for the purchase of property and equipment. The
Corporation held U.S. Treasury and Agency securities with a market value of
$25,728,000 at December 31, 1998.
The Corporation continues to seek investments in or acquisitions of
other businesses. No assurances can be given that any further acquisitions or
investments will be made or, if made, that they will be profitable. On
January 1, 1999, the Corporation exercised its option to convert a
convertible debt obligation into a 50% equity interest in Touch Controls. On
January 11, 1999, the Corporation acquired an 80% interest in One Source
Industries, LLC. For further information on these transactions see Notes 5
and 21 of Notes to Consolidated Financial Statements.
In the opinion of management, the Corporation has sufficient cash and
liquid assets to fund its growth and operating plans for the foreseeable
future.
20
<PAGE>
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and process data fields containing a two digit
year is commonly referred to as the Year 2000 ("Y2K") issue. As Y2K
approaches, some systems may be unable to accurately process certain
information because some computer programs have time-sensitive software that
recognizes a date using "00" as the year 1900 rather than the year 2000. This
software could cause a system failure or miscalculations causing disruptions
of operation, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Corporation has completed an assessment of its existing hardware and
software systems and after a review of all material issues, one of which
being the year 2000 issue, has determined which systems need to be replaced
or upgraded. The Corporation has contracted to spend approximately $160,000
to date in system replacements and upgrades, most of which was incurred in
the ordinary course of business.
The remaining upgrades are expected to be completed not later than June
30, 1999, at an estimated cost of $55,000. The Corporation believes that with
conversions to new software, the year 2000 issue will not pose significant
operational problems for its computer systems.
The cost of the Y2K project and the date on which the Corporation will
complete the conversion are based on management's best estimates, which are
derived utilizing numerous assumptions of future events, including the
continued availability of certain resources and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated.
The Corporation has not fully determined the extent to which its
customers and vendors systems may not be compliant. There can be no assurance
that the systems of other companies with which the Corporation deals will be
timely converted or that such failure to convert by another company would not
have an adverse effect on the Corporation's financial position. While the
Corporation believes that it will be able to manage its Y2K program without
any material adverse effect on its financial condition, results of operations
or cash flows, no assurance can be given that any or all of the Corporation's
systems will be Y2K compliant, or that the impact of any failure to achieve
substantial Y2K compliance will not have a material adverse effect on the
Corporation's financial condition, results of operations or cash flows.
The Corporation is developing contingency plans to alter business
relationships in the event certain third parties fail to become Y2K compliant.
With the exception of the historical information, the matters discussed
above include forward-looking statements that involve risks and uncertainties.
21
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
Portions of this Annual Report may contain "forward-looking statements"
within the meaning of the Private Securities Reform Act of 1995. The reader
is cautioned that all forward-looking statements are necessarily speculative
and there are certain risks and uncertainties that could cause actual events
or results to differ materially from those referred to in such
forward-looking statements. The discussion below, together with portions of
the discussion elsewhere in this annual report, highlight some of the more
important risks identified by management of the Corporation but should not be
assumed to be the only things that could affect future performance.
RISKS ASSOCIATED WITH ACQUISITIONS
On January 11, 1999, the Corporation acquired an 80% interest in One
Source Industries, LLC. Acquisitions involve numerous risks, including:
- Management must devote its attention to assimilating the acquired business
which diverts its attention from other business concerns;
- Acquisitions involve entry into new markets in which the Corporation has
limited prior experience;
- Key employees of an acquired business may leave following the acquisition;
and
- Acquired companies have self-contained management information and
accounting systems.
The Corporation has devoted substantial time and resources to integrate
acquired businesses, and will be required to devote substantial time and
resources to integrate any other businesses that may be acquired in the
future. Possible future acquisitions could cause the Corporation to incur
additional debt, contingent liabilities and amortization expenses relating to
goodwill and other intangible assets. These factors could have an adverse
affect on the Corporation's financial condition and operating results.
The Corporation does not presently have any arrangements or
understandings to acquire any company or business, and the Corporation cannot
guarantee that it will be able to identify or complete any acquisition in the
future. If the Corporation makes additional acquisitions, there can be no
assurance that the Corporation will realize any anticipated benefits.
COMPETITION
Competition is intense in each of the markets in which the Corporation
competes. In addition to direct competition, the Corporation faces
significant indirect competition for customers. Many of the Corporation's
competitors have better name recognition, and substantially greater financial
and other resources than the Corporation.
22
<PAGE>
DEPENDENCE ON MAJOR CUSTOMERS AND VENDORS
ONE SOURCE - The Corporation recently acquired an 80% interest in One
Source. One Source does approximately 58% of its current business with two
customers. A loss of either customer would negatively impact future revenues
and profitability.
WESTLAND ASSOCIATES - The group purchasing business of Westland
Associates is dependent upon continuing favorable relationships with key
vendors, who provide a service to existing and future customers. There is a
risk that without such vendor support and cooperation, Westland Associates
could lose customers to other vendors and competitors.
GLOBAL TELECOMMUNICATIONS - The business of Global Telecommunications is
dependent on occupancy of the military bases that it serves for its revenues.
Any event that involves a major deployment of military personnel from these
bases would negatively impact revenues and profitability.
LOANS
Loan originations occur as opportunities arise which management of the
Corporation believes are attractive after considering the proposed terms,
including yield, duration, collateral coverage and qualifications of the
borrower.
Despite management's best attempts to mitigate the risks associated with
its loan portfolio, there are numerous events and circumstances that cannot
be reasonably foreseen, and which may impact the ability to recover the
principal and accrued interest on such loans.
23
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
Information relating to qualitative disclosure about market risk is set forth
under the caption "Finance and Secured Lending" in Item 1 - "Business", Item
7 -"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and in Note 1 of the Notes to Consolidated Financial
Statements. Such information is incorporated herein.
The Corporation does not use derivative financial instruments in its
investment portfolio. The Corporation places its investments in instruments
that meet high credit quality standards; the policy also limits the amount of
credit exposure to any one issue, issuer and type of instrument.
The table below provides information about the Corporation's investment
portfolio. For securities available-for-sale, the table presents principal
cash flows and related weighted average interest rates by expected maturity
dates. The investments in partnerships that invest in securities are callable
at the option of the Corporation at various specified dates in any year.
The Corporation's investment policy requires that all investments mature in
five years or less. All investments are considered to be other than trading
investments.
Principal Amounts by expected maturity for each of the five years ending
December 31, is detailed below.
(Dollars in thousands, except interest rates)
<TABLE>
<CAPTION>
FAIR
VALUE
DEC 31,
FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 TOTAL 1998
----------- ----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents $ 291 $ 291 $ 291
average interest rate 2.46% 2.46%
Securities available-for-
sale $ 10,528 $15,552 $ 26,080 $25,728
average interest rate 5.89% 5.41% 5.58%
Investments in limited
partnerships that
invest in securities $ 1,996 $ 1,996 $ 1,996
average interest rate Note 1
Loans $ 5,463 $ 3,719 $ 601 $ 9,783 $ 9,783
average interest rate 13.80% 13.79% 8.75% 13.49%
</TABLE>
Note 1 - These investments are subject to equity price risk. The table above
assumes that such investments will be liquidated in 1999.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Westminster Capital, Inc.
Beverly Hills, California
We have audited the accompanying consolidated statements of financial
condition of Westminster Capital, Inc. and its subsidiaries (the
"Corporation") as of December 31, 1998 and 1997 and the related consolidated
statements of operations, comprehensive income, shareholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements of the Corporation for the year ended December 31, 1996
were audited by other auditors whose report, dated March 1, 1997, expressed
an unqualified opinion on those statements.
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 Westminster Capital, Inc. and
its subsidiaries as of December 31, 1998 and 1997 and the results of their
operations, comprehensive income and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Los Angeles, California
March 15, 1999
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Westminster Capital, Inc.
Beverly Hills, California:
We have audited the accompanying consolidated statements of operations,
comprehensive income, shareholders' equity, and cash flows of Westminster
Capital, Inc. and subsidiaries (the "Corporation") for the year ended December
31, 1996. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Westminster Capital, Inc. and subsidiaries for the year ended
December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Los Angeles, California
March 1, 1997
26
<PAGE>
WESTMINSTER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 291,000 $ 1,738,000
Securities available-for-sale, at fair value 25,982,000 17,655,000
Investments in limited partnerships
that invest in securities 1,996,000 2,314,000
Other investments 500,000 750,000
Loans receivable, net 9,783,000 7,081,000
Accounts receivable 660,000 1,002,000
Accrued interest receivable 937,000 801,000
Income taxes receivable 260,000 -
Real estate acquired through foreclosure 833,000 833,000
Telephone systems, net 392,000 834,000
Property and equipment, net 147,000 710,000
Goodwill, net 788,000 881,000
Other assets 28,000 271,000
--------------------------------------------------------
TOTAL ASSETS $42,597,000 $34,870,000
--------------------------------------------------------
--------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Accounts payable $ 409,000 $ 669,000
Accrued expenses 2,091,000 1,915,000
Obligations under capital leases 101,000 -
Mortgage payable - 655,000
Deferred income taxes 8,006,000 5,366,000
Minority interest in limited partnership 143,000 297,000
--------------------------------------------------------
TOTAL LIABILITIES 10,750,000 8,902,000
--------------------------------------------------------
--------------------------------------------------------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value: 30,000,000 shares
Authorized: 7,835,000 shares issued
and outstanding in 1998 and 1997 7,835,000 7,835,000
Capital in excess of par value 55,943,000 55,943,000
Accumulated deficit (31,996,000) (37,823,000)
Accumulated other comprehensive income 65,000 13,000
--------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 31,847,000 25,968,000
--------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $42,597,000 $34,870,000
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
WESTMINSTER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
REVENUES: 1998 1997 1996
- --------- ---- ---- ----
<S> <C> <C> <C>
Interest on loans $ 1,167,000 $ 1,094,000 $ 1,184,000
Loan fees 49,000 639,000 751,000
Interest on securities available-
for-sale and money market funds 1,335,000 932,000 1,044,000
Unrealized (losses) gains on limited
partnerships that invest in securities (299,000) 529,000 -
Gain (loss) on sale of securities
available-for-sale, net 66,000 332,000 (3,000)
Lawsuit settlement, net 52,000 950,000 813,000
Telephone system revenue 1,394,000 1,444,000 1,528,000
Sales to auto dealers 18,851,000 2,711,000 -
Gain (loss) from equity investment 5,887,000 (686,000) (169,000)
Interest on tax refund 2,644,000 - -
Other (loss) income (221,000) 51,000 86,000
---------------------- ---------------------- ---------------------
Total Revenues 30,925,000 7,996,000 5,234,000
---------------------- ---------------------- ---------------------
EXPENSES:
Telephone time charges 604,000 733,000 725,000
Cost of sales to auto dealers 17,817,000 2,539,000 -
Other telephone system charges 537,000 605,000 614,000
General and administrative 4,049,000 1,790,000 1,424,000
---------------------- ---------------------- ---------------------
Total Expenses 23,007,000 5,667,000 2,763,000
---------------------- ---------------------- ---------------------
INCOME BEFORE INCOME
TAXES AND MINORITY INTEREST 7,918,000 2,329,000 2,471,000
INCOME TAX PROVISION (2,040,000) (932,000) (840,000)
MINORITY INTEREST IN INCOME
OF CONSOLIDATED PARTNERSHIP (51,000) (26,000) (60,000)
---------------------- ---------------------- ---------------------
NET INCOME $ 5,827,000 $ 1,371,000 $ 1,571,000
---------------------- ---------------------- ---------------------
---------------------- ---------------------- ---------------------
Net Income Per Common Share:
Basic $.74 $.17 $.20
Diluted .73 .17 .20
---------------------- ---------------------- ---------------------
---------------------- ---------------------- ---------------------
Weighted Average Shares Outstanding:
Basic 7,835,000 7,835,000 7,818,000
Diluted 7,928,000 7,866,000 7,822,000
---------------------- ---------------------- ---------------------
---------------------- ---------------------- ---------------------
</TABLE>
See accompanying notes to consolidated financial statements
28
<PAGE>
WESTMINSTER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
------------------------------- OTHER
NUMBER CAPITAL IN COMPREHENSIVE
OF EXCESS OF ACCUMULATED INCOME
SHARES AMOUNT PAR VALUE DEFICIT NET OF TAXES TOTAL
--------------- --------------- --------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 7,815,000 $ 7,815,000 $ 55,946,000 $ (40,765,000) $ 104,000 $ 23,100,000
Net income - - - 1,571,000 - 1,571,000
Other comprehensive income -
change in unrealized holding
gains on securities available-
for-sale, net of taxes - - - - 779,000 779,000
Exercise of stock options 20,000 20,000 (3,000) - - 17,000
--------------- --------------- --------------- ---------------- --------------- --------------
BALANCE, DECEMBER 31, 1996 7,835,000 7,835,000 55,943,000 (39,194,000) 883,000 25,467,000
Net income - - - 1,371,000 - 1,371,000
Other comprehensive income -
change in unrealized holding
gains on securities available-
for-sale, net of taxes - - - (870,000) (870,000)
--------------- --------------- --------------- ---------------- --------------- --------------
BALANCE, DECEMBER 31, 1997 7,835,000 7,835,000 55,943,000 (37,823,000) 13,000 25,968,000
Net income - - - 5,827,000 - 5,827,000
Other comprehensive income -
change in unrealized holding
gains on securities available-
for-sale, net of taxes - - - - 52,000 52,000
--------------- --------------- --------------- ---------------- --------------- --------------
BALANCE, DECEMBER 31, 1998 7,835,000 $ 7,835,000 $ 55,943,000 $ (31,996,000) $ 65,000 $ 31,847,000
--------------- --------------- --------------- ---------------- --------------- --------------
--------------- --------------- --------------- ---------------- --------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
WESTMINSTER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,827,000 $ 1,371,000 $ 1,571,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan (recoveries) losses
and doubtful receivables, net (306,000) 92,000 50,000
Depreciation, amortization and accretion, net 202,000 33,000 40,000
(Gain) loss on sales of securities available
for sale (66,000) (332,000) 3,000
Gain on sale of property and equipment (183,000) - -
Unrealized losses (gains) on limited
partnerships that invest in securities 299,000 (529,000) -
Dividend income 17,000 - -
Loss from other investments 250,000 686,000 169,000
Change in assets and liabilities net of effects
from purchase of Westland Associates:
Decrease in accounts receivable 342,000 159,000 46,000
(Increase) decrease in accrued interest receivable (233,000) (422,000) 100,000
Increase in income tax receivable (260,000) - -
Net change in deferred income taxes 2,604,000 835,000 840,000
Decrease (increase) in other assets 243,000 (93,000) (2,000)
Decrease in accounts payable (260,000) (197,000) (104,000)
Increase in accrued expenses 176,000 305,000 302,000
Decrease in mortgage payable (655,000) - -
Net change in minority interest (154,000) (57,000) (111,000)
---------------------- ---------------------- ---------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,843,000 1,851,000 2,904,000
---------------------- ---------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (41,668,000) (31,791,000) (43,321,000)
Proceeds from maturities of securities - - 2,010,000
Proceeds from sale of property and equipment 1,069,000 - -
Proceeds from sales of securities 33,478,000 34,759,000 41,659,000
Purchases of limited partnership interests - (125,000) (1,660,000)
Loan originations and purchases (8,592,000) (8,302,000) (7,760,000)
Principal collected on loans receivable 6,458,000 5,519,000 6,046,000
Net change in due to broker - (1,200,000) 1,200,000
Proceeds from exercise of options - - 17,000
Payment for purchase of Westland Associates - (1,269,000) -
Purchase of equity investment - - (500,000)
Purchase of telephone systems and office equipment (19,000) (14,000) -
---------------------- ---------------------- ---------------------
NET CASH USED IN INVESTING ACTIVITIES (9,274,000) (2,423,000) (2,309,000)
---------------------- ---------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations (16,000) - -
---------------------- ---------------------- ---------------------
NET CASH USED IN FINANCING ACTIVITIES (16,000) - -
---------------------- ---------------------- ---------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,447,000) (572,000) 595,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,738,000 2,310,000 1,715,000
---------------------- ---------------------- ---------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 291,000 $ 1,738,000 $ 2,310,000
---------------------- ---------------------- ---------------------
---------------------- ---------------------- ---------------------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
WESTMINSTER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net income $5,827,000 $1,371,000 $1,571,000
----------------- ----------------- -----------------
Other comprehensive income/(loss), net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses)
arising during period 231,000 (553,000) 777,000
Less: reclassification adjustment
losses (gains) included in net
income 179,000 (317,000) (2,000)
----------------- ----------------- -----------------
Other comprehensive income (loss) 52,000 (870,000) 779,000
----------------- ----------------- -----------------
Comprehensive income $5,879,000 $501,000 $2,350,000
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
WESTMINSTER CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(See Independent Auditors' Report)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
The consolidated financial statements of Westminster Capital, Inc. (the
"Corporation") include the accounts of the Corporation and its wholly owned
subsidiaries, Westland Associates, Inc., Westminster Finance, Inc., FarWest
Financial Insurance Agency, Silver Ridge Apartments, G.P., Inc. and Silver
Ridge Apartments, L.P., Inc. Both Silver Ridge Apartments G.P., Inc. and
Silver Ridge Apartments L.P., Inc. have been inactive since 1993 and FarWest
Financial Insurance Agency has been inactive since 1991. The consolidated
financial statements also include the accounts of Global Telecommunications,
a limited partnership in which the Corporation has a 75% limited partnership
interest. All material intercompany accounts and transactions have been
eliminated in consolidation. References to the Corporation may include one or
more of its wholly owned subsidiaries.
On September 23, 1996, the Corporation acquired a 40% interest in Pink Dot,
Inc. ("Pink Dot"), a home delivery shopping company. The Corporation
accounted for this investment under the equity method of accounting until it
was sold on February 26, 1998 (see Note 11). Under the equity method of
accounting, income or loss is recognized in the Corporation's Statements of
Operations based on its proportionate share of Pink Dot's income or loss.
On November 12, 1997, the Corporation acquired 100% of the common stock of
Westland Associates, Inc. (Westland Associates), a corporation that provides
group purchasing of goods and services for new car dealers in California,
Arizona and Nevada. The acquisition of assets acquired at fair value of
$2,659,000 were represented by the assumption of liabilities of $1,390,000,
and a cash payment of $1,269,000 for the common stock, and was accounted for
using the purchase method of accounting.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents are short-term, highly
liquid investments with original maturities of three months or less. They are
readily convertible to cash and are so near maturity that no significant risk
of changes in value exists because of changes in interest rates.
SECURITIES AVAILABLE-FOR-SALE - The Corporation classifies its securities as
held to maturity securities, trading securities and available-for-sale
securities, as applicable. The Corporation did not hold any held to maturity
securities or trading securities at December 31, 1998 or 1997.
Securities available-for-sale are carried at estimated fair value. The
Corporation classifies investments as available-for-sale when it determines
that such securities may be sold at a future date or if there are foreseeable
circumstances under which the Corporation would sell such securities.
32
<PAGE>
Changes in the estimated fair value of securities available-for-sale are
included in shareholders' equity as unrealized holding gains or losses, net
of the related tax effect. Declines in the fair value of individual
securities available-for-sale below their cost that are other than temporary
are written-down to their estimated fair value with the resulting write-down
included in net income as realized losses. Realized gains or losses on
available-for-sale securities are computed on a specific identification
basis. Amortized premiums and accreted discounts are included in interest
income using the interest method.
INVESTMENTS IN LIMITED PARTNERSHIPS THAT INVEST IN SECURITIES - The
Corporation has invested in limited partnerships that invest in securities.
Each of these partnerships seeks to achieve returns through investments in
equity and debt securities following identified strategies. Gains or losses
on these investments are recorded based upon the equity method of accounting.
WARRANTS - In connection with the funding of loans and purchase of
securities, the Corporation has received warrants to purchase common stock of
the debtor. Certain warrants are not assigned a value as no estimated fair
value is readily determinable. Such warrants are recorded at their estimated
fair value when a market is established.
PURCHASE DISCOUNT ON AUTOMOBILE LEASING PORTFOLIO - The discount received on
the purchase of the automobile leasing portfolio is recognized in income over
the lives of the loans using a method which approximates the interest method.
All such loans were paid off as of December 31, 1998.
LOANS RECEIVABLE - Loans receivable are carried at the amount funded, less
principal payments received, adjusted for net deferred loan fees and
allowances for loan losses. Loans are identified as impaired when it is
deemed probable that the borrower will be unable to meet the scheduled
principal and interest payments under the terms of the loan agreement.
Impairment is generally measured based upon the estimated fair value of the
collateral. Allowances for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). The accompanying financial
statements require the use of management estimates to calculate allowances
for loan losses. These estimates are inherently uncertain and depend on the
outcome of future events. Management's estimates are based upon identified
losses on impaired loans; previous loan loss experience; current economic
conditions; the value of the collateral; and other relevant factors.
Management believes the level of the allowances at December 31, 1998 are
adequate to absorb losses inherent in the loan portfolio.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE - Real estate acquired through
foreclosure is recorded at estimated fair value at the time of the
foreclosure. Any subsequent operating expenses or income, reduction in
estimated values, and gains or losses on disposition of such property are
included in current operations.
33
<PAGE>
LONG-LIVED ASSETS - The Corporation evaluates the recoverability of the
carrying value of property and equipment and intangible assets in accordance
with the provisions of Statement of Financial Accounting Standards No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF. The
Corporation considers historical performance and anticipated future results
in its evaluation of potential impairment. Accordingly, when indicators of
impairment are present, the Corporation evaluates the carrying value of these
assets in relation to the operating performance of the business and future
and undiscounted cash flows expected to result from the use of these assets.
Impairment losses are recognized when the sum of future cash flows are less
than the assets'carrying value. No such impairment losses have been
recognized as of December 31, 1998.
TELEPHONE SYSTEMS - Telephone systems are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful life of the assets, which is seven years.
PROPERTY AND EQUIPMENT - In connection with the Corporation's purchase of
Westland Associates on November 12, 1997, the historical cost basis of
Westland Associates' land and building were adjusted to their estimated fair
value through a purchase accounting adjustment. The adjustment that was
recorded resulted in an increase in the carrying value of the land and
building of approximately $482,000, which was based upon an escrow and
subsequent sale of the land and building on March 11, 1998.
All other components of property and equipment are stated at cost, less
accumulated depreciation. Provisions for depreciation are made using
straight-line and accelerated methods over the estimated useful lives of the
assets, which range from three to seven years.
GOODWILL - Goodwill represents the excess of the purchase price over the
estimated fair value of net assets associated with investments using the
purchase and equity methods of accounting. Goodwill is amortized on a
straight-line basis over a ten year period and is evaluated periodically for
other than temporary impairment. During this evaluation, management takes
into consideration the value of the recorded goodwill and any event or
circumstances that might have diminished fair value. Should such an
assessment indicate permanent impairment, the net book value would be
adjusted accordingly. In connection with the Corporation's acquisition of
Westland Associates on November 12, 1997, goodwill of $887,000 was recorded.
Accumulated amortization of goodwill was $99,000 and $44,000 at December 31,
1998 and 1997, respectively. See Note 11 regarding the write-off of goodwill
related to Pink Dot in 1997.
LOAN FEES - Loan fees are deferred net of direct incremental loan origination
costs. Net deferred fees are accreted into income using the interest method
or straight line method, if not materially different. Loan fees due at the
maturity of a loan are also deferred and accreted to income, unless
collectibility is in doubt, in which case they are then recognized on the
cash basis.
REVENUE RECOGNITION - Westland Associates, the Corporation's wholly-owned
subsidiary, recognizes revenue when its vendors drop-ship products directly
to its dealers. Telephone system revenue is recognized on the accrual basis
for charges incurred on a monthly basis.
34
<PAGE>
INCOME TAXES - The Corporation joins with its subsidiaries in filing
consolidated federal income and state franchise tax returns. In the tax
returns, taxable income or loss is consolidated with the taxable income or
loss of the subsidiaries.
Under the asset and liability method of accounting for income taxes, income
tax expense (benefit) is recognized by establishing deferred tax assets and
liabilities for the estimated future tax consequences attributable to the
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The
Corporation's evaluation of the realizability of deferred tax assets includes
consideration of the amount and timing of future reversals of existing
temporary differences.
STOCK OPTION PLAN - The Corporation accounts for its stock option plan in
accordance with the provision of Accounting Principles Board ("APB") Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Corporation adopted Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), ACCOUNTING FOR
STOCK-BASED COMPENSATION, which encourages but does not require entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows
entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma income per share disclosures for
employee stock option grants issued in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Corporation has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure requirements of SFAS No. 123.
USE OF 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 reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain reclassifications were made to prior years
consolidated financial statements to conform to current year presentation.
COMPREHENSIVE INCOME - In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, ("SFAS No. 130")
"REPORTING COMPREHENSIVE INCOME", which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 defines comprehensive income
as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. SFAS
No. 130 establishes standards for the reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general purpose financial statements. SFAS No. 130 requires than an
enterprise (i) classify items of other comprehensive
35
<PAGE>
income by their nature in a financial statement and (ii) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the
statement of financial condition. Disclosure in the accompanying financial
statements includes the presentation of Consolidated Statements of
Comprehensive Income for each of the three years ended December 31, 1998.
BUSINESS SEGMENTS - Effective for the years ended December 31, 1998, the
Corporation adopted Statement of Financial Accounting Standards No. 131,
("SFAS No. 131"), "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION", which requires a new basis of determining reportable business
segments i.e., the management approach. This approach (as contrasted with
prior requirement which utilized a specified classification system for
determining segments) designates the Corporation's organization as used by
management for making operating decisions and assessing performance as the
source of business segments. On this basis, the Corporation has three
principal businesses and, therefore, three reportable business segments:
finance and secured lending, group purchasing services and other business.
Segment results are presented on this new basis in 1998 as well as
retroactively. Neither SFAS No. 130 nor SFAS No. 131 altered reported net
income (see Note 9).
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998,
the Financial Accounting Standards Board issued SFAS No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value. The Corporation is currently unable to accurately estimate the
impact this pronouncement may have upon its financial statements.
36
<PAGE>
2. SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale are carried at estimated fair value. The
amortized cost and estimated fair value of securities available-for-sale at
December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Amortized Cost Gains Losses Fair Value
--------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
1998:
U.S. Treasury and Agency
Securities $ 25,638 $ 90 $ -- $ 25,728
Equity and Other Debt
Securities 241 65 (52) 254
--------------------- ------------------ ------------------ ------------------
Total $ 25,879 $ 155 $ (52) $ 25,982
--------------------- ------------------ ------------------ ------------------
--------------------- ------------------ ------------------ ------------------
1997:
U.S. Treasury and Agency
Securities $ 17,387 $ 20 $ -- $ 17,407
Equity and Other Debt
Securities 241 52 (45) 248
--------------------- ------------------ ------------------ ------------------
Total $ 17,628 $ 72 $ (45) $ 17,655
--------------------- ------------------ ------------------ ------------------
--------------------- ------------------ ------------------ ------------------
</TABLE>
Unrealized holding gains on securities available-for-sale of $65,000 at
December 31, 1998 and $13,000 at December 31, 1997 are net of taxes of
$37,000 and $14,000, respectively.
Maturities of U.S. Treasury and Agency Securities were as follows at December
31, 1998 (in thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------------- --------------------
<S> <C> <C>
Due within one year $ 10,367 $ 10,410
Due after one year through
five years 15,271 15,318
------------------- --------------------
$ 25,638 $ 25,728
------------------- --------------------
------------------- --------------------
</TABLE>
Gross unrealized gains include the value ascribed to warrants which have a
readily determinable value, whether detached or attached to securities.
37
<PAGE>
Gross gains of $66,000 and no losses were realized on sales of securities
available-for-sale in 1998. Gross gains and (losses) of $432,000 and
($100,000) and $221,000 and ($224,000) were realized on sales in 1997 and
1996, respectively. During 1997, the market value of one non-tradeable
security declined below its cost to a level that was considered to be other
than temporary. A resulting write-down of $100,000 was recorded by the
Corporation, which is included in the caption "gain (loss) on sale of
securities available-for-sale" on the Consolidated Statement of Operations
for the year ended December 31, 1997. During the year ended December 31,
1996, the Corporation recorded a permanent impairment write-down of $150,000
on an equity security, which is included in the caption "gain (loss) on sale
of securities available-for-sale" on the Consolidated Statement of Operations
for the year ended December 31, 1996.
3. INVESTMENTS IN LIMITED PARTNERSHIPS THAT INVEST IN SECURITIES
The Corporation has invested in limited partnerships that invest in
securities. Gains or losses on these investments are recorded based upon the
equity method of accounting which approximates fair value. During the year
ended December 31, 1998, the Corporation recorded unrealized losses of
$299,000 in connection with these investments in the Consolidated Statement
of Operations. During the year ended December 31, 1997, the Corporation
recorded unrealized gains of $529,000 in connection with these investments in
the Consolidated Statements of Operations. No such gains or losses were
recorded during the year ended December 31, 1996.
4. OTHER INVESTMENTS
In May 1996, the Corporation made an equity investment of $750,000 in HP
America ("HPA"), a health maintenance organization based in Florida. This
investment is guaranteed by an unaffiliated company and includes a put option
of the investment to the guarantor at a price of $1,215,000. The guarantee
applies in the event that HPA is not subject to an effective registration by
August 1, 1998, subsequently extended to November 1999.
In October 1998, HPA announced a capital deficiency, the cessation of
operations in New Jersey and the seizure of its operations in Florida by the
Commissioner of Insurance. Based on these events and the uncertainty
concerning the value of the guarantee held by the Corporation for this
investment, the Corporation recorded a permanent impairment write-down of
$250,000 on this investment during the year ended December 31, 1998 which is
included in the caption "Other (loss) income" on the Consolidated Statement
of Operations for the year ended December 31, 1998. Subsequent to this
permanent impairment write-down, the Corporation received from the guarantor
additional equity securities as security for the guarantee, which the
Corporation considers to be sufficient to secure the carrying value of this
investment at December 31, 1998.
Based on a revised guarantee from the guarantor, the Corporation is
contractually entitled to receive $1,215,000 on or before November 1, 1999,
either through liquidation of the securities as collateral or direct payment
from the guarantor.
38
<PAGE>
5. LOANS RECEIVABLE
The composition of the Corporation's loans receivable at December 31, 1998 and
1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loans secured by automobile
leases, net of discount $ 0 $ 132
Loans, net of loan fees, secured
by trust deeds or mortgages 2,643 1,543
Loans secured by other collateral 7,140 5,306
Unsecured loans 0 100
-------------- ---------------
Total $ 9,783 $ 7,081
-------------- ---------------
-------------- ---------------
</TABLE>
The loans secured by automobile leases represent a portfolio of loans
purchased by the Corporation in 1995. The purchase price was $3,551,000 net
of discount of $742,000. At December 31, 1998, the loans secured by
automobile leases had been repaid in full.
The loans secured by trust deeds or mortgages as of December 31, 1998,
include two unrelated notes of $1,050,000 net of discount of $25,000 and
$520,000 net of discount of $2,000, respectively, that were originated in
1996 and that were originally due in 1998, but that were in default as of
December 31, 1997. The Corporation has commenced foreclosure proceedings on
both these loans (See Notes 18 and 21). Additionally, a loan of $1,100,000
was advanced in August 1998, bearing interest at 15% per annum and is secured
by real estate and other collateral.
The loans secured by other collateral as of December 31, 1998, include two
loans made to Pink Dot, Inc. (Pink Dot), a home delivery shopping company, in
which the Corporation had a 40% equity investment that was sold on February
26, 1998. In connection with the sale of Pink Dot stock on February 26, 1998,
two outstanding promissory notes payable to the Corporation by Pink Dot were
replaced by two new promissory notes. One outstanding promissory note in the
original principal amount of $2,500,000 together with accrued but unpaid
interest through February 26, 1998 in the amount of $303,000, was replaced by
a new note in the principal amount of $2,803,000 with a variable rate of
interest equal to the Bank of America "prime rate" of 10%. The second
outstanding promissory note in the nominal original principal amount of
$1,000,000, of which $415,000 had been advanced through February 26, 1998,
together with accrued but unpaid interest in the amount of $21,000, was
replaced with a new note in the principal amount of $436,000 with an interest
rate of 8%. All tangible and intangible assets of Pink Dot secure both
replacement notes.
39
<PAGE>
The Corporation has discounted the face value of the notes due from Pink Dot
to reflect an adjustment to the interest rate on these loans, based on the
modified risk associated with such loans. This modified risk arises from the
change in contractual relationship between the Corporation and Pink Dot, as a
result of the sale of the Corporation's equity interest in Pink Dot (See note
11). At December 31, 1998, loan principal outstanding on these two loans was
$2,596,000 and $402,000, respectively, net of imputed interest of $207,000
and $34,000, respectively.
Loans secured by other collateral as of December 31, 1998, include a
$1,900,000 note, a portion of which is secured by real estate, which bears
interest at the rate of 15% per annum that is due in July 1999.
Loans secured by other collateral includes a $1,442,000 note that is part of
a $2,000,000 loan commitment made in 1997, a portion of which is convertible
into 55% of the debtor's common stock. This loan bears interest at a variable
rate equal to the "prime rate" plus one percent per annum, compounded
monthly. The principal balance and all unpaid accrued interest are due in
twenty-four equal monthly installments beginning November 20, 2000. The loan
is secured by a security interest in all tangible and intangible assets of
the debtor. (see Note 21).
Loans secured by other collateral includes an $800,000 note bearing interest
at a variable rate of interest equal to the "prime rate" of Wells Fargo Bank,
compounded monthly, and is convertible into 50% of the debtor's common stock.
The loan is secured by a security interest in all tangible and intangible
assets of the debtor. (see Note 21).
A loan is impaired when it is probable that the Corporation will be unable to
collect all principal and accrued interest due according to the contractual
terms of the loan agreement. The average balance of impaired loans and
interest income recognized on impaired loans were $1,752,000 and $118,000,
respectively, for the year ended December 31, 1998, and $1,670,000 and
$213,000, respectively, for the year ended December 31, 1997. The components
of impaired loans and accrued interest at December 31, 1998 and 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
Impaired loans and
Accrued interest $1,760 $1,744 $ -
Less: valuation allowances (177) (31) -
---------------- ---------------- -----------------
Net carrying value of
Impaired loans and
Accrued interest $1,583 $1,713 $ -
---------------- ---------------- -----------------
---------------- ---------------- -----------------
</TABLE>
40
<PAGE>
Activity in the valuation allowance for all loans and accrued interest for the
years ended December 31, 1998 and 1997 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at January 1 $ 31 $ - $ -
Additions 146 31 -
Direct write-downs - - -
---------------- ---------------- ----------------
Balance at December 31 $ 177 $ 31 $ -
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
6. PURCHASE ACCOUNTING ADJUSTMENTS
As discussed in Note 1, the Corporation purchased 100% of the common stock of
Westland Associates on November 12, 1997. The acquisition was accounted for
under the purchase method of accounting. The following table summarizes the
fair value of assets and liabilities of Westland Associates as of the date of
the acquisition and the computation of the excess of the purchase price over
the fair value of the net assets acquired (in thousands):
<TABLE>
<CAPTION>
Fair Value of
Assets Acquired
and Liabilities
Assumed
--------------------
<S> <C>
Accounts receivable, net $ 936
Property and equipment, net 663
Other assets 173
-------------------
Total assets 1,772
-------------------
Accounts payable 789
Accrued expenses and other liabilities 581
Deferred income taxes 20
-------------------
Total liabilities 1,390
-------------------
Fair value of net assets acquired 382
Purchase price 1,269
-------------------
Excess of purchase price over the fair value
of net assets acquired $ 887
-------------------
-------------------
</TABLE>
41
<PAGE>
The excess of the purchase price over the fair value of the net assets
acquired is recognized as goodwill, and is being amortized using the
straight-line method over 10 years.
In connection with the Corporation's purchase of Westland Associates,
employment agreements were executed with Westland Associates' president and
another key employee. The agreements run for terms of 24 months and 12
months, respectively, and call for compensation levels equal to the levels
that were paid to each of them prior to the acquisition of Westland
Associates by the Corporation.
7. TELEPHONE SYSTEMS, NET
The following is a summary of telephone systems, net, at December 31, 1998
and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Telephone systems $ 1,183 $ 1,740
Less: Accumulated depreciation (791) (906)
---------------- ----------------
Telephone systems, net $ 392 $ 834
---------------- ----------------
---------------- ----------------
</TABLE>
Depreciation expense of telephone systems was approximately $207,000,
$246,000 and $253,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
On May 27, 1998, Global Telecommunications Systems, LTD, reached a settlement
with the Navy for the cancellation of the service contract at the Miramar
Naval Air Station effective June 30, 1998. Global received a settlement
payment of approximately $363,000 plus additional sums of $46,000 from the
sale of related assets. The Corporation recorded a gain of $229,000 from the
settlement of the Miramar contract, which amount is included in Telephone
Systems Revenue for the year ended December 31, 1998.
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
<S> <C> <C>
Building $ 0 $395
Land 0 255
Furniture and equipment 245 49
Automobiles 50 50
------------------------------
295 749
Less: Accumulated depreciation (148) (39)
------------------------------
$147 $710
------------------------------
------------------------------
</TABLE>
42
<PAGE>
Furniture and equipment includes $116,000 in assets acquired through capital
leasing transactions during 1998, and are secured by obligations under
capital leases (see Note 10). The book value of such equipment at December
31, 1998 was $96,000.
Depreciation expense related to property and equipment was approximately
$46,000, $15,000, and $12,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
In connection with the Corporation's acquisition of 100% of the common stock
of Westland Associates on November 12, 1997, the Corporation acquired the
following property and equipment, which was recorded at estimated fair value:
<TABLE>
<S> <C>
Building $395,000
Land 255,000
Furniture and equipment 13,000
----------------
Total $663,000
----------------
----------------
</TABLE>
The land and building were sold on March 11, 1998 for net proceeds of
$605,000. The resulting net loss from the sale inclusive of closing costs of
$45,000 is included in the general and administrative expenses in the
Consolidated Statement of Operations for the year ended December 31, 1998.
9. SEGMENT INFORMATION
The Corporation has three reportable segments: finance and secured lending,
group purchasing services and other business.
The finance and secured lending segment consists of lending activity,
originating or purchasing secured loans that generally do not exceed
thirty-six months in duration. Assets not employed in lending activities or
in other segments are invested in securities available-for-sale. These
securities consist principally of U.S. government securities, but to a
limited extent include investments in common and preferred stocks, warrants,
and convertible debentures.
The group purchasing segment represents a 100% ownership interest in Westland
Associates, a company that provides group purchasing of goods and services
for new car dealers.
The other business segment includes all other business activity, notably
Global Telecommunications, LTD, a telephone company serving military
personnel, the results of a one-time settlement for a refund claim from the
Franchise Tax Board of the State of California and other settlement income.
43
<PAGE>
Revenues, gross profit and other financial data of the Corporation's industry
segments for the three years ending December 31, 1998, are included below. All
revenues are earned in the United States of America.
<TABLE>
<CAPTION>
FINANCE GROUP
AND SECURED PURCHASING OTHER
LENDING SERVICES BUSINESS TOTAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
- ----
Revenues $ 7,955,000 $ 18,851,000 $ 4,119,000 $ 30,925,000
Gross profit 7,955,000 1,034,000 3,185,000 12,174,000
General and administrative 2,299,000 1,750,000 0 4,049,000
Depreciation, amortization and
accretion, net (130,000) 121,000 207,000 198,000
Interest expense 0 9,000 0 9,000
Income(loss) before taxes 5,656,000 (716,000) 2,978,000 7,918,000
Identifiable assets 40,250,000 1,744,000 603,000 42,597,000
1997
- ----
Revenues $ 2,891,000 $ 2,711,000 $ 2,394,000 $ 7,996,000
Gross profit 2,891,000 172,000 1,056,000 4,119,000
General and administrative 1,557,000 233,000 0 1,790,000
Depreciation, amortization and
accretion, net (223,000) 10,000 246,000 33,000
Interest expense 5,000 1,000 0 6,000
Income(loss) before taxes 1,334,000 (61,000) 1,338,000 2,329,000
Identifiable assets 32,412,000 1,223,000 1,236,000 34,870,000
1996
- ----
Revenues $ 2,893,000 $ 0 $ 2,341,000 $ 5,234,000
Gross profit 2,893,000 0 1,002,000 3,895,000
General and administrative 1,424,000 0 0 1,424,000
Depreciation, amortization and
accretion, net (207,000) 0 247,000 40,000
Interest expense 0 0 0 0
Income(loss) before taxes 1,469,000 0 1,002,000 2,471,000
Identifiable assets 32,132,000 0 1,080,000 33,212,000
</TABLE>
General and administrative expenses includes interest expense and the net
effects of depreciation, amortization and accretion in the Consolidated
Statement of Operations.
Income (loss) before taxes represents Income before taxes and minority
interest.
The group purchasing services segment reflects results of operations from the
date of acquisition of Westland Associates on November 12, 1997. The loss
includes allocated goodwill amortization since the date of acquisition.
Other business consists in 1998 of the operations of Global Telecommunications,
interest on the Franchise Tax Board settlement and settlement recoveries in the
Drexel Burnham Lambert, Inc. class action lawsuit; and in 1997 and 1996, the
operations of Global Telecommunications and settlement recoveries in the Drexel
Burnham Lambert, Inc. class action lawsuit.
44
<PAGE>
10. OBLIGATIONS UNDER CAPITAL LEASES
The Corporation entered into three capital lease transactions during the year
ended December 31, 1998. These obligations have various maturities through April
2003.
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of net minimum lease payments as
of December 31, 1998:
<TABLE>
<S> <C>
1999 $ 29,000
2000 29,000
2001 29,000
2002 29,000
2003 15,000
--------
Net minimum lease payments $131,000
Less: amount representing interest 30,000
--------
Present value of minimum lease payments $101,000
--------
--------
</TABLE>
All obligations under capital leases are secured by the equipment under lease.
11. GAIN ON SALE OF EQUITY INVESTMENT
On September 23, 1996, the Corporation acquired a 40% interest in Pink Dot, Inc.
("Pink Dot"), a home delivery-shopping company, for $500,000. The excess of the
cost of the investment over 40% of equity at the date of investment was recorded
as goodwill and was being amortized over a ten year period. The Corporation
recorded a loss of $686,000 in 1997 in connection with its 40% equity investment
in Pink Dot. As a result, the investment account and goodwill related to Pink
Dot were reduced to zero by adjustments of $46,000 and $249,000, respectively.
As this loss exceeded the carrying amount of the Corporation's investment
account and goodwill related to Pink Dot, the carrying amount of the loans
receivable from Pink Dot was reduced by $391,000.
On February 26, 1998, the Corporation sold the 40% of the issued and outstanding
stock of Pink Dot owned by the Corporation to the majority owner of Pink Dot
("the buyer") for a purchase price of $6,000,000. The purchase price was
originally evidenced by the buyer's promissory note in the principal amount of
$6,000,000 due and payable on May 27, 1998 with interest at the rate of 9%
accruing from March 28, 1998 until repayment. Principal and accrued interest of
$102,000 were paid in full on June 2, 1998.
45
<PAGE>
12. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
In December 1997, the Corporation acquired a single-family residence located in
Newport Beach, California through a foreclosure on a defaulted loan that was
secured by a second trust deed on the property. The carrying value of the loan
at the time of the foreclosure, net of reserves, was $178,000. The property was
acquired subject to a first mortgage in the amount of $655,000, which the
Corporation paid off in January 1998. The property, which had a carrying value
of $833,000 at December 31, 1998, was subsequently sold on January 15, 1999 for
$945,000 in net proceeds.
13. INCOME TAXES
The provision for income taxes for the years ended December 31, 1998, 1997, and
1996 includes the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <S> <S> <S>
Current tax provision(benefit)
Federal $ 583 $ - $ -
State (1,150) - -
Deferred tax provision
Federal 2,457 716 610
State 150 216 230
---------------- ----------------- -----------------
Total provision for income taxes $ 2,040 $ 932 $ 840
---------------- ----------------- -----------------
---------------- ----------------- -----------------
</TABLE>
The Corporation made income tax payments of $1,384,000 during 1998. No income
tax payments were made during 1997 or 1996, except for the minimum state
franchise tax.
The Corporation had tax net operating loss carryforwards at December 31, 1998 of
approximately $441,000 and $274,000 for federal and state purposes,
respectively. These net operating loss carryforwards can only be utilized to
offset future taxable income at the Corporation's subsidiary, Westland
Associates, Inc.
At December 31, 1997 tax net operating loss carryforwards were approximately
$8,600,000 and $2,000,000 for federal and state purposes, respectively.
The income tax provision reflects effective rates of 25.8%, 40%, and 34% for the
years ended December 31, 1998, 1997, and 1996 on income before income taxes,
respectively. The income tax provision differed from the amounts computed by
applying the statutory federal income tax rate of 34% to the income before
income taxes for the following reasons (in thousands):
46
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Tax expense at statutory Federal income tax rate $ 2,692 $ 792 $ 840
California franchise tax, net of Federal benefit 470 126 144
Adjustment to prior year tax liability (1,113) - -
State and municipal securities interest - - (148)
Minority interest (20) (10) (24)
Other, net 11 24 28
- ------------------------------------------------- ----------------- ----------------- -----------------
$ 2,040 $ 932 $ 840
- ------------------------------------------------- ----------------- ----------------- -----------------
</TABLE>
At December 31, 1998 and 1997 the Corporation had cumulative deferred taxes
payable of $8,006,000 and $5,366,000, respectively. The Corporation had a
current income tax receivable for overpayment of both federal and state
income taxes, for the year ended December 31, 1998. No current income taxes
were payable or receivable at December 31, 1997 and 1996. Tabulated below are
the significant components of the net deferred tax liability at December 31,
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
Components of the deferred tax asset:
Net operating loss carryforward $ 175 $ 3,124
State taxes 816 595
Loan fee income 11 39
Equity in Pink Dot 0 416
Other 322 212
---------------- ---------------
Deferred tax asset 1,324 4,386
---------------- ---------------
Components of the deferred tax liability:
Legal settlements (9,185) (9,307)
Unrealized gains on limited partnerships
that invest in securities (98) (227)
Unrealized holding gains on
securities available-for-sale (47) (14)
Purchase adjustment-Westland Associates 0 (204)
---------------- ---------------
Deferred tax liability (9,330) (9,752)
---------------- ---------------
Net deferred tax liability $ (8,006) $ (5,366)
---------------- ---------------
---------------- ---------------
Net state deferred tax liability $ (1,865) $ (1,707)
Net federal deferred tax liability (6,141) (3,659)
---------------- ---------------
$ (8,006) $ (5,366)
---------------- ---------------
---------------- ---------------
</TABLE>
In evaluating the realizability of its deferred tax assets, management has
considered the turnaround of deferred tax liabilities during the periods in
which those temporary differences become deductible.
47
<PAGE>
Effective April 1, 1998, the Franchise Tax Board ("FTB") and the Corporation
entered into a settlement pursuant to which the State of California refunded
50% of the amounts claimed for refund by the Corporation for the years ended
December 31, 1987 and 1988, plus interest on those amounts from the date the
taxes were originally paid. As a result, the Corporation received refunds in
the amounts of $3,834,000 including accrued interest of $2,355,000 for the
year ended December 31, 1987 and $495,000 including accrued interest of
$289,000 for the year ended December 31, 1988.
Since the Corporation's original claims for refund were initially established
as receivables due from the FTB but were subsequently fully reserved for due
to uncertainty as to collectability, the combined refunds from the FTB in the
amount of $1,686,000 have been recorded as a reduction of the Corporation's
provision for income taxes and the accrued interest from the FTB in the
amount of $2,644,000 has been recorded as interest income during the the
current year ended December 31, 1998.
14. SUPPLEMENTAL CASH FLOW INFORMATION
The tax effect of unrealized gains (losses) on securities available-for-sale
for the years ended December 31, 1998, 1997 and 1996 was $88,000, ($575,000),
and $519,000, respectively.
During 1998, the Corporation acquired furniture and equipment under capital
leases of $116,000.
In connection with the Corporation's purchase of 100% of the common stock of
Westland Associates on November 12, 1997 for a purchase price of $1,269,000,
liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired and goodwill $2,659,000
Cash paid for the common stock ( 1,269,000)
-------------
Liabilities assumed $1,390,000
-------------
-------------
</TABLE>
In connection with a loan foreclosure on December 15, 1997, the Corporation
acquired real estate, net of a first mortgage payable, in the amount of
$178,000. Including the mortgage payable of $655,000, the real estate was
recorded at a carrying value of $833,000.
Federal and California income tax payments of $1,384,000 were made during
1998.
See Note 1 for the Corporation's accounting policy in regards to cash and
cash equivalents.
15. LAWSUIT SETTLEMENT
During 1998, the Corporation received $52,000 in net proceeds from the
settlement of claims asserted on behalf of the Corporation against Drexel
Burnham Lambert, Inc., Michael Milken and other related parties. In 1997 and
1996, the Corporation received $950,000 and $813,000, respectively, in net
proceeds from the same settlement.
48
<PAGE>
16. NET INCOME PER COMMON SHARE
Net income per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), EARNINGS PER SHARE,
and is calculated on the basis of the weighted average number of common
shares outstanding during each period plus the additional dilutive effect of
common stock equivalents. The dilutive effect of outstanding stock options is
calculated using the treasury stock method. As a result of the income per
share methods required to be disclosed by the Corporation under SFAS No. 128,
the Statement also requires disclosure of a reconciliation from Basic Net
Income Per Common Share to Diluted Net Income Per Common Share for the years
ended December, 31 1998, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
WEIGHTED
NET AVERAGE NET INCOME
INCOME SHARES PER SHARE
---------------- -------------------- ---------------------
<S> <S> <C> <C>
DECEMBER 31, 1998
- -----------------
BASIC NET INCOME PER COMMON SHARE
Income available to common stockholders $5,827,000 7,835,000 $0.74
Dilutive effect of common equivalents shares of
stock options 93,000
DILUTED NET INCOME PER COMMON SHARE
Income available to common stockholders $5,827,000 7,928,000 $0.73
DECEMBER 31, 1997
- -----------------
BASIC NET INCOME PER COMMON SHARE
Income available to common stockholders $1,371,000 7,835,000 $0.17
Dilutive effect of common equivalents shares of
stock options 31,000
DILUTED NET INCOME PER COMMON SHARE
Income available to common stockholders $1,371,000 7,866,000 $0.17
DECEMBER 31, 1996
- -----------------
BASIC NET INCOME PER COMMON SHARE
Income available to common stockholders $1,571,000 7,818,000 $0.20
Dilutive effect of common equivalents shares of
Stock options 4,000
DILUTED NET INCOME PER COMMON SHARE
Income available to common stockholders $1,571,000 7,822,000 $0.20
</TABLE>
49
<PAGE>
17. STOCK OPTION PLAN
During 1997,the Corporation's Board of Directors adopted the 1997 Stock
Incentive Plan (the "1997 Plan"). The 1997 Plan which was approved at the
Annual Meeting of Shareholders on June 2, 1998, replaces the 1986 Incentive
Stock Option Plan and the 1986 Non-statutory Stock Option Plan (collectively
"1986 Plan"), both of which expired in 1996. An aggregate of one million
shares of the Corporation's common stock may be issued under the 1997 Plan.
During 1998, the Vice President of Finance was granted an option to purchase
up to 20,000 shares of common stock under the 1997 Plan at a price of $3.00
per share, which represents the market price on the date of grant. The option
is exercisable in five equal annual installments commencing in May 1999. The
options expire in 2003.
During 1997, the Executive Vice President and Chief Financial Officer was
granted an option to purchase up to 100,000 shares of common stock under the
1997 Plan at a price of $2.37 per share, which represents the market price on
the date of grant. The option is exercisable in five equal annual
installments commencing in February 1998. The option expires in 2002. At
December 31, 1998 these options were exercisable as to an aggregate of 20,000
shares.
During 1995, the Chairman of the Board and Chief Executive Officer was
granted an option to purchase up to 250,000 shares of common stock under the
1986 Plan at $1.99 per share, which is equal to 110% of the market price on
the date of grant as specified in that plan. The option is exercisable in
four equal annual installments commencing with the first anniversary of the
grant date. The option expires five years from the date of grant. At December
31, 1998, the option was exercisable as to 187,500 shares.
During 1995, five outside Directors of the Corporation were granted options
to purchase up to 10,000 shares each under the 1986 Plan at $1.8125 per
share, which is equal to the market price on the date of grant as specified
in that plan. The options are exercisable in four equal annual installments
commencing with the first anniversary of the grant date. The options expire
five years from the date of grant. During 1997, 10,000 of these options were
cancelled. At December 31, 1998, these options were exercisable as to an
aggregate of 30,000 shares.
The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $1.37, $1.17 and $0.84, respectively, on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: expected dividend yield 0%, risk-free interest
rate of 5.41%, expected volatility of 43%, and an expected life of 5 years.
The Corporation applies APB Opinion No. 25 in accounting for stock option
plans and, accordingly, no compensation cost has been recognized for its
stock options in the consolidated financial statements. Had the Corporation
determined compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, the Corporation's net income would have
been reduced to the pro forma amounts indicated below (in thousands, except
per share data):
50
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income
As reported $5,827 $1,371 $1,571
Pro forma 5,779 1,323 1,548
Net income per share(diluted)
As reported $.73 $.17 $.20
Pro forma .73 .17 .20
</TABLE>
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Option Option Price
Shares Price Per Share
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Balance at December 31, 1996 300,000 $ 1.81 - 1.99 $1.96
Granted 100,000 2.37 2.37
Exercised -- -- --
Cancelled (10,000) 1.81 1.81
Expired -- -- --
-------------------- ------------------- -------------------
Balance at December 31, 1997 390,000 1.81 - 2.37 2.07
Granted 20,000 3.00 3.00
Exercised --
Cancelled --
Expired --
-------------------- ------------------- -------------------
Balance at December 31, 1998 410,000 $ 1.81 - 3.00 $2.12
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
</TABLE>
At December 31, 1998 and 1997, the weighted-average remaining contractual life
of outstanding options was 1.95 and 2.87 years, respectively.
At December 31, 1998 and 1997, the number of options exercisable was 237,500 and
145,000 respectively, and the weighted-average exercise price of those options
was $2.00.
51
<PAGE>
18. COMMITMENTS AND CONTINGENCIES
The Corporation had outstanding loan commitments at December 31, 1998 totaling
$558,000. At December 31, 1997, outstanding loan commitments were $2.6 million.
The Corporation has filed an action to foreclose a mortgage held by the
Corporation as security for a $1,050,000 loan that is in default. The mortgage
is on real property, title to which is held in the name of a trust of which the
borrower is trustee. Certain beneficiaries of the trust have filed a Motion to
Intervene in the foreclosure action, alleging that the trustee did not have
authority to enter into the trust and that the Corporation acted improperly in
lending money to the borrower, individually, and accepting as security real
property owned by the trust. The Corporation believes, based on the trust
documents, that the trustee had absolute authority to grant the mortgage and the
Corporation obtained title insurance for the mortgage. The Corporation intends
to pursue vigorously its right to foreclose the mortgage. The title insurer is
defending on the issue of the authority of the trustee to enter into the trust.
The Corporation is a defendant in various other lawsuits arising from the normal
course of business. Management believes, based upon the opinion of legal
counsel, that the ultimate resolution of the pending litigation will not have a
material effect upon the financial condition or results of operations of the
Corporation.
19. LEASE COMMITMENTS
Aggregate minimum lease commitments under long-term operating leases as of
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $162,000
2000 150,000
2001 149,000
2002 131,000
2003 16,000
--------
$608,000
--------
--------
</TABLE>
Minimum lease payments for the Corporation's corporate offices are under a
non-cancelable operating lease which expires in October 2002 and which provides
for a stated nominal rent increase in the thirty-first month of the lease. The
Corporation recorded $74,367, $78,548 and $62,365 in rent expense for corporate
offices, for the years ended December 31, 1998, 1997, and 1996, respectively.
Minimum lease payments for Westland Associates' corporate offices are under a
non-cancelable operating lease commencing April 28, 1998 and expiring on March
28, 2003. Rent expense of $51,619 was recorded pursuant to this lease for the
year ended December 31, 1998.
52
<PAGE>
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107 requires disclosures of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. Fair
value amounts represent estimates of value at a point in time. Significant
estimates regarding economic conditions, loss experience, risk characteristics,
and other factors are used in estimating fair value. These estimates can be
subjective in nature and involve matters of judgment. Changes in the assumptions
could have a material impact on the amounts disclosed. The methods and
assumptions for determining fair value of the Corporation's financial
instruments are as follows:
CASH AND CASH EQUIVALENTS
The carrying amount is a reasonable estimate of fair value.
SECURITIES AVAILABLE-FOR-SALE
Fair value has been determined based on quoted market prices, when available. If
a quoted market price is not available, recent market trading prices or the
value at which interests may currently be redeemed are used to estimate fair
value.
INVESTMENTS IN LIMITED PARTNERSHIPS THAT INVEST IN SECURITIES
The fair value of investments in limited partnerships that invest in securities
is estimated based upon the underlying value of the securities in which the
limited partnerships invest.
LOANS RECEIVABLE, NET, AND ACCRUED INTEREST RECEIVABLE
Loans held by the Corporation are performing in accordance with their
contractual terms, with the exception of two loans secured by real estate in the
amounts of $1,050,000 and $520,000, respectively, which were in default as of
December 31, 1998. Based on the type of loans, interest rate characteristics,
credit risk, collateral, subsequent payments received, and maturity, the
carrying value of the loans and accrued interest receivable has been determined
to be a reasonable estimate of fair value.
OTHER INVESTMENTS
The fair value of other investments is estimated to range between $500,000 (the
carrying value at December 31, 1998) and $1,215,000 (value of a guarantee from
the guarantor).
53
<PAGE>
21. SUBSEQUENT EVENTS
Effective January 1, 1999, the Corporation exercised its option to convert a
convertible debt obligation into a 50% equity interest in Touch Controls, Inc.
On January 11, 1999, the Corporation entered into a Membership Interest Purchase
Agreement to acquire an 80% interest in One Source Industries, LLC ("One
Source") from One Source Industries, Inc. for cash consideration of
approximately $4.8 million paid at closing, deferred consideration of $196,000,
plus up to an additional $2.15 million in deferred contingent cash consideration
that may be paid over the next four years based on the performance of One Source
during such period. The acquisition was financed using existing cash reserves.
One Source provides turn-key packaging and point-of-sale displays for a broad
spectrum of consumer products ranging from computer software to food products.
On March 1, 1999, the Corporation granted Physician Advantage and its two
shareholders an option to purchase the Corporation's convertible secured note at
any time prior to May 17, 1999, for a purchase price equal to the outstanding
principal balance on the date of purchase and accrued interest plus $600,000. As
consideration for granting the option, the shareholders of Physician Advantage
have agreed to transfer 15% of the fully diluted outstanding equity in Physician
Advantage to the Corporation effective May 17, 1999, in the event that the
option is not exercised by that date. At March 1, 1999, the principal balance of
the loan and accrued interest totaled $1,628,000.
In connection with the Corporation's efforts to foreclose on real estate
collateral for a defaulted loan in the principal amount of $520,000, the debtor,
Rousey Real Estate Investments, Inc., filed for protection under Chapter XI of
the Bankruptcy Act on June 10, 1998 and a stay was issued preventing the
Corporation from proceeding with a trustee's sale of the real estate collateral.
On February 23, 1999, the Bankruptcy court rejected the debtor's plan of
reorganization and lifted the stay, thus permitting the trustee's sale to
proceed. On March 15, 1999, the debtor filed an appeal of the Bankruptcy Court's
decision with the Federal District Court. No date has been set for a hearing
with respect to the appeal.
54
<PAGE>
22. QUARTERLY SUMMARY OF OPERATIONS (UNAUDITED)
The following quarterly summary of operations is unaudited. In the opinion of
the Corporation's management, all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of the interim
periods presented, have been included (in thousands, except per share data):
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr. Total
---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED 12/31/98
Total revenues $8,577 11,928 $5,581 $4,839 $30,925
Total expenses 6,073 6,242 5,920 4,772 23,007
Income before income taxes
And minority interest 2,504 5,686 (339) 67 7,918
Net income 2,511 3,506 (229) 39 5,827
Basic earnings per share 0.32 0.45 (0.03) 0.00 0.74
Diluted earnings per share 0.32 0.44 (0.03) 0.00 0.73
YEAR ENDED 12/31/97
Total revenues $1,681 $831 $1,112 $4,372 $7,996
Total expenses 726 694 678 3,569 5,667
Income before income taxes
And minority interest 955 137 434 803 2,329
Net income 555 78 244 494 1,371
Basic earnings per share 0.07 0.01 0.03 0.06 0.17
Diluted earnings per share 0.07 0.01 0.03 0.06 0.17
</TABLE>
The increase in revenues and expenses beginning in the fourth quarter of 1997
were the result of the Corporation's acquisition of Westland Associates on
November 12, 1997. See segment reporting for results of Westland Associates.
55
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
CORPORATION
Incorporated by reference to the Corporation's definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders pursuant to instruction G(3) to Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Corporation's definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders pursuant to instruction G(3) to Form
10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Incorporated by reference to the Corporation's definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders pursuant to instruction G(3) to Form
10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Corporation's definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders pursuant to instruction G(3) to Form
10-K.
56
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a)(1) The following financial statements are included in Item 8:
Consolidated Statements of Financial
Condition as of December 31, 1998 and 1997
Consolidated Statements of Operations
for the Three Years Ended December 31, 1998
Consolidated Statements of Shareholders'
Equity for the Three Years Ended December 31, 1998
Consolidated Statements of Cash Flows
for the Three Years Ended December 31, 1998
Consolidated Statements of Comprehensive Income
for the Three Years Ended December 31, 1998
Notes to Consolidated Financial Statements
for the Three Years Ended December 31, 1998
(a)(2) Financial Statement Schedules
All schedules are omitted as the required information is
inapplicable or is presented in the consolidated financial statements or
related notes.
(b) Reports of Form 8-K
No reports were filed on Form 8-K during the fourth quarter of 1998.
(c) Exhibits
See "Index to Exhibits."
57
<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.
WESTMINSTER CAPITAL, INC.
March 29, 1999 By: /s/ William Belzberg
---------------------
William Belzberg,
Chairman of the Board
Chief Executive Officer
By: /s/ Keenan Behrle
---------------------
Keenan Behrle,
Executive Vice President,
Chief Financial Officer, and
Principal Accounting Officer
58
<PAGE>
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 dates indicated.
<TABLE>
<CAPTION>
SIGNATURES CAPACITY DATE
<S> <C> <C>
/s/William Belzberg Chairman of the Board March 29, 1999
- --------------------------- of Directors and
William Belzberg Chief Executive Officer
/s/Keenan Behrle Director March 29, 1999
- ---------------------------
Keenan Behrle
/s/Hyman Belzberg Director March 29, 1999
- ---------------------------
Hyman Belzberg
/s/Samuel Belzberg Director March 29, 1999
- ---------------------------
Samuel Belzberg
/s/ Gerald E. Finnell Director April 8, 1999
- ---------------------------
Gerald E. Finnell
/s/ Barbara C. George Director March 29, 1999
- ---------------------------
Barbara C. George
/s/Monty Hall Director March 29, 1999
- ---------------------------
Monty Hall
/s/Lester Ziffren Director March 29, 1999
- ---------------------------
Lester Ziffren
</TABLE>
59
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. SEQUENTIALLY NUMBERED DESCRIPTION
<S> <C>
2.1 Option and Stock Purchase Agreement dated November 10, 1997 between the
Corporation and William Toro (filed as Exhibit 2.1 to the Registrant's
Report on Form 8-K dated March 5, 1998 and incorporated herein by this
reference).
2.2 Amendment to Option and Stock Purchase Agreement dated December 16,
1997 between the Corporation and William Toro (filed as Exhibit 2.2 to
the Registrant's Report on Form 8-K dated March 5, 1998 and
incorporated herein by this reference).
2.3 Secured Promissory Note in the amount of $6,000,000 dated February 26,
1998 between the Corporation and William Toro (filed as Exhibit 2.3 to
the Registrant's Report on Form 8-K dated March 5, 1998 and
incorporated herein by this reference).
2.4 Stock Purchase Agreement dated as of September 30, 1997 between the
Corporation and the shareholders of Westland Associates, Inc., a
California corporation. (filed as Exhibit 2.4 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by this reference).
2.5 Membership Interest Purchase Agreement, dated January 11, 1999, between
the Corporation and One Source Industries, Inc (filed as Exhibit 2.1 to
the Registrant's Report on Form 8-K dated January 11, 1999 and
incorporated herein by this reference).
2.6 Amended and Restated Operating Agreement of One Source Industries, LLC
Inc (filed as Exhibit 2.2 to the Registrant's Report on Form 8-K dated
January 11, 1999 and incorporated herein by this reference).
3.1 Certificate of Incorporation of the Registrant as amended through the
date hereof (filed as Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994 and incorporated herein
by this reference).
3.2 By-Laws of the Registrant as amended in their entirety effective April
4, 1995 (filed as Exhibit 4.4 to the Registrant's Post Effective
Amendment No. 1 to Form S-8 filed on June 23, 1995 as Registration No.
33-21177 and incorporated herein by this reference).
10.1 Sales Agreement between The Sumitomo Bank of California and Purchasers
dated August 17, 1995 (filed as Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by this reference).
10.2 1986 Incentive Stock Option Plan and 1986 Nonstatutory Stock Option
Plan (filed as Exhibit 4.1 to the Registrants' Post Effective Amendment
No.1 to Form S-8 filed on June 23, 1995 as Registration No. 33-21177
and incorporated herein by this reference).
</TABLE>
60
<PAGE>
<TABLE>
<S> <C>
10.3 Form of Stock Option Agreement (filed as Exhibit 4.2 to the
Registrants' Post Effective Amendment No.1 to Form S-8 filed on June
23, 1995 as Registration No. 33-21177 and incorporated herein by this
reference).
10.4 Restated and Amended Limited Partnership Agreement for Global
Telecommunications Systems, Ltd. dated December 31, 1993 (filed as
Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by this
reference).
10.5 Loan and Stock Purchase Agreement dated November 20, 1995 between the
Corporation and Pink Dot, Inc., a California Corporation ("Pink Dot")
(filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by this
reference).
10.6 Amendment to Loan and Stock Purchase Agreement dated September 20, 1996
between the Corporation and Pink Dot (filed as Exhibit 10.6 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by this reference).
10.7 Convertible Secured Note Purchase Agreement dated November 20, 1997
between the Corporation and Physician Advantage LLC, Michael H. Burnam
and Sheldon A.E. Rosenthal. (filed as Exhibit 10.7 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by this reference).
10.8 Loan Agreement dated September 23, 1997 between the Corporation and
Touch Controls, Inc., a California Corporation. (filed as Exhibit 10.8
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 and incorporated herein by this reference).
10.9 Secured Convertible Promissory Note dated September 23, 1997 between
the Corporation and Touch Controls, Inc., a California Corporation.
(filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997 and incorporated herein by this
reference).
10.10 1997 Stock Incentive Plan. (filed as Exhibit 10.10 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by this reference).
16.1 Letter from KPMG as of May 9, 1997 (filed as an Exhibit to the
Registrant's Report on Form 8-K dated May 5, 1997 and incorporated
herein by this reference).
21 Subsidiaries of Registrant.
23.1 Independent Auditors' Consent - Deloitte & Touche LLP
</TABLE>
61
<PAGE>
<TABLE>
<S> <C>
23.2 Independent Auditors' Consent - KPMG LLP
27 Financial Data Schedule for the year ended December 31, 1998.
99.1 Press Release dated January 12, 1999 (filed as Exhibit 99.1 to the
Registrant's Report on Form 8-K dated January 11, 1999 and incorporated
herein by this reference).
</TABLE>
62
<PAGE>
SUPPLEMENTAL INFORMATION
EXECUTIVE OFFICERS AND DIRECTORS
OF THE COMPANY
Mr. William Belzberg is Chairman of the Board of Directors and Chief Executive
Officer of the Company.
Mr. Behrle is a Director, Executive Vice President and Chief Financial Officer
of the Company.
Mr. Guimarais is the Vice President of Finance.
Mr. Hyman Belzberg, a Director, is President of Bel-Alta Holdings Ltd., a real
estate and mortgage investment company.
Mr. Samuel Belzberg, a Director, is Chairman of the Board of Balfour Holdings
Inc., a real estate and land development company in the United States and
Canada.
Mr. Finnell, a Director, is a retired partner of the accounting firm of KPMG
LLP, is Chairman of the Gaming Enterprise Board, Salt River Pima-Maricopa
Indian Community and is Chairman of the Board of Directors for Healthstar
Corporation, a public healthcare management company.
Dr. George, a Director, is a Professor of Business Law in the Department of
Finance, Real Estate Law in the College of Business Administration,
California State University, Long Beach and Associate Dean of Academic
Affairs.
Mr. Hall, a Director, is a television producer, performer and philanthropist.
Mr. Ziffren, a Director, is a retired partner/advisory counsel to the law
firm of Gibson, Dunn & Crutcher, Los Angeles, California.
63
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Name State of Incorporation
- --------------------------------------- --------------------------------
<S> <C>
Westland Associates, Inc. California
Global Telecommunications Sytems, Ltd. N/A - Limited Partnership
Westminster Finance, Inc. California
One Source Industries, LLC California
</TABLE>
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-21177 of Westminster Capital, Inc. on Form S-8 of our report dated March
15, 1999, appearing in this Annual Report on Form 10-K of Westminster
Capital, Inc. for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
Los Angeles, California
April 8, 1999
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Westminster Capital, Inc:
We consent to incorporation by reference in the registration statement No.
33-21177 on Form S-8 of Westminster Capital, Inc. of our report dated March
1, 1997, relating to the consolidated statements of operations, comprehensive
income, shareholders' equity, and cash flows of Westminster Capital, Inc. and
subsidiaries for the year ended December 31, 1996, which report appears in
the December 31, 1998, annual report on Form 10-K of Westminster Capital, Inc.
/s/ KPMG LLP
Los Angeles, California
April 5, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION OF REGISTRANT AS OF DECEMBER 31,
1998 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS OF REGISTRANT FOR THE TWELVE
MONTHS ENDED DECEMBER 31,1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 291,000
<SECURITIES> 25,982,000
<RECEIVABLES> 11,557,000
<ALLOWANCES> 177,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 687,000
<DEPRECIATION> 148,000
<TOTAL-ASSETS> 42,597,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 7,835,000
<OTHER-SE> 24,102,000
<TOTAL-LIABILITY-AND-EQUITY> 42,597,000
<SALES> 18,851,000
<TOTAL-REVENUES> 30,925,000
<CGS> 17,817,000
<TOTAL-COSTS> 23,007,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 146,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,918,000
<INCOME-TAX> 2,040,000
<INCOME-CONTINUING> 1,371,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,827,000
<EPS-PRIMARY> .74
<EPS-DILUTED> .73
</TABLE>
