EXHIBIT 99.3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors, Stockholders and Members of the
Butterfield & Butterfield Group of Companies
In our opinion, the accompanying combined balance sheet and the related
combined statements of income, of group equity and of cash flows present fairly,
in all material respects, the combined financial position of the Butterfield &
Butterfield Group of Companies at December 31, 1997 and 1998, and the results of
their combined operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Group's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 23, 1999
-1-
BUTTERFIELD & BUTTERFIELD
GROUP OF COMPANIES
COMBINED BALANCE SHEET
(in thousands, except share amounts)
December 31,
--------------------- March 31,
1997 1998 1999
--------- --------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 7,748 $ 4,952 $ 862
Accounts receivable and advances, net............................................... 6,401 6,036 6,011
Inventories......................................................................... 1,851 1,139 327
Other current assets................................................................ 1,064 1,114 883
------- ------- -------
Total current assets............................................................... 17,064 13,241 8,083
Property and equipment, net.......................................................... 29,436 31,966 32,297
Asset held for sale.................................................................. 1,360 1,160 1,060
Intangible assets, net............................................................... 630 2,345 2,330
Note receivable...................................................................... 2,806 1,946 1,919
Investment in partnerships........................................................... -- 926 928
Other assets......................................................................... 137 42 42
------- ------- -------
$51,433 $51,626 $46,659
======= ======= =======
LIABILITIES AND GROUP EQUITY
Current liabilities:
Accounts payable.................................................................... $ 493 $ 1,380 $ 1,532
Accrued expenses.................................................................... 586 131 144
Accrued compensation and benefits................................................... 1,497 1,221 875
Notes payable, current.............................................................. 6,282 3,790 3,396
Payable to consignors............................................................... 11,571 6,390 4,315
------- ------- -------
Total current liabilities.......................................................... 20,429 12,912 10,262
Accrued investment loss.............................................................. 3,099 -- --
Minority interests in deficit of combined companies.................................. (944) (180) (102)
Accrued environmental and seismic costs.............................................. 5,700 5,900 5,900
Notes payable, long-term............................................................. 15,668 18,111 17,888
------- ------- -------
43,952 36,743 33,948
------- ------- -------
Commitments and contingencies (Notes 7)
Group equity:
Common stock -- par value $.001, 15,000,000 shares authorized,
4,752,364 shares issued and outstanding............................................ 4 4 4
Members' equity..................................................................... 10,297 15,620 15,620
Additional paid-in capital.......................................................... 1,064 1,364 1,364
Accumulated deficit................................................................. (3,884) (2,105) (4,277)
------- ------- -------
Total group equity................................................................. 7,481 14,883 12,711
------- ------- -------
$51,433 $51,626 $46,659
======= ======= =======
The accompanying notes are an integral part of these combined financial
statements.
-2-
BUTTERFIELD & BUTTERFIELD
GROUP OF COMPANIES
COMBINED STATEMENT OF OPERATIONS
(in thousands)
Year Ended Three Months Ended
December 31, March 31,
--------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- --------
(unaudited)
Net revenues:
Auction fees and services............................... $20,027 $23,806 $24,026 $4,397 $5,183
Real estate rentals..................................... 3,892 4,300 4,486 1,155 1,057
------- ------- ------- ------ ------
Net revenues........................................... 23,919 28,106 28,512 5,552 6,240
------- ------- ------- ------ ------
Cost of net revenues:
Auction fees and services............................... 3,832 4,325 5,002 799 1,769
Real estate rentals..................................... 1,622 1,773 2,146 681 478
------- ------- ------- ------ ------
Cost of net revenues................................... 5,454 6,098 7,148 1,480 2,247
------- ------- ------- ------ ------
Gross profit........................................... 18,465 22,008 21,364 4,072 3,993
------- ------- ------- ------ ------
Operating expenses:
Sales and marketing..................................... 10,016 10,817 12,523 2,403 3,161
General and administrative.............................. 2,683 2,760 2,222 463 1,303
------- ------- ------- ------ ------
Total operating expenses............................... 12,699 13,577 14,745 2,866 4,464
------- ------- ------- ------ ------
Income (loss) from operations............................ 5,766 8,431 6,619 1,206 (471)
------- ------- ------- ------ ------
Other income (expense):
Interest and other income, net.......................... 358 975 861 362 154
Interest expense........................................ (2,161) (2,308) (2,114) (462) (512)
------- ------- ------- ------ ------
Income (loss) from combined companies
before taxes and minority interests..................... 3,963 7,098 5,366 1,106 (829)
------- ------- ------- ------ ------
Provision for income taxes............................... (42) (40) (48) -- (1)
Minority interest in combined company.................... (576) (314) 70 173 59
------- ------- ------- ------ ------
Income (loss) from combined companies.................... 3,345 6,744 5,388 1,279 (771)
Equity interest in partnership loss...................... (86) (320) (381) (95) (78)
------- ------- ------- ------ ------
Net income (loss)........................................ $ 3,259 $ 6,424 $ 5,007 $1,184 $ (849)
======= ======= ======= ====== ======
The accompanying notes are an integral part of these combined financial
statements.
-3-
BUTTERFIELD & BUTTERFIELD
GROUP OF COMPANIES
COMBINED STATEMENT OF GROUP EQUITY
(in thousands)
Additional Total
Members' Paid-in Accumulated Group
Shares Amount Equity Capital Deficit Equity
--------- ------ -------- ---------- ------------- ---------
Balance, December 31, 1996........................... 4,752 $4 $ 9,809 $ 914 $(5,752) $ 4,975
Capital contributions from stockholders/members..... - - 488 150 - 638
Distributions to stockholders/members............... - - - - (4,556) (4,556)
Net income.......................................... - - - - 6,424 6,424
--------- -- ------- ------ ------- -------
Balance, December 31, 1997........................... 4,752 4 10,297 1,064 (3,884) 7,481
Capital contributions from stockholders/members..... - - 5,323 300 - 5,623
Distributions to stockholders/members............... - - - - (3,228) (3,228)
Net income.......................................... - - - - 5,007 5,007
--------- -- ------- ------ ------- -------
Balance, December 31, 1998........................... 4,752 4 15,620 1,364 (2,105) 14,883
Distributions to stockholders/members (unaudited)... - - - - (1,323) (1,323)
Net loss (unaudited)................................ - - - - (849) (849)
--------- -- ------- ------ ------- -------
Balance, March 31, 1999 (unaudited).................. 4,752 $4 $15,620 $1,364 $(4,277) $12,711
========= == ======= ====== ======= =======
The accompanying notes are an integral part of these combined financial
statements.
-4-
BUTTERFIELD & BUTTERFIELD
GROUP OF COMPANIES
COMBINED STATEMENT OF CASH FLOWS
(in thousands)
Three Months Ended
Year Ended December 31, March 31,
---------------------------- ----------------------
1996 1997 1998 1998 1999
------- ------- -------- ---------- --------
(unaudited)
Cash flows from operating activities:
Net income (loss) $3,259 $6,424 $ 5,007 $1,184 $ (849)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 1,188 1,269 1,486 416 372
Allowance for doubtful accounts........................ -- 30 54 -- 91
(Gain)/Loss sale of property and equipment............. 190 -- (333) (200) --
Loss on impairment of asset held for sale.............. -- -- 200 -- 100
Minority interest in deficit of combined companies..... 86 24 764 708 78
Net change in equity interest in partnerships ......... 576 (146) (4,025) 36 (2)
Changes in assets and liabilities:
Accounts receivable and advances...................... 3,904 (167) 311 (367) (66)
Inventories........................................... 46 (1,414) 712 (254) 812
Other assets.......................................... 111 981 45 758 231
Accounts payable...................................... (375) 151 887 (89) 152
Accrued expenses...................................... (304) (168) (455) (870) 13
Accrued compensation and benefits..................... 113 707 (276) (4) (346)
Payable to consignors................................. 1,038 2,555 (5,181) (8,015) (2,075)
Accrued environmental and seismic costs............... 750 -- 200 -- --
------ ------ ------- ------ -------
Net cash provided by (used in) operating activities.... 10,582 10,246 (604) (6,697) (1,489)
------ ------ ------- ------ -------
Cash flows from investing activities:
Purchase of property and equipment...................... (1,228) (2,168) (3,338) (197) (688)
Purchase of intangible assets........................... (36) (141) (1,248) (34) --
Proceeds from sale of property and equipment............ 1,051 -- 1,274 390 --
Related party advances/repayments....................... (1,369) -- -- -- --
Payments on notes receivable............................ 32 145 109 27 27
------ ------ ------- ------ -------
Net cash provided by (used in) investing activities.... (1,550) (2,164) (3,203) 186 (661)
------ ------ ------- ------ -------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit........... (2,375) 1,990 1,001 (400) (394)
Net borrowings (repayments) on notes payable............ (3,876) (960) (2,385) (2,048) (223)
Contributions from stockholders......................... 467 638 5,623 1,292 --
Distributions to stockholders........................... (2,107) (4,556) (3,228) (1,160) (1,323)
------ ------ ------- ------ -------
Net cash used in financing activities.................. (7,891) (2,888) (1,011) (2,316) (1,940)
------ ------ ------- ------ -------
Net increase (decrease) in cash and cash equivalents..... 1,141 5,194 (2,796) (8,827) (4,090)
Cash and cash equivalents, beginning of period........... 1,413 2,554 7,748 7,748 4,952
------ ------ ------- ------ -------
Cash and cash equivalents, end of period................. $2,554 $7,748 $ 4,952 (1,079) $ 862
====== ====== ======= ====== =======
Supplemental disclosures:
Cash paid for interest.................................. $2,077 $1,830 $ 1,633 462 $ 513
Cash paid for income taxes.............................. $ 2 $ 70 $ 45 -- 1
Non-cash investing and financing activities:
Building and inventory obtained in connection with
foreclosure............................................ $ -- $1,510 $ 751 $ -- $ --
Notes and accounts payable assumed in connection with
foreclosure............................................ $ -- $ 695 $ -- $ -- $ --
Receivables canceled in connection with foreclosure..... -- 815 500 -- --
Land and building transferred in exchange for
assumption of debt...................................... -- -- 835 -- --
The accompanying notes are an integral part of these combined financial
statements.
-5-
BUTTERFIELD & BUTTERFIELD
GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(in thousands except share amounts)
Note 1--The Group and Summary of Significant Accounting Policies:
Butterfield & Butterfield
The Group Companies and Basis of Presentation
The accompanying combined financial statements include the accounts of
Butterfield & Butterfield Auctioneers Corp. and all affiliated entities under
common control including; Butterfield Credit Corporation Inc., 111 Potrero, LLC
and HBJ Partners, LLC. (collectively the "Group" or "Group Companies"). All
intercompany accounts and transactions have been eliminated in the preparation
of these combined statements.
Butterfield & Butterfield Auctioneers Corp. ("B&B") - B&B was established
in 1865, incorporated in California in July 1970 and reincorporated in the
state of Delaware in March 1999. B&B conducts auctions and performs appraisal
services of fine art, jewelry, antiques and wine primarily in San Francisco,
Los Angeles and Chicago.
Butterfield Credit Corporation Inc. ("BCCI") - BCCI is a wholly-owned
subsidiary of B&B and is incorporated in California. BCCI operates as a
financing corporation whose sole purpose is serving B&B's clients.
111 Potrero Partners, LLC - ("111 Potrero") - 111 Potrero is a limited
liability corporation organized in May 1996. 111 Potrero owns several
commercial properties located in San Francisco and Los Angeles, which are
currently occupied by B&B and third parties.
HBJ Partners, LLC - ("HBJ") - HBJ is a limited liability corporation
organized in California in September 1996. HBJ owns several commercial
properties located in San Francisco, which are currently occupied by B&B and
third parties. HBJ also has general partnership interests in 111 Santa Fe
Avenue Partners, 2959 Victoria Street Partners and 6700 Cherry Avenue
Partners. Ownership interests in the above partnerships were 58%, 60% and 38%,
respectively.
Investment in general partnerships
Interests in general partnerships in which the Group owns more than 50
percent ownership and exerts control are reported under the consolidation
method of accounting; the combined accounts include 100 percent of the assets
and liabilities of these general partnerships and the ownership interests of
minority investors are recorded as "Minority interest in combined companies".
Investments in general partnerships in which the Group owns more than 20
percent are accounted for by the equity method of accounting and are recorded
as "Investment in partnerships".
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.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of acquisition to be cash
equivalents. Cash equivalents consist primarily of deposits in money market
funds.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with financial institutions
that management believes are of high credit quality. The Company's accounts
receivable are derived from revenue earned from customers located in the U.S.
and are denominated in U.S. dollars. The Company maintains an allowance for
doubtful accounts receivable based upon the expected collectibility of accounts
receivable. During the years ended December 31, 1996, 1997 and 1998, and the
periods ended March 31, 1998 (unaudited) and 1999 (unaudited) respectively, one
customer accounted for 13.3%, 11.4%, 11.5%, 14.8% (unaudited) and 13.2%
(unaudited), respectively of net revenues. No other customer accounted for more
than 10% of net revenues or net accounts receivable.
Fair value of financial instruments
The Company's financial instruments, including cash, cash equivalents,
accounts receivable, accounts payable and debt are carried at cost, which
approximates their fair value because of the short-term maturity of these
instruments.
Inventory
Inventory generally consists of objects obtained as a result of the auction
process or of goods purchased specifically for resale. Inventory is valued at
the lower of cost, specifically identified, or estimated net realizable value.
Property and equipment
Property and equipment are stated at historical cost. Depreciation and
amortization are computed using the straight-line method and accelerated methods
over the estimated useful lives of the related assets, ranging from three years
for computer equipment to 31.5 years for buildings.
Intangible assets
Goodwill and other intangible assets resulting from the acquisition of
Dunnings Auction Services, Inc. in June 1998 were estimated by management to be
primarily associated with a covenant not to compete and goodwill and are being
amortized over their estimated useful lives of five and 15 years, respectively.
-6-
Impairment of long-lived assets
The Company evaluates the recoverability of long-lived assets in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121"). SFAS No. 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the fair value as
estimated by management based on appraisals, current market value, comparable
sales values and the estimated undiscounted future cash flows attributable to
such assets.
Environmental expenditures
Environmental expenditures that relate to current operations are charged to
expense or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations, and that do not contribute to current or
future revenue generation, are charged to expense. Liabilities are recorded when
environmental assessments are made and remediation obligations are probable and
the costs can be reasonably estimated. The timing of these accruals is generally
no later than the completion of feasibility studies.
HBJ and 111 Potrero own or control numerous real estate properties that are
either used in the auction business or leased to unrelated parties for various
commercial applications. Certain environmental and structural deficiencies have
been identified in the past for which the Company has remediation
responsibility. The amount accrued to correct these matters are based upon
estimates developed in preliminary studies by external consultants. Due to
uncertainties inherent in the estimation process, it is at least reasonably
possible that as additional information is obtained, the amounts accrued for
these matters may be revised in future periods.
Revenue recognition
Auction revenues are derived primarily from auction commissions and fees
from sale of property through the auction process. Revenue from these sources
are recognized at the date the related auction is concluded. Services revenues
are derived from financial, appraisal and other related services which are
recognized as such services are rendered.
Advertising expense
The Group Companies incur advertising expenses primarily related to the
distribution of catalogues and advertising for specific auction events.
Advertising expenses are recognized in accordance with Statement of Position
("SOP") 93-7 "Reporting on Advertising Costs." As such, the Group expenses the
costs of producing advertisements at the time production occurs, and expenses
the cost of communicating advertising in the period in which the advertising
space or airtime is used. Advertising expenses totaled $926, $868, $1,337, $197
(unaudited) and $289 (unaudited) during the years ended December 31, 1996, 1997
and 1998, and the three months ended March 31, 1998 and 1999, respectively.
Income taxes
For all periods presented in these combined financial statements, B&B and
BCCI have elected to be taxed as "S" Corporations and therefore, their
respective taxable income or loss have been reported on the shareholders'
individual tax returns. As limited liability corporations, 111 Potrero's and
HBJ's taxable income or loss have also been reported on the members, individual
income tax returns. Accordingly the provison for income taxes is comprised
solely of the California state franchise tax applicable to S Corporations.
Unaudited interim financial information
The accompanying interim combined financial statements as of March 31, 1999
and for the three months ended March 31, 1998 and 1999, are unaudited. The
unaudited interim combined financial statements have been prepared on the same
basis as the annual combined financial statements, and in the opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Group Companies' financial
position, results of operations and cash flows as of March 31, 1999 and for the
three months ended March 31, 1998 and 1999. The financial data and other
information disclosed in these notes to the combined financial statements
related to
-7-
these period are unaudited. The results for the three months ended March 31,
1999 are not necessarily indicative of the results to be expected for the year
ending December 31, 1999.
Comprehensive income
Effective January 1, 1998, the Group Companies adopted the provisions of
Statement of Financial Accounting Standard ("SFAS") No. 130 "Reporting
Comprehensive Income." SFAS No. 130 establishes the standard for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during a
period from non-owner sources. To date, the Group Companies have not had any
transactions that are required to be reported in comprehensive income.
Recent accounting pronouncements
In April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those
one-time activities related to opening a new facility, introducing a new
product or service, commencing some new operation or organizing a new entity.
Under SOP 98-5, the cost of start-up activities should be expensed as
incurred. SOP 98-5 is effective January 1, 1999 and the Group Companies do not
expect its adoption to have a material effect on their combined results of
operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivatives and Hedging Activities." SFAS No. 133 is effective
for all fiscal quarters beginning with the quarter ending June 30, 2000. SFAS
133 establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Group Companies will adopt SFAS No. 133 in July 2000 and
have not assessed the impact of adoption on their combined results of
operations, financial position or cash flows.
2. Balance Sheet Components
December 31,
--------------- March 31,
1997 1998 1999
---------- ---------- --------------
(unaudited)
Accounts receivable and advances, net:
Auction receivables........................................... $5,498 $5,203 $4,307
Consignor advances............................................ 1,358 1,342 2,304
Less: Allowance for doubtful accounts -- auction receivables.. (268) (314) (474)
Less: Allowance for doubtful accounts -- consignor advances... (187) (195) (126)
------ ------ ------
$6,401 $6,036 $6,011
====== ====== ======
Property and equipment, net:
Land and buildings............................................ $34,043 $ 37,359 $ 37,945
Computer equipment............................................ 1,658 1,821 1,885
Furniture, fixtures and equipment............................. 421 543 590
Leasehold improvements........................................ 2,154 2,199 2,234
Automobiles................................................... 244 367 383
Construction in progress...................................... -- 189 --
------- -------- --------
38,520 42,478 43,037
Less: accumulated depreciation................................ (9,084) (10,512) (10,740)
------- -------- --------
$29,436 $ 31,966 $ 32,297
======= ======== ========
-8-
3. Borrowings
Decmeber 31, March 31,
1997 1998 1999
----------- ---------- --------------
(unaudited)
Revolving line of credit, prime rate ................ $ 1,990 $ 2,991 $ 2,597
Mortgage notes, prime plus 1%,
due September 31, 2002 ............................ 2,013 1,905 1,878
Mortgage notes, LIBOR plus 1.75%,
due July 15 2001 .................................. 3,067 3,638 3,600
Mortgage notes, 8.255%,
due May 15, 2000 .................................. 12,407 12,249 12,111
10.5% loan on foreclosed property
due October 2010 .................................. 663 618 606
8.5% loan in connection with Dunnings acquisition
due June 30, 2000 ................................. - 500 500
Related party 10% demand note ....................... 1,710 - -
Demand note payable, prime rate ..................... 100 - -
----------------------------------
Subtotal .......................................... 21,950 21,901 21,284
Less current portion ................................ (6,282) (3,790) (3,396)
----------------------------------
$15,668 $18,111 $17,888
==================================
At December 31, 1997, HBJ maintained a revolving line of credit with a bank
that provided for borrowings of up to $2,000 and is personally guaranteed by the
members. Effective August 1, 1998, the agreement was amended to increase the
amount available to $4,500. The line of credit accrues interest on outstanding
borrowings at a rate equal to the bank's prime rate (8.5% and 7.75% at December
31, 1997 and 1998, respectively).
B&B and BCCI each maintain a $3,000 bank line of credit which expire on
July 31, 1999 and are each guaranteed by the other party. There were no
outstanding balances at December 31, 1997, 1998 and at March 31, 1999
(unaudited). The lines of credit require compliance with certain financial
covenants and annual profitability. The Companies were in compliance with these
covenants at December 31, 1998 and March 31, 1999 (unaudited). Interest is
generally charged at the Bank's prime rate (8.0% at December 31, 1998) less
.25%. However, the Company has the option to select from variations of the
London Interbank Offered Rate (LIBOR) 5.59% at December 31, 1998) plus 2% for
all or a portion of the outstanding balance for a predetermined loan term of 30
days to one year.
The mortgage notes outstanding are on property owned by the real estate
general partnerships and are personally guaranteed by the general partners. The
notes have variable interest rates ranging from 7.34% to 8.75% at December 31,
1998 and are secured by certain land, buildings and improvements. The notes are
repayable in equal monthly installments over six to ten year terms, with final
installments consisting of all remaining unpaid principal and accrued interest
at the end of the term.
During 1997, B&B foreclosed on secured receivables totaling $815 and
assumed a related note payable for $668, plus unpaid property taxes of $27. The
property received in the foreclosure consisted of inventory with estimated value
of $150 and real property recorded at the remaining value of consideration given
of $1,360, which approximates its fair value. The real property has been
classified as asset held for sale on the accompanying combined balance sheet,
because B&B has not used the property in its business operations and has
actively listed the property for sale since the foreclosure date. The related
loan bears interest at a fixed rate of 10.5% and is due in monthly principal and
interest installments of $9.
In connection with the purchase of Dunnings Auction Services, Inc.,
("Dunnings") (see Note 9), the Company assumed a note payable to the prior
owners in the original amount of $500. The note carries interest at 8.5%, and is
due in two approximately equal installments on June 30, 1999 and 2000.
In July 1993, an affiliate of HBJ entered into a note payable from a
general partner for $1,800. The note was payable on demand and accrued interest
at an annual rate of 10%. During the first quarter of 1998, the Company paid off
the note in full.
Notes payable consist of one demand note payable to an individual
totaling $100 at December 31, 1997 with an interest rate of prime and was
repaid during 1998.
Minimum annual repayments on these notes at December 31, 1998 are as
follows:
Year ending
December 31,
1999............................... $ 4,319
2000............................... 12,210
2001............................... 3,479
2002............................... 1,618
2003............................... 48
Thereafter......................... 227
-------
$21,901
=======
Interest expense for all obligations for the years ended December 31, 1996,
1997 and 1998 and for the three months ended March 31, 1998 and 1999 totaled
$2,161, $2,308, $2,114, $462 (unaudited) and $512 (unaudited), respectively.
-9-
4. Leasing Arrangements
HBJ and underlying general partnerships and 111 Potrero's leasing
operations consist principally of the leasing of certain land and buildings.
These leases are classified as operating leases that expire at various intervals
between 1999 and 2010. Certain of these leases contain renewal options and have
escalation clauses tied to changes in CPI. Under the terms of the leases, the
tenants are generally responsible for the payment of property taxes, insurance
and maintenance costs related to the leased property.
B&B leases space from HBJ and 111 Potrero at market rates. These lease
arrangements have been eliminated in consolidation.
Property on Operating Leases and Property Held for Lease
The following schedule provides an analysis of the Company's investment in
property use under operating leases and property held for lease by major
classes:
December 31,
1997 1998
------- --------
Land................................. $ 6,956 $ 7,265
Building............................. 7,133 8,581
Improvements......................... 8,535 9,672
Other................................ 37 37
------- -------
22,661 25,555
Less: Accumulated depreciation....... (3,751) (4,249)
------- -------
$18,910 $21,306
======= =======
The following is a schedule by year of minimum future rental income on
noncancellable operating leases as of December 31, 1998:
Year ending
December 31
1999......................................... $ 3,960
2000......................................... 3,964
2001......................................... 3,967
2001......................................... 3,837
2002......................................... 3,841
Thereafter................................... 21,110
-------
Total minimum future rentals................. $40,679
=======
5. Sale of Real Estate Properties
During 1998, the partners of 131 North Gilbert Avenue Partners, including
HBJ a 63.3% holder, sold the property to an unrelated party for $2,450 in cash
and recognized a gain on the transaction of $200. In August, HBJ also sold the
Parthenia property for $865 in cash and recognized a gain of $133.
6. Employee Benefit Plans
The Company has a defined savings contribution plan that covers employees
after one year of service. Under the Plan, participants may elect to contribute
up to 15% of their compensation, up to a maximum amount allowable under IRS
regulations on a pre-tax basis. In addition, the Company may contribute to the
plan up to 25% of the first 2% of each participant's compensation in an amount
determined annually by the Board of Directors. The Company's contributions
amounted to $14, $11, $20 and $5 (unaudited) for the years ended December 31,
1996, 1997, 1998 and for the three month ended March 31, 1999, respectively.
7. Commitments and Contingencies
Operating leases
The Group leases office and warehouse space and equipment under
noncancelable operating leases with varying expiration dates through the year
2005. Rent expense for the years ended December 31, 1996, 1997 and 1998 and for
the three months ended March 31, 1998 and 1999, totaled $5, $5, $58, $1
(unaudited) and $27 (unaudited), respectively.
Future minimum annual lease payments for noncancelable operating leases are
not material.
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Employment Agreement
In connection with the Dunnings purchase (see Note 9), the Group Companies
entered into employment agreement with a former owner of Dunnings. Under the
agreement, the Group Companies shall continue base salary payments of $175
annually through the November 2001 expiration date in the event of the
employee's death or termination with or without cause. Payments shall cease upon
resignation or termination with cause.
8. Acquisition
Effective June 30, 1998, the Group Companies acquired all net assets of
Dunning Auction Services, Inc., an auction house located in Elgin, Illinois. The
acquistion has been accounted for using the purchase method of accounting and
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the date of acquisition.
The total purchase price of $750 consisted of $250 in cash and the
assumption of $500 in debt. Of the total purchase price, $100 was allocated to
an agreement not to compete and the excess was allocated to goodwill.
The results of operations are included in the combined financial
statements commencing on July 1, 1998. The pro forma results of operations to
present what the results would have been had the acquisitions actually taken
place at the beginning of the respective periods presented did not result in a
material difference from the reported results of operations.
9. Operating Segment Reporting
Effective January 1, 1998, the Group Companies adopted the provisions of
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes the standards for reporting information
about operating segments in annual financial statements and requires that
certain selected information about operating segments be reported in interim
financial reports. It also establishes standards for related disclosures about
products and services, and geographic areas. Operating segments are defined as
components of an enterprise about which separate financial information is
evaluated regularly by the chief decision-maker in order to allocate resources
and in assessing performance.
The Group Companies have identified two primary operating segments: auction
services and real estate. The auction services segment consists of the
operations of B&B and BCCI. The real estate segment consists of the HBJ, 111
Potrero and the various general partnership interests. All segments conducted
their operations solely in the United States.
Segment selection was based upon the internal organization structure, the
manner in which these operations are managed and their performance evaluated by
management, the availability of separate financial information, and overall
materiality considerations. The operating information for the two segments
identified are as follows:
Auction
Services Real Estate Total
--------------- ---------------- ----------
March 31, 1999 (unaudited)
Net revenues:
Net revenues from external customers.......... $ 5,183 $ 1,057 $ 6,240
Intersegment net revenues..................... 168 447 615
--------------- ---------------- ----------
Total segment net revenues.................. 5,351 1,504 6,855
Income:
Income before taxes........................... (1,506) 736 (770)
Provision for income taxes.................... (1) - (1)
Minority interest............................. - (78) (78)
--------------- ---------------- ----------
Net income.................................... (1,507) 658 (849)
Other disclosuress:
Depreciation and amortization................. (167) (205) (372)
Interest income............................... 111 43 154
Interest expense.............................. (98) (414) (512)
Capital expenditures.......................... (517) (2) (519)
Unconsolidated affiliates:
Equity in income/loss....................... - 59 59
Investment in............................... - 928 928
Total assets at year-end...................... 14,845 31,814 46,659
Auction
Services Real Estate Total
--------------- ---------------- ----------
Year ended December 31, 1998
Net revenues:
Net revenues from external customers.......... $ 24,026 $ 4,486 $ 28,512
Intersegment net revenues..................... 1,237 1,422 2,659
--------------- ---------------- ----------
Total segment net revenues.................. 25,263 5,908 31,171
Income:
Income before taxes........................... 2,578 2,858 5,436
Minority interest............................. - (381) (381)
Provision for income taxes.................... (48) - (48)
--------------- ---------------- ----------
Net income.................................... 2,530 2,477 5,007
Other disclosures:
Depreciation and amortization................. 619 867 1,486
Interest income............................... 374 410 784
Interest expense.............................. 481 1,633 2,114
Capital expenditures.......................... 638 4,166 4,804
Unconsolidated affiliates:
Equity in income/loss....................... - (70) (70)
Investment in............................... - 928 928
Total assets at year-end...................... 17,483 34,143 51,626
Auction
Services Real Estate Total
--------------- ---------------- ----------
Year ended December 31, 1997
Net revenues:
Net revenues from external customers.......... $ 23,806 $ 4,300 $ 28,106
Intersegment net revenues..................... 628 1,684 2,312
--------------- ---------------- ----------
Total segment net revenues.................. 24,434 5,984 30,418
Income:
Income before taxes........................... 4,223 2,561 6,784
Minority interest............................. - (320) (320)
Provision for income taxes.................... (40) - (40)
--------------- ---------------- ----------
Net income.................................... 4,183 2,241 6,424
Other disclosures:
Depreciation and amortization................. 491 778 1,269
Interest income............................... 792 183 975
Interest expense.............................. 606 1,702 2,308
Capital expenditures.......................... 478 2,516 2,994
Unconsolidated affiliates:
Equity in income/loss....................... - (314) (314)
Investment in............................... - (3,099) (3,099)
Total assets at year-end...................... 20,223 31,210 51,433
Auction
Services Real Estate Total
--------------- ---------------- ----------
Year ended December 31, 1996
Net revenues:
Net revenues from external customers.......... $ 20,027 $ 3,892 $ 23,919
Intersegment net revenues..................... 664 1,596 2,260
--------------- ---------------- ----------
Total segment net revenues.................. 20,691 5,488 26,179
Income:
Income before taxes........................... 2,632 755 3,387
Minority interest............................. - (86) (86)
Provision for income taxes.................... (42) - (42)
--------------- ---------------- ----------
Net income.................................... 2,590 669 3,259
Other disclosures:
Depreciation and amortization................. 536 652 1,188
Loss on sale of asset......................... - 340 340
Interest income............................... 698 - 698
Interest expense.............................. 485 1,676 2,161
Capital expenditures.......................... 520 708 1,228
Unconsolidated affiliates:
Equity in income/loss....................... - (576) (576)
Investment in............................... - (3,245) (3,245)
Total assets at year-end...................... 14,965 29,114 44,079
10. Subsequent Events
Initial Public Offering Withdrawn
In April 1999, B&B withdrew its registration statement for its initial
public offering. Accordingly, in the second quarter of 1999, the Company will
record a charge of approximately $2.6 million related to the costs of the
withdrawn offering. Of these costs, approximately $202 (unaudited) was included
in prepaid assets at March 31, 1999.
Acquisition by eBay Inc.
On May 28, 1999, eBay Inc. acquired all of the outstanding equity interests
of the Group Companies at which time they each became wholly-owned subsidiaries
of eBay Inc.
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