UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______________ to ________________
Commission file number 333-66859
INTREPID CAPITAL CORPORATION
(Exact name of Registrant as specified in its Charter)
DELAWARE 59-3546446
(State of Incorporation) (I.R.S. Employer Identification No.)
3652 SOUTH THIRD STREET, SUITE 200, JACKSONVILLE BEACH, FLORIDA 32250
(Address of principal executive offices) (Zip Code)
(904) 246-3433
(Registrant's telephone number)
(Former address of principal executive offices) (Zip Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Check whether the issuer: (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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended December 31, 2002 were
$12,200,508.
As of February 28, 2003, there were 3,400,183 shares of Common Stock
outstanding and 1,000 shares of Common Stock issued and held in treasury. The
aggregate market value of the voting Common Stock held by non-affiliates of the
Registrant as of February 28, 2003, as based on the average closing bid and ask
prices, was approximately $1,243,821.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
PART I
Certain statements contained in this Annual Report on Form 10-KSB are
"forward-looking statements," within the meaning of the Private Securities
Litigation Reform Act of 1995, and are thus prospective in nature. Such
forward-looking statements reflect management's beliefs and assumptions and are
based on information currently available to management. The forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause actual results, performance or achievements of Intrepid Capital
Corporation to differ materially from those expressed or implied in such
statements. There can be no assurance that such factors or other factors will
not affect the accuracy of such forward-looking statements
ITEM 1. DESCRIPTION OF BUSINESS
General
Intrepid Capital Corporation ("ICAP"), incorporated in 1998, is a
Florida-based financial services holding company that conducts its business
through its wholly owned subsidiaries, Intrepid Capital Management ("ICM") and
Allen C. Ewing & Co. ("Ewing").
ICM, a registered investment advisor, manages equity, fixed-income,
and balanced portfolios for public and private companies, labor unions,
endowments, foundations, and high net worth individuals and families. ICM has
received authority to act as an investment manager in several states to meet
the needs of its customers throughout the United States.
Ewing is a registered broker-dealer with the Securities and Exchange
Commission ("SEC") and a member of the National Association of Securities
Dealers, Inc. ("NASD") and the Securities Investor Protection Corporation
("SIPC").
In a transaction effective December 31, 2001, ICAP acquired all of the
outstanding stock of ICC Investment Advisors, Inc., a Florida corporation, the
operations of which are conducted through its wholly-owned subsidiary, The
Investment Counsel Company ("ICC"). Subsequent to the acquisition, ICC was
merged with and into ICM.
In a transaction effective October 30, 2001, ICAP discontinued its
resinous material operations formerly conducted through Enviroq Corporation
("Enviroq") by selling all of the issued and outstanding capital stock of
Sprayroq, Inc. ("Sprayroq"), Enviroq's 50% owned subsidiary. Enviroq remains a
wholly-owned subsidiary of ICAP to hold the promissory notes received in
connection with the sale, but conducts no operations currently, as its
operations consisted solely of its investment in Sprayroq.
In the future, ICAP intends to continue to expand through the growth
of its present subsidiaries and through the acquisition of additional firms
that provide investment management and other financial services. Currently, the
principal business of ICAP is the operation of its wholly owned subsidiaries,
ICM and Ewing.
Investment Management
ICM is a registered investment advisor under the Investment Advisors
Act of 1940, as amended (the "Investment Advisors Act"), operating with clients
throughout the United States. ICAP's investment management strategy is to
capitalize on growth opportunities for investment management services in the
institutional, for-profit corporate, non-profit corporate and private client
markets. ICM manages assets across a diverse range of investment styles, asset
classes and client types, with significant participation in both the debt and
equity markets. ICM is responsible for developing and implementing its own
investment philosophy. ICM seeks to grow by expanding the capabilities of its
investment management services,
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increasing and focusing its marketing efforts and selectively expanding its
distribution channels. As of December 31, 2002, ICM had $469.1 million of
assets under management for its clients.
Factors Affecting Investment Managers.
Revenues in the investment management industry are determined
primarily by fees based on assets under management. Therefore, the principal
determinant of growth in the industry is the growth of institutional assets
under management. In management's judgment, the major factors which influence
changes in institutional assets under management are: (a) changes in the market
value of securities; (b) net cash flow into or out of existing accounts; (c)
gains of new or losses of existing accounts by specific firms or segments of
the industry; and (d) the introduction of new products by the industry or by
particular firms. In general, assets under management of the industry have
increased steadily as a result of these factors.
Investment Banking
Ewing is a registered broker-dealer and a member of the NASD and the
SIPC. Ewing provides full-service securities brokerage and investment banking,
which primarily includes advisory services to clients on corporate finance
matters, including mergers and acquisitions and the issuance of public stock.
Ewing's securities brokerage business is conducted, on a fully
disclosed basis, through National Financial Services, LLC ("NFS"). Ewing's
operations, in conjunction with NFS, include the execution of orders,
processing of transactions, receipt, identification and delivery of funds and
securities, custody of customer securities, internal financial controls and
compliance with regulatory and legal requirements.
Factors Affecting Investment Bankers
Revenues in the securities industry are directly affected by general
economic and market conditions, including fluctuations in volume and prices of
securities, changes and prospects for changes in interest rates and demand for
brokerage and investment banking services, all of which can affect Ewing's
relative profitability. In periods of reduced market activity, profitability is
likely to be adversely affected because certain expenses, including salaries
and related costs, portions of communication costs and occupancy expenses,
remain relatively fixed.
Investors are becoming more self-reliant and value conscious in the
pursuit of their financial goals. Investors are increasingly willing to acquire
the information about, and an understanding of, investment alternatives and
have become increasingly sophisticated and knowledgeable about investing with
easy access to a broad range of financial information.
ICAP Business Strategy
ICAP intends to grow its business by leveraging its competitive
investment management service strengths through ICM, including ICM's long-term
performance record, diverse product offerings and experienced research, client
service and investment staff. In order to achieve continued growth and
profitability, ICAP will continue to pursue its business strategy, the key
elements of which include:
Maintain Investment Management As Core Business
ICAP's core business is investment management. Concentrating its
professional and financial resources on providing high quality investment
products and client service, ICAP hopes to further establish a respected
reputation among its clients and in the investment community. ICAP believes
that its continuing commitment to its core investment management business,
together with its continued independence during a
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period of consolidation in the financial services industry, is attractive to
potential clients and will also contribute to its ability to attract and retain
highly qualified investment professionals.
Broadening and Strengthening the ICAP Brand
ICAP intends to strengthen its brand name identity by, among other
things, increasing its marketing and advertising to provide a uniform image and
has the capacity to create new products and services around the core ICAP brand
to complement its existing product offerings.
Enhancing Diverse Product and Service Offerings
ICAP believes that its ability to offer a broad range of investment
products and services in a wide variety of investment styles will enhance its
opportunities for attracting new clients and cross-selling its products and
services to existing clients. ICAP also seeks to complement existing product
offerings through internal development and acquisition of new investment
capabilities.
Increasing Penetration in the Accredited Investor Market
ICAP's high net worth business focuses, in general, on serving clients
who fit within the definition of "accredited investors" under the federal
securities laws. That means ICAP's customers will generally be (i) banks or
other financial institutions; (ii) registered broker-dealers; (iii) registered
investment companies; (iv) small business investment companies; (v) natural
persons whose individual net worth, or joint net worth with that person's
spouse, exceed $1,000,000; (vi) natural persons whose individual net income
exceeded $200,000, or $300,000 together with their spouses, for each of the
past two years, and such persons have the reasonable expectation of achieving
such incomes in the current year; (vii) certain types of trusts with total
assets in excess of $5,000,000; and (viii) entities in which all of the equity
owners are accredited investors. With ICM and ICC's history of serving this
segment and their long-term performance record, ICAP believes that it is well
positioned to capitalize on the growth opportunities in this market.
Attracting and Retaining Experienced Professionals
The availability of the publicly traded ICAP Common Stock will enhance
ICAP's ability to attract and retain top performing investment professionals.
The ability to attract and retain highly experienced investment and other
professionals with a long-term commitment to ICAP and its clients will be a
significant factor in ICAP's long-term growth. As ICAP continues to increase
the breadth of its investment management capabilities, it plans to add
portfolio managers and other investment personnel in order to foster expansion
of its products.
Capitalizing on Strategic Acquisitions and Alliances
ICAP intends to selectively and opportunistically pursue acquisitions
and alliances that will broaden its product offerings and add new sources of
distribution. ICAP believes that it is well positioned, as a publicly traded
company, to pursue strategic acquisitions and alliances with firms providing
investment management and other financial services.
Competition
ICAP, through its wholly owned subsidiaries, is principally engaged in
an extremely competitive business, the financial services industry. Competitors
include, with respect to one or more aspects of its business, all of the member
organizations of the New York Stock Exchange and other registered securities
exchanges, all of the members of the NASD, investment management firms,
commercial banks, thrift institutions and financial consultants. Many of these
organizations have substantially more employees and
3
greater financial resources than ICAP. ICAP also competes for investment funds
with banks, insurance companies and investment companies. Discount brokerage
firms oriented to the retail market, including firms affiliated with commercial
banks and thrift institutions, are devoting substantial funds to advertising
and direct solicitation of customers in order to increase their share of
commission dollars and other securities related income. ICAP is not engaged in
extensive advertising programs for this type of business.
Management believes that the most important factors affecting
competition in the investment management business are the abilities and
reputations of investment managers, differences in investment performance of
the various firms, the development and execution of new investment strategies,
access to channels of distribution, and resources to invest in information
technologies and client service capabilities. ICAP expects that other industry
participants will from time to time seek to recruit ICAP investment
professionals and other employees away from ICAP. The loss of key professionals
could have a material adverse affect on ICAP.
The financial services industry is, by its nature, subject to various
risks, particularly in volatile or illiquid markets, including the risk of
losses resulting from the ownership of securities, customer fraud, employee
errors or misconduct, failures in connection with the processing of securities
transactions and litigation. ICAP's business and its profitability are affected
by many factors, including the volatility and price level of the securities
markets, the volume, size and timing of securities transactions, the demand for
investment banking services, the level and volatility of interest rates, the
availability of credit, legislation affecting the business and financial
communities, and the economy in general. Markets characterized by low trading
volumes and depressed prices generally result in reduced commissions and
investment banking revenues as well as losses from declines in the market value
of securities positions.
Supervision and Regulation
ICAP
ICAP is incorporated under, and required to be in compliance with, the
laws of the State of Delaware. ICAP is also subject to the reporting
requirements of the Securities Act of 1933 and the Securities Exchange Act of
1934 as well as to applicable regulation and supervision by the SEC. Because
ICAP is not engaged in the rendering of investment advisory services, its
activities as a holding company will not result in ICAP being deemed an
"investment advisor", as such term is defined in the Investment Advisors Act
and various state advisors acts. ICAP, therefore, is not required to be
registered under the Investment Advisors Act or any state advisors acts.
However, because Ewing is subject to the Uniform Net Capital Rule (as defined
below), ICAP is also subject to the requirements of such rule.
ICAP believes that it, including all subsidiaries, is currently in
compliance with all state and federal regulations, and its most recent
regulatory audit met all applicable regulatory requirements. ICAP also has in
place an ongoing internal compliance program supported by regulators, external
consultants, accountants and attorneys.
ICM
ICM is incorporated under, and required to be in compliance with, the
corporate laws of the State of Florida. Because ICM is engaged in the business
of providing investment advisory services to a number of clients, ICM is
registered under the Investment Advisors Act and under applicable state
investment advisors acts. All registrations, reporting, maintenance of books
and records and compliance procedures required by the foregoing laws and
regulations are maintained independently by ICM. ICM is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and to U.S.
Department of Labor regulations promulgated thereunder, insofar as it is a
"fiduciary" under ERISA with respect to its respective clients.
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The laws and regulations applicable to ICM and its operations
generally grant supervisory agencies and other regulatory bodies' broad
administrative powers, including the power to limit or restrict ICM from
carrying on its business in the event that it fails to comply with such laws
and regulations. Possible sanctions that may be imposed in the event of such
noncompliance include the suspension of individual employees, limitations on
engaging in business for specified periods of time, revocation of registration
as an investment advisor, censures and fines.
Ewing
Ewing is incorporated under, and required to be in compliance with,
the corporate laws of the State of Florida. Ewing is registered as a
broker-dealer with the SEC under the Securities Exchange Act of 1934 (the
"Exchange Act") and, where applicable, under various state securities laws, and
is further regulated by the rules of the NASD. All registrations, reporting,
maintenance of books and records and compliance procedures required by the
foregoing laws and regulations are maintained independently by Ewing.
Ewing is also required by federal law to belong to the SIPC, which
provides, in the event of the liquidation of a broker-dealer, protection for
securities held in customer accounts of up to $500,000 per customer, subject to
a limitation of $100,000 on claims for cash balances. The SIPC is funded
through assessments levied on registered broker-dealers. Stocks, bonds, mutual
funds and money market funds are considered securities and are protected on a
share basis for the purposes of SIPC protection. SIPC protection does not apply
to fluctuations in the market value of securities.
Margin lending arranged by Ewing is subject to the margin rules of the
Board of Governors of the Federal Reserve System and the NASD. Under such
rules, broker-dealers are limited in the amount they may lend in connection
with certain purchases and short sales of securities and are also required to
impose certain maintenance requirements on the amount of securities and cash
held in margin accounts. In addition, those rules govern the amount of margin
customers must provide and maintain in writing uncovered options.
As a registered broker-dealer, Ewing (and ICAP by virtue of its
ownership of Ewing) is subject to Rule 15c3-1 of the Exchange Act, also known
as the "Uniform Net Capital Rule", which has also been adopted by the NASD. The
Uniform Net Capital Rule specifies minimum net capital requirements for all
registered broker-dealers and is designed to measure financial integrity and
liquidity. Failure to maintain the required regulatory net capital may subject
a firm to suspension or expulsion by the NASD, certain punitive actions by the
Commission and, ultimately, may require a firm's liquidation.
Ewing falls within the provisions of Rule 15c3-l(a)(2)(iv) of the
Exchange Act. Ewing is subject to the minimum net capital requirements
applicable to brokers or dealers that introduce customer accounts and receive
securities, which requires that Ewing maintain minimum net capital, as defined,
of not less than $100,000 at December 31, 2002. Ewing is not subject to Rule
15c3-3 of the Exchange Act, which regulates a broker-dealer's custody of
customer securities, and claims exemption from the reserve requirement under
Rule 15c3-3(k)(2)(ii) of the Exchange Act. Ewing maintains net capital in
excess of that required by Rule 17a-11 of the Exchange Act which requires Ewing
to give notice in the event that Ewing's net capital falls below certain
levels.
Employees
As of December 31, 2002, ICAP and its subsidiaries employed 44 full
time persons. ICAP has no collective bargaining agreement with any of its
employees and believes that its overall relations with employees are good.
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ITEM 2. DESCRIPTION OF PROPERTY
ICAP and ICM maintain offices at 3652 South Third Street, Suite 200,
Jacksonville Beach, Florida 32250, occupying approximately 5,600 square feet
under a lease that expires in January 2010.
ICM also maintains an office at 255 South Orange Avenue, Suite 900,
Orlando, Florida 32801, occupying approximately 4,000 square feet under a lease
that expires in August 2007.
Ewing maintains an office at 50 North Laura Street, Suite 3625,
Jacksonville, Florida 32202, occupying approximately 4,300 square feet under a
lease that expires in January 2005.
Ewing also maintains an office at 200 S. Tryon Street, Suite 700,
Charlotte, North Carolina 28202, occupying approximately 3,700 square feet
under a lease that expires in March 2007.
All properties are in adequate condition for the purposes for which
ICAP uses them.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending, or to ICAP's
knowledge, threatened against ICAP or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to ICAP's stockholders during the fourth
quarter of fiscal year 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ICAP's common stock trades in the over-the-counter market and is
quoted on the NASDAQ OTC Bulletin Board under the symbol "ICAP". The following
table sets forth, for the last two fiscal years, the high and low bid and asked
prices of the common stock of ICAP. The information set forth below has been
obtained from Bloomberg L.P. and is believed to be reliable. The reported high
and low bid and asked quotations reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not represent actual transactions.
Fiscal Year 2002 Low Bid High Bid Low Asked High Asked
---------------- ------- -------- --------- ----------
First Quarter $3.00 $1.65 $1.10 $3.35
Second Quarter 1.80 2.50 1.90 3.00
Third Quarter 0.72 1.85 1.00 2.00
Fourth Quarter 0.50 1.50 0.75 1.65
Fiscal Year 2001 Low Bid High Bid Low Asked High Asked
---------------- ------- -------- --------- ----------
First Quarter $2.50 $1.75 $1.38 $3.50
Second Quarter 1.10 1.55 1.40 1.80
Third Quarter 1.00 1.40 1.20 1.60
Fourth Quarter 1.00 1.35 1.50 1.68
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As of December 31, 2002, there were 3,400,183 shares of ICAP Common
Stock outstanding, 1,000 shares held in treasury and 313 stockholders of
record. The number of record holders includes as single holders various
institutions (such as brokerage firms) that hold shares in "street name" for
multiple stockholders.
ICAP has not paid any cash dividends on the ICAP Common Stock since
its organization, and currently intends to retain any earnings for operations
and the expansion of its business. Other than state corporate law limitations,
there are no restrictions on ICAP's ability to pay dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The discussion and analysis of ICAP's financial condition and results
of operations are based on ICAP's consolidated financial statements which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. We base these estimates on historical
experience and on various other assumptions that management believes are
reasonable under the circumstances; additionally we evaluate these results on
an on-going basis. Actual results may differ from these estimates under
different assumptions or conditions.
ICAP has a significant amount of goodwill and identifiable intangible
assets recorded on its financial statements. ICAP's identifiable intangible
assets consist of investment management contracts and customer relationships.
Management's allocation of purchase price to these identifiable intangible
assets requires estimates about the amount and useful lives of identifiable
intangible assets acquired. These estimates require a significant degree of
estimates based on management's assumptions regarding future cash flows,
account retention, expected profit margins, and applicable discount rates and
are subject to uncertainty and may differ significantly from actual results
under different assumptions or conditions.
ICAP has completed its initial assessment of impairment for goodwill
and identifiable intangible assets. Management has assessed the recoverability
of the identifiable intangible assets and has determined there to be no
impairment based on its estimates and analysis of future cash flows. Management
will continue to assess the recoverability whenever events or circumstances
indicate they may be impaired and monitor the future results of the investment
management segment. In addition, ICAP will periodically review goodwill and
intangible assets for impairment in accordance with existing accounting
pronouncements and has set an annual impairment test date for goodwill of
December 31. Such review will involve ICAP's determination of reporting unit
fair values through estimation of projected cash flows, discount rates, future
performance and other variables, which will require a significant amount of
judgment by ICAP's management.
Acquisitions
On December 31, 2001, ICAP acquired 100% of the outstanding capital
stock of ICC and has accounted for this transaction under the purchase method
of accounting. ICC, which was merged with and into ICM on June 30, 2002, is
expected to significantly enhance ICAP's investment management segment in many
areas including improved distribution capabilities, increased investment
management revenues, and increased efficiencies through economies of scale.
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Discontinued Operations
On October 30, 2001, ICAP sold its ownership of Sprayroq, Enviroq's
50% owned subsidiary. Enviroq's operations consisted solely of its investment
in Sprayroq, and ICAP has reported its operations as discontinued for all
periods presented. Enviroq conducts no operations currently, but remains a
wholly-owned subsidiary of the Company to hold the interest bearing promissory
notes received in connection with the sale. A loss on sale of discontinued
operations of $566,000, after tax, was recorded during the year ended December
31, 2001. Revenues from Enviroq were $1,230,402 for the year ended December 31,
2001. The loss from discontinued operations for Enviroq, including income tax
expense, was $31,620 for the year ended December 31, 2001.
Liquidity and Capital Resources
ICAP's current assets consist generally of cash, money market funds
and taxes receivable. ICAP has financed its operations with funds provided by
stockholder capital, proceeds from notes payable, and the disposal of Sprayroq,
Inc. ICAP has developed and is implementing a growth strategy plan that
includes both internal growth and external growth through acquisitions.
In connection with the acquisition of ICC, ICAP financed the cash
portion of the transaction through a loan from AJG, a Delaware corporation and
wholly-owned subsidiary of Arthur J. Gallagher & Co., a publicly-traded
Delaware corporation (NYSE: AJG), pursuant to the terms and conditions of an
Investment Agreement, a Convertible Note Agreement, a Convertible Note, an
Option Agreement, a Registration Rights Agreement and a Standstill Agreement,
each dated as of December 31, 2001 between ICAP and AJG (collectively, the
"Loan Documents"). Pursuant to the Loan Documents and the exhibits thereto,
among other things, AJG loaned ICAP $3,500,000 to finance the cash portion of
the transaction, as well as the costs and expenses associated with the
acquisition and for ICAP's working capital needs. In exchange, ICAP issued a
convertible promissory note in favor of AJG which was due on or before April
30, 2002, bore interest at 5% per annum, and could be converted on or prior to
maturity into Class A Cumulative Convertible Pay-In-Kind Preferred Stock of
ICAP. On March 29, 2002, the loan was converted into 1,166,666 shares of ICAP's
Class A Cumulative Convertible Pay-In-Kind Preferred Stock.
ICAP believes the acquisition of ICC and subsequent merger with and
into ICM provides ICAP a much broader distribution platform for investment
management services, branding, and the ability to consolidate back-office
investment management functions. ICAP is currently seeking additional capital
for future strategic opportunities through multiple sources. While management
believes it will be able to meet its capital needs through several potential
alternatives, there can be no assurances that such transactions will take place
on terms favorable to ICAP, if at all. If adequate funds are not available or
terms are not suitable, ICAP's growth strategy would be significantly limited
and such limitation could have an effect on ICAP's business, results of
operations and financial condition.
From January 2002 through June 2002, ICAP managed, under a time
specific contract, the loan asset portfolio of Hamilton Bank, N.A., a national
bank located in Miami, Florida, for which the Federal Deposit Insurance
Corporation ("FDIC") was acting as receiver (the "FDIC contract"). For the year
ended December 31, 2002, revenues earned from the FDIC contract were $7,204,196
which includes reimbursable pass-through costs occurring during and after the
contract termination date.
For 2002, the net cash used in operating activities of $366,329 was
primarily attributable to an increase in prepaid and other assets. Net cash
used in investing activities of $239,282 was primarily due to the purchase of
equipment. Net cash provided by financing activities of $275,000 was
attributable to the net proceeds from notes payable.
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ICAP, through its subsidiary Ewing, is subject to the net capital
requirements of the Exchange Act, the NASD and other regulatory authorities. At
December 31, 2002, Ewing's regulatory net capital was $222,980, which is
$122,980 in excess of its minimum net capital requirement of $100,000.
Results of Operations
If the purchase of ICC had occurred on January 1, 2001, the
consolidated results of operations for 2001 would have reflected pro forma
total revenues of $5,284,348 and pro forma net loss of $1,511,516.
ICAP has invested and plans to continue to focus and invest primarily
in the investment management segment. ICM has several portfolio styles, ranked
by independent sources, in the top percentile of all investment managers for
both performance and risk control. ICAP is investing in human capital through
the retention of portfolio management professionals, the hiring of six
investment management sales professionals and has sales promotion efforts,
through advertising and marketing, aimed at branding and broadening ICM's
investment management market share and presence.
During 2002, ICM was selected by one of the nation's top securities
firms as a top-tier investment manager for use by their more than 7,300 brokers
in more than 700 offices throughout the world. In a further effort to focus on
investment management, ICAP exited the retail brokerage operations in October
2002 through the termination of the six employees involved exclusively with the
retail brokerage operations and is only maintaining the brokerage operations
that aid the investment banking business.
Although ICAP is currently experiencing operational losses and is
expected to during part of 2003 as a result of its investments, management
projects the investments will justify the current expenses through significant
increases in its investment management revenues in 2003.
Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
Total revenues were $12,200,508 for the twelve months ended December
31, 2002, compared to $3,306,144 for the twelve months ended December 31, 2001,
representing a 269.0% increase.
Investment management fees increased $2,674,685, or 330.4%, to
$3,484,115. Investment management fees represent revenue earned by ICM and ICC
for investment advisory services. The fees earned are generally a function of
the overall fee rate charged to each account and the level of AUM. Quarterly
management fees are billed on the first day of each quarter based on each
account value at the market close of the prior quarter. AUM was $458.4, $475.5,
452.1 and $458.2 million at December 31, 2001, March 31, 2002, June 30, 2002
and September 30, 2002, respectively, compared to $105.3, $84.6, $79.3 and
$74.1 million at December 31, 2000, March 31, 2001, June 30, 2001 and September
30, 2001, respectively. The increase in investment management fees for the year
ended December 31, 2002 relates primarily to the increase in AUM as a result of
the acquisition of ICC in December 2001. AUM was $469.1 million at December 31,
2002, compared to $458.4 million at December 31, 2001.
Investment banking revenues increased $6,584,467, or 662.6%, to
$7,578,218. Investment banking revenues represent fees earned by Ewing for
providing investment banking services to clients on corporate finance matters,
including mergers and acquisitions and the issuance of capital stock to the
public. Such revenues are dependent on the timing of services provided and are
normally received upon consummation of the underlying transaction. The increase
is primarily attributable to the FDIC contract, which accounts for
approximately 95% of total investment banking revenue for the period.
Commissions decreased $472,271, or 35.0%, to $878,024. Commissions
represent revenue earned by Ewing from securities transactions conducted on
behalf of customers, including sales of mutual fund shares and variable
annuities. The decrease is primarily attributable to decreased transaction
volume as a result of
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the Company exiting the retail brokerage operations in October 2002 through the
termination of the six employees involved exclusively with the retail brokerage
operations and to volatile market conditions.
Other income increased $107,483, or 70.4%, to $260,151. The increase
is primarily attributable to an increase in interest received from the higher
average cash balances invested in money markets and to re-negotiated fee
arrangements for investment-related recordkeeping services.
Total expenses were $12,018,787 for the twelve months ended December
31, 2002, compared to $3,975,688 for the twelve months ended December 31, 2001,
representing a 202.3% increase.
Compensation and benefits increased $4,810,940, or 202.0%, to
$7,192,389. Compensation and benefits represent fixed salaries, commissions
paid on securities transactions and investment banking revenues, temporary
staffing costs, and other related employee benefits. The increase is primarily
attributable to bonuses and temporary staffing costs associated with the FDIC
contract, which are non-recurring and totaled approximately $3.0 million, to
the acquisition of ICC employees, to severance packages related to the
integration of ICM and ICC, and to compensation and benefits associated with
several newly hired regional ICM sales professionals.
Brokerage and clearing expenses decreased $57,740, or 21.8%, to
$207,571. Brokerage and clearing expenses represent the securities transaction
and other costs paid to the clearing broker-dealer, and are related to
commission revenue earned by Ewing. The decrease is primarily attributable to
decreased transaction volume as a result of the Company exiting the retail
brokerage operations in October 2002 through the termination of the six
employees involved exclusively with the retail brokerage operations and to
volatile market conditions.
Advertising and marketing expenses increased $546,690, or 226.9%, to
$787,677. The increase is primarily attributable to the travel and
entertainment expenses associated with new regional sales professionals and an
increase in ICM's advertising and marketing expenses associated with a new
advertising and marketing campaign aimed to attract prospective clients and to
inform them of ICM's top-tier investment performance.
Professional and regulatory expenses increased $1,842,422, or 636.8%,
to $2,131,766. The increase is primarily attributable to the legal and other
costs associated with the FDIC contract, which are non-recurring and totaled
approximately $1.4 million.
Occupancy and maintenance expenses increased $279,576, or 75.1%, to
$652,076. The increase is primarily attributable to the acquisition of ICC in
December 2001 and to the opening of a new office located in Charlotte, North
Carolina which, subsequently, was closed in February 2003.
Interest expense increased $53,485, or 86.8%, to $115,104. The
increase is primarily attributable to interest on the AJG note prior to its
conversion into shares of the Company's Class A Cumulative Convertible
Pay-In-Kind Preferred Stock and to interest on a note payable to a bank used
for working capital needs associated with the FDIC contract.
Other expenses increased $384,113, or 138.0%, to $662,525. The
increase is primarily attributable to the acquisition of ICC in December 2001
and to the opening of a new office located in Charlotte, North Carolina which,
subsequently, was closed in February 2003.
10
Expected Impact of Recently Announced Accounting Standards
In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 142, effective January 1, 2002, requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized but instead be tested for impairment at least annually. As of
December 31, 2002, ICAP completed its initial annual impairment test for
goodwill with no impairment being required.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN
45"). FIN 45 introduces new disclosure and liability recognition requirements
for guarantees of debt that fall within its scope. ICAP has adopted FIN 45. The
liability recognition requirements will be applied for all guarantees entered
into or modified after December 31, 2002.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46"). FIN 46 addresses consolidation by business enterprises of variable
interest entities which do not effectively disperse risk among parties
involved. FIN 46 requires an enterprise to consolidate the operations of a
variable interest entity if the enterprise absorbs a majority of the variable
interest entity's expected losses, receives a majority of its expected residual
returns, or both. The provisions of FIN 46 are effective for financial
statements issued after January 31, 2003 and ICAP has adopted FIN 46 as of that
date. ICAP has a variable interest in Intrepid Capital, L.P., a private
investment partnership in which ICAP serves as the general partner and from
which ICAP receives investment management fees. ICAP's maximum exposure to loss
as a result of its involvement with Intrepid Capital, L.P. is limited to its
investment of $128,724 at December 31, 2002 and annual investment management
fees which approximated $60,000 for the year ended December 31, 2002.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of ICAP as of December 31, 2002
and other information required by Item 310(a) of Regulation S-B are set forth
on pages F-1 through F-19 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants
regarding accounting procedures or financial disclosure.
11
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Executive officers and directors of ICAP as of the date hereof are as
follows:
NAME AGE DIRECTOR SINCE POSITION AND OFFICES WITH INTREPID
---- --- -------------- ----------------------------------
Robert B. Dunlap 60 February 2003 Director
Arnold A. Heggestad 59 August 1999 Director
David R. Long 51 March 2002 Director
Amy A. Lord 35 February 2003 Director
Fred J. Shockley 59 February 2003 Director
Mark P. Strauch 47 March 2002 Director
Mark F. Travis 41 September 1998 Executive Vice President and Director
Forrest Travis 64 September 1998 President, Chief Executive Officer and Director
Michael J. Wallace 29 February 2003 Chief Financial Officer, Secretary, Treasurer and
Director
Robert B. Dunlap has served as a director of ICAP since February 2003.
Mr. Dunlap currently serves as Vice President of Ewing. From 1991 to 1998, Mr.
Dunlap was a Senior Vice President and Senior Credit Officer in the Special
Assets Division of First Union National Bank in Jacksonville, Florida.
Previously from 1987 to 1990, Mr. Dunlap was a Senior Vice President at Duval
Federal Savings & Loan in Jacksonville, Florida. Mr. Dunlap received a Bachelor
of Science degree with a major in Business Management in 1965 from Florida
State University. Mr. Dunlap received an MBA degree in 1991 and a Masters of
Accounting degree in 1995 from University of North Florida. Mr. Dunlap is a
licensed CPA, a licensed Florida Real Estate Broker, and holds a Series 7
license.
Dr. Arnold A. Heggestad has served as a director of ICAP since August
1999. Dr. Heggestad currently serves as Holloway Professor of Finance and
Entrepreneurship and director of the Center for Entrepreneurship and Innovation
at the University of Florida College of Business Administration. Dr. Heggestad
has served as Executive Director of the University of Florida Research
Foundation, Inc., director of the Jacksonville, Florida branch of the Federal
Reserve Bank of Atlanta, Georgia, advisory director of Florida Bank, chairman
of The Cypress Equity Fund and a Commissioner of the Government Accountability
to the People Commission. From 1977 until 1986, Dr. Heggestad was the chairman
of the Department of Finance, Insurance, and Real Estate and associate dean of
the University of Florida College of Business Administration. Dr. Heggestad
received a bachelor's degree from the University of Maryland and masters and
Ph.D. degree from Michigan State University.
David R. Long has served as a director of ICAP since March 2002. Mr.
Long is President of AJG Financial Services, Inc. ("AJG"), a Delaware
corporation, and Vice President and Chief Investment Officer of Arthur J.
Gallagher & Co. ("Gallagher"), a New York Stock Exchange listed, Delaware
corporation that is the parent corporation of AJG. Prior to joining AJG in
1980, Mr. Long worked at the Harris Trust and Savings Bank in Chicago,
Illinois. Mr. Long serves as a Director for Asset Alliance Corporation,
Softwerc Technologies, Inc., and Franklin Capital Group. He is also Chairman of
the Board of Directors of Chicago Equity Fund and Peachtree Franchise Finance,
LLC. Mr. Long graduated from the University of Illinois with a Bachelor's of
Business Administration Degree in Finance and received his Masters in
Management from Northwestern University.
12
Amy A. Lord has served as a director of ICAP since February 2003. Ms.
Lord has been Vice President and Portfolio Manager of ICM since June 2002,
where she manages equity and fixed income portfolios. Prior to the ICC merger
with and into ICM in June 2002, Ms. Lord was a Managing Director of ICC in
Orlando, Florida, which she joined in 1992. Ms. Lord is President of the
Orlando Society of Financial Analysts, and a member of the Association for
Investment Management and Research (AIMR). In 1995, Ms. Lord became a Chartered
Financial Analyst. She earned a Bachelor's degree from the University of
Florida and currently holds NASD Series 2, 63, and 65 licenses.
Fred J. Shockley has served as a director of ICAP since February 2003.
Mr. Shockley has been Executive Vice President and Senior Portfolio Manager of
ICM since June 2002. From June 1995 until ICC's merger with ICM in June 2002,
Mr. Shockley served as the President of ICC. Mr. Shockley also served as Chief
Investment Officer of ICC from January 1989 to June 2002. From January 1985 to
January 1989, Mr. Shockley served as Vice President and Portfolio Manager of
ICC. Prior to joining ICC, Mr. Shockley served in various portfolio management
roles at Nationwide Insurance Company for 17 years, the last four of which was
as Director of Equities. Mr. Shockley received a Bachelor of Science degree in
Chemistry from the University of Cincinnati in 1966 and a MBA from the Ohio
State University in 1968. Mr. Shockley received his CFA charter in 1974 and
currently holds NASD Series 2, 63 and 65 licenses.
Mark P. Strauch has served as a director of ICAP since March 2002. Mr.
Strauch has been the Executive Vice-President of AJG since 1996 and is
Corporate Vice-President of Gallagher. Between 1989 and 2001, Mr. Strauch
served as Corporate Treasurer, and prior to that was the Corporate Tax Manager
of Gallagher, where he helped develop a tax advantaged investment portfolio
unique to the industry. Prior to joining Gallagher as an investment and tax
analyst in 1981, Mr. Strauch worked at the Harris Trust and Savings Bank in
Chicago, Illinois. Mr. Strauch serves as a Director for Asset Alliance
Corporation, US Energy Systems, Inc., Softwerc Technologies, Inc., Icor
Brokerage, Orbis Online, Inc., and Peachtree Franchise Finance, LLC. Mr.
Strauch holds a Bachelor's degree in Finance from the University of Illinois, a
Masters in Management from Northwestern University and a Masters of Science in
Taxation from De Paul University.
Mark F. Travis has been Executive Vice President of ICAP since
December 1998 and has served as a director since September 1998. Mr. Travis
also has been President of ICM since December 1998. From its inception in
January 1995 until December 1998, Mr. Travis was Vice President of ICM. From
June 1984 to January 1995, Mr. Travis was a Vice President of Smith Barney,
Inc. in Jacksonville, Florida. Mr. Travis received a Bachelor of Arts in
Economics from the University of Georgia in 1984 and currently holds NASD
Series 3, 7, 24, 63 and 65 licenses. Mark F. Travis is the son of Forrest
Travis.
Forrest Travis has been President and Chief Executive Officer of ICAP
since December 1998 and has served as a director since September 1998. Mr.
Travis also has been Executive Vice President of Ewing since August 1999. From
June 1995 until the merger of Capital Research Corporation ("CRC") with and
into Ewing in December 1999, Mr. Travis served as President of CRC. From its
inception in January 1995, until December 1998, Mr. Travis was President of
ICM. From December 1980 to January 1995, Mr. Travis was a Senior Vice President
and a Director of the Consulting Group of Smith Barney, Inc. in Jacksonville,
Florida. Mr. Travis received a Bachelor of Engineering degree from The Georgia
Institute of Technology and currently holds NASD Series 2, 3, 4, 7, 24, 27, 53,
63 and 65 licenses. Forrest Travis is the father of Mark F. Travis.
Michael J. Wallace has served as a director of ICAP since February
2003. Mr. Wallace has been Chief Financial Officer of Intrepid since December
1998. Mr. Wallace also has been Treasurer of ICM since January 1998. From
January 1998 until CRC's December 1999 merger with and into Ewing, Mr. Wallace
served as Treasurer of CRC and has served as Treasurer of Ewing since December
1999. From March 1995 to March 1997, Mr. Wallace was employed by SunTrust Bank
of North Florida in branch banking. From January 1993 to January 1995, Mr.
Wallace served in the United States Navy. Mr. Wallace holds a Bachelor of
Business Administration degree in Accounting from the University of North
Florida and is licensed as a
13
CPA in the State of Florida.
Recent Changes to the Board
On February 27, 2003, the stockholders of ICAP, acting by majority
written consent in lieu of a special meeting under Section 228(e) of the
General Corporation Law of the State of Delaware, removed Benjamin C. Bishop,
Jr. and David W. Jackson from the Board of Directors of ICAP and appointed Fred
J. Shockley, Amy A. Lord, Michael J. Wallace and Robert B. Dunlap to serve on
the Board of Directors of ICAP until their successors are duly elected and
qualified.
ITEM 10. EXECUTIVE COMPENSATION
The following table and notes present the cash and non-cash
compensation paid or accrued during the fiscal years ended December 31, 2002,
2001 and 2000 to ICAP's Chief Executive Officer and to any other executive
officer whose total cash compensation exceeded $100,000.
LONG TERM COMPENSATION
----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------------------- ----------------------- -------
OTHER RESTRICTED ALL OTHER
NAME AND ANNUAL STOCK OPTIONS/ LTIP ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD SAR PAYOUTS COMPENSATION
------------------ ---- ------ -------- ------------ ---------- -------- ------- ------------
Forrest Travis, 2002 $256,000(1) -- -- -- -- -- --
President and 2001 $205,100(1) -- -- -- -- -- --
Chief Executive Officer 2000 $221,767(1) -- -- -- -- -- --
Mark F. Travis 2002 $205,500(1) $50,000 -- -- -- -- --
Executive Vice 2001 $195,100(1) -- -- -- -- -- --
President 2000 $175,855(1) -- -- -- -- -- --
---------
(1) This amount includes ICAP's matching contributions to its 401(k) plan
for the benefit of Forrest Travis in the aggregate amount of $6,000,
$5,100 and $5,100 and for the benefit of Mark F. Travis in the
aggregate amount of $5,500, $5,100 and $5,100 for fiscal years 2002,
2001 and 2000, respectively.
Option/SAR Grants in Last Fiscal Year
During the fiscal year ended December 31, 2002, no options or SAR's
were granted to ICAP's Chief Executive Officer or to any other executive
officer whose total cash compensation exceeded $100,000.
Aggregate Option/SAR Exercises and Fiscal Year-End Option/SAR Values
No options or SARs were exercised during the fiscal year ended
December 31, 2002 by ICAP's Chief Executive Officer or by any other executive
officer whose total cash compensation exceeded $100,000.
Long Term Incentive Plan Awards in Last Fiscal Year
During the fiscal year ended December 31, 2002, ICAP made no awards
under any Long Term Incentive Plan to ICAP's Chief Executive Officer or to any
other executive officer whose total cash compensation exceeded $100,000.
14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table set forth below presents certain information regarding the
beneficial ownership as of February 28, 2003 of (i) each stockholder known to
ICAP to own more than 5% of the outstanding shares of any class of the ICAP's
outstanding securities entitled to vote; (ii) directors of ICAP; (iii)
executive officers of ICAP; and (iv) all executive officers and directors of
ICAP as a group.
SHARES UNDER
EXERCISABLE
OPTIONS TOTAL SHARES
NAME AND ADDRESS SHARES OWNED(1) AND WARRANTS(2) BENEFICIALLY OWNED PERCENTAGE OWNED
---------------- --------------- --------------- ------------------ ----------------
AJG Financial Services, Inc.+ (3) -- 1,832,877 1,832,877 35.0%
The Gallagher Center
Two Pierce Place
Itasca Illinois 60143-3141
David M. Brock 177,464 17,746 195,210 5.7%
3652 South Third Street,
Suite 200
Jacksonville Beach, Florida 32250
Bryan A. Davis 177,464 17,746 195,210 5.7%
3652 South Third Street,
Suite 200
Jacksonville Beach, Florida 32250
Robert B. Dunlap+ -- 240,000 240,000 6.6%
3652 South Third Street,
Suite 200
Jacksonville Beach, Florida 32250
Arnold A. Heggestad+ 15,000 32,500 47,500 1.4%
3652 South Third Street,
Suite 200
Jacksonville Beach, Florida 32250
David W. Long+ (3) -- -- -- --
The Gallagher Center
Two Pierce Place
Itasca Illinois 60143-3141
Amy A. Lord+ 24,485 2,449 26,934 *
3652 South Third Street,
Suite 200
Jacksonville Beach, Florida 32250
Fred J. Shockley+ 407,601 40,760 448,361 13.0%
3652 South Third Street,
Suite 200
Jacksonville Beach, Florida 32250
Mark P. Strauch+ (3) -- -- -- --
The Gallagher Center
Two Pierce Place
Itasca Illinois 60143-3141
A. Bronson Thayer 203,231 20,323 223,554 6.5%
3652 South Third Street,
Suite 200
Jacksonville Beach, Florida 32250
Forrest Travis+++ 1,297,837 -- 1,297,837 38.2%
3652 South Third Street,
Suite 200
Jacksonville Beach, Florida 32250
Mark F. Travis+++ 416,353 -- 416,353 12.2%
3652 South Third Street,
Suite 200
Jacksonville Beach, Florida 32250
Michael J. Wallace+++ 33,500 12,500 46,000 1.3%
3652 South Third Street,
Suite 200
Jacksonville Beach, Florida 32250
All directors and executive
officers as a group
(10 persons) 2,194,776 2,161,086 4,355,862 78.3%
+ Director of ICAP
++ Executive Officer of ICAP
* Less than 1%
---------
15
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934. Unless otherwise noted,
ICAP believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock
beneficially owned by them.
(2) Includes shares which may be acquired by the exercise of stock options
and warrants granted by ICAP and exercisable within 60 days of
December 31, 2001.
(3) On December 31, 2001, AJG Financial Services, Inc. was issued an option
to purchase that number of shares of the Common Stock which would equal
51% of the aggregate issued and outstanding Common Stock on a fully
diluted basis, of which shares equaling 35.025% of the aggregate issued
and outstanding Common Stock on a fully-diluted basis is currently
vested, and the remainder of which vests at such time as AJG Financial
Services, Inc. makes an additional $4.5 million investment in ICAP. The
exercise price per share of Common Stock underlying the option is
currently $3.00 per share of Common Stock. David W. Long and Mark P.
Strauch represent AJG Financial Services, Inc. on the Board of
Directors of the Company.
EQUITY COMPENSATION PLAN INFORMATION
The table set forth below presents certain information regarding
equity compensation plan information as of February 28, 2003 of ICAP.
NUMBER OF
SECURITIES TO BE
ISSUED UPON WEIGHTED AVERAGE NUMBER OF SECURITIES
EXERCISE OF EXERCISE PRICE OF REMAINING AVAILABLE
OUTSTANDING OPTION, OUTSTANDING FOR FUTURE ISSUANCE
WARRANTS OPTION, WARRANTS UNDER EQUITY
PLAN CATEGORY AND RIGHTS AND RIGHTS COMPENSATION PLANS
------------------------------ --------------------- ------------------ --------------------
Equity compensation plans
approved by equity holders (1) 302,500 $ 1.46 447,500
Equity compensation plans not
approved by equity holders 240,000 $ 2.04 n/a
---------
(1) ICAP offers options to purchase shares of Common Stock to certain of
its employees and directors under the Incentive Stock Option Plan of
Intrepid Capital Corporation and the Non Employee Directors Incentive
Stock Option Plan of Intrepid Capital Corporation.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements are filed with this report on Form
10-KSB:
Independent Auditors' Report................................................................F-1
Consolidated Balance Sheets of Intrepid Capital Corporation and Subsidiaries as of
December 31, 2002 and 2001................................................................. F-2
Consolidated Statements of Operations of Intrepid Capital Corporation and Subsidiaries
for the Years Ended December 31, 2002 and 2001..............................................F-3
Consolidated Statements of Stockholders' Equity of Intrepid Capital Corporation and
Subsidiaries for the Years Ended December 31, 2002 and 2001.................................F-4
Consolidated Statements of Cash Flows of Intrepid Capital Corporation and Subsidiaries
for the Years Ended December 31, 2002 and 2001..............................................F-5
Notes to Consolidated Financial Statements..................................................F-6
16
(b) Exhibit Index
Exhibit No. Description of Exhibit
----------- ----------------------
2.1 Share Purchase Agreement dated as of August 4, 1999, among Intrepid Capital Corporation, Benjamin C. Bishop,
Jr., Charles E. Harris, Synagen Capital Partners, Inc. and Arnold A. Heggestad (incorporated by reference to
Exhibit 2 to the Registrant's Form 8-K filed August 18, 1999).
3.1 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1
to the Registrant's Annual Report on Form 10-KSB filed April 1, 2002).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.(B) to the Registrant's Form S-4 filed
November 6, 1998, Registration No. 333-66859).
4.1 Form of Warrant Agreement dated as of December 31, 2001 by and between Intrepid Capital Corporation and each
of the shareholders of ICC Investment Advisors, Inc. (incorporated by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K, filed with the Commission on January 15, 2002).
4.2 Option Agreement between Intrepid Capital Corporation and AJG Financial Services, Inc. dated as of December
31, 2001 (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K, filed with
the Commission on January 15, 2002).
10.1 Incentive Stock Option Plan of Intrepid Capital Corporation (incorporated by reference to Exhibit 10.(D) to
the Registrant's Form S-4 filed November 6, 1998, Registration No. 333-66859).
10.2 Non-Employee Directors' Stock Option Plan of Intrepid Capital Corporation (incorporated by reference to
Exhibit 10.(E) to the Registrant's Form S-4 filed November 6, 1998, Registration No. 333-66859).
10.3 Form of Non-Negotiable Convertible Promissory Note between Intrepid Capital Corporation and Benjamin C.
Bishop, Jr. (incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K filed August 18, 1999).
10.4 Form of Employment Agreement between Intrepid Capital Corporation and Benjamin C. Bishop, Jr. (incorporated by
reference to Exhibit 10.4 to the Registrant's Form 8-K filed August 18, 1999).
10.5 Non-Competition and Confidentiality Agreement dated as of December 31, 2001 by and between Intrepid Capital
Corporation and A. Bronson Thayer (incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K, filed with the Commission on January 15, 2002).
10.6 Form of Registration Rights Agreement dated as of December 31, 2001 by and between Intrepid Capital
Corporation and each of Fred Shockley and David Brock (incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K, filed with the Commission on January 15, 2002).
10.7 Investment Agreement between Intrepid Capital Corporation and AJG Financial Services, Inc. dated as of
December 31, 2001 (incorporated by reference to Exhibit 10.3 to the
17
Registrant's Current Report on Form 8-K, filed with the Commission on January 15, 2002) (certain of the
schedules and Exhibits to the Investment Agreement have been omitted from the Report pursuant to Item
601(b)(20 of Regulation S-B, and the Company agrees to furnish copies of such omitted exhibits and schedules
supplementally to the Securities and Exchange Commission upon request).
10.8 Convertible Note Agreement between Intrepid Capital Corporation and AJG Financial Services, Inc. dated as of
December 31, 2001 (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K,
filed with the Commission on January 15, 2002).
10.9 Registration Rights Agreement between Intrepid Capital Corporation and AJG Financial Services, Inc. dated as
of December 31, 2001 (incorporated by reference to Exhibit 10.5 to the Registrant's Current Report on Form
8-K, filed with the Commission on January 15, 2002).
10.10 Standstill Agreement between Intrepid Capital Corporation and AJG Financial Services, Inc. dated as of
December 31, 2001 (incorporated by reference to Exhibit 10.6 to the Registrant's Current Report on Form 8-K,
filed with the Commission on January 15, 2002).
10.11 Non-Qualified Stock Option Agreement between Intrepid Capital Corporation and Robert B. Dunlap dated as of
January 21, 2003.
21.1 List of Subsidiaries.
24.1 Power of Attorney relating to this Form 10-KSB is set forth on the signature page of this Form 10-KSB.
99.1 Certification of the Company's Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of the Company's Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(c) Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the fourth quarter of
2002.
ITEM 14. CONTROLS AND PROCEDURES
Management's Evaluation of Disclosure Controls
Based on their evaluation of ICAP's disclosure controls and procedures
as of a date within 90 days of the filing of this Report, the President and
Chief Executive Officer and the Chief Financial Officer of ICAP have concluded
that such controls and procedures are effective. There were no significant
changes in ICAP's internal controls or in other factors that could
significantly affect such controls subsequent to the date of their evaluation.
18
SIGNATURES AND CERTIFICATIONS
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INTREPID CAPITAL CORPORATION
By /s/ Forrest Travis
-----------------------------------------
Forrest Travis, President and
Chief Executive Officer
By /s/ Michael J. Wallace
-----------------------------------------
Michael J. Wallace, Chief
Financial Officer
Dated: March 28, 2003
I, Forrest Travis, certify that:
1. I have reviewed this annual report on Form 10-KSB of Intrepid Capital
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
19
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Forrest Travis
-------------------------------------------
Forrest Travis,
President and Chief Executive Officer
I, Michael Wallace, certify that:
1. I have reviewed this annual report on Form 10-KSB of Intrepid Capital
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
20
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Michael J. Wallace
----------------------------------
Michael J. Wallace,
Chief Financial Officer
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH
REPORTS FILED PURSUANT TO SECTION 15(D) OF THE
EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report to security holders for the registrant's last fiscal
year and no proxy statement, form of proxy or other proxy soliciting material
was sent to the stockholders of the registrant during the registrant's last
fiscal year.
21
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Forrest Travis as his attorney-in-fact,
acting with full power of substitution for him in his name, place and stead, in
any and all capacities, to sign any amendments to this Form 10-KSB and to file
the same, with exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission and hereby ratifies and
confirms all that said attorney-in-fact, or his substitute or substitutes, may
do or cause to be done by virtue thereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Forrest Travis President, Chief Executive Officer and Director March 28, 2003
----------------------------
Forrest Travis
/s/ Mark F. Travis Executive Vice President and Director March 28, 2003
----------------------------
Mark F. Travis
/s/ Michael J. Wallace Chief Financial Officer, Secretary, Treasurer March 28, 2003
---------------------------- and Director
Michael J. Wallace
/s/ Robert B. Dunlap Director March 28, 2003
----------------------------
Robert B. Dunlap
/s/ Arnold A. Heggestad Director March 28, 2003
----------------------------
Arnold A. Heggestad
/s/ David R. Long Director March 28, 2003
----------------------------
David R. Long
/s/ Amy A. Lord Director March 28, 2003
----------------------------
Amy A. Lord
/s/ Fred J. Shockley Director March 28, 2003
----------------------------
Fred J. Shockley
/s/ Mark P. Strauch Director March 28, 2003
----------------------------
Mark P. Strauch
22
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
2.1 Share Purchase Agreement dated as of August 4, 1999, among Intrepid Capital Corporation, Benjamin C. Bishop,
Jr., Charles E. Harris, Synagen Capital Partners, Inc. and Arnold A. Heggestad (incorporated by reference to
Exhibit 2 to the Registrant's Form 8-K filed August 18, 1999).
3.1 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1
to the Registrant's Annual Report on Form 10-KSB filed April 1, 2002).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.(B) to the Registrant's Form S-4 filed
November 6, 1998, Registration No. 333-66859).
4.1 Form of Warrant Agreement dated as of December 31, 2001 by and between Intrepid Capital Corporation and each
of the shareholders of ICC Investment Advisors, Inc. (incorporated by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K, filed with the Commission on January 15, 2002).
4.2 Option Agreement between Intrepid Capital Corporation and AJG Financial Services, Inc. dated as of December
31, 2001 (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K, filed with
the Commission on January 15, 2002).
10.1 Incentive Stock Option Plan of Intrepid Capital Corporation (incorporated by reference to Exhibit 10.(D) to
the Registrant's Form S-4 filed November 6, 1998, Registration No. 333-66859).
10.2 Non-Employee Directors' Stock Option Plan of Intrepid Capital Corporation (incorporated by reference to
Exhibit 10.(E) to the Registrant's Form S-4 filed November 6, 1998, Registration No. 333-66859).
10.3 Form of Non-Negotiable Convertible Promissory Note between Intrepid Capital Corporation and Benjamin C.
Bishop, Jr. (incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K filed August 18, 1999).
10.4 Form of Employment Agreement between Intrepid Capital Corporation and Benjamin C. Bishop, Jr. (incorporated by
reference to Exhibit 10.4 to the Registrant's Form 8-K filed August 18, 1999).
10.5 Non-Competition and Confidentiality Agreement dated as of December 31, 2001 by and between Intrepid Capital
Corporation and A. Bronson Thayer (incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K, filed with the Commission on January 15, 2002).
10.6 Form of Registration Rights Agreement dated as of December 31, 2001 by and between Intrepid Capital
Corporation and each of Fred Shockley and David Brock (incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K, filed with the Commission on January 15, 2002).
10.7 Investment Agreement between Intrepid Capital Corporation and AJG Financial Services, Inc. dated as of
December 31, 2001 (incorporated by reference to Exhibit 10.3 to the
23
Registrant's Current Report on Form 8-K, filed with the Commission on January 15, 2002) (certain of the
schedules and Exhibits to the Investment Agreement have been omitted from the Report pursuant to Item
601(b)(20 of Regulation S-B, and the Company agrees to furnish copies of such omitted exhibits and schedules
supplementally to the Securities and Exchange Commission upon request).
10.8 Convertible Note Agreement between Intrepid Capital Corporation and AJG Financial Services, Inc. dated as of
December 31, 2001 (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K,
filed with the Commission on January 15, 2002).
10.9 Registration Rights Agreement between Intrepid Capital Corporation and AJG Financial Services, Inc. dated as
of December 31, 2001 (incorporated by reference to Exhibit 10.5 to the Registrant's Current Report on Form
8-K, filed with the Commission on January 15, 2002).
10.10 Standstill Agreement between Intrepid Capital Corporation and AJG Financial Services, Inc. dated as of
December 31, 2001 (incorporated by reference to Exhibit 10.6 to the Registrant's Current Report on Form 8-K,
filed with the Commission on January 15, 2002).
10.11 Non-Qualified Stock Option Agreement between Intrepid Capital Corporation and Robert B. Dunlap dated as of
January 21, 2003.
21.1 List of Subsidiaries.
24.1 Power of Attorney relating to this Form 10-KSB is set forth on the signature page of this Form 10-KSB.
99.1 Certification of the Company's Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of the Company's Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
24
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report ...................................................................... F-1
Consolidated Balance Sheets of Intrepid Capital Corporation and Subsidiaries as of
December 31, 2002 and 2001 ........................................................................ F-2
Consolidated Statements of Operations of Intrepid Capital Corporation and Subsidiaries for
the Years Ended December 31, 2002 and 2001 ........................................................ F-3
Consolidated Statements of Stockholders' Equity of Intrepid Capital Corporation and
Subsidiaries for the Years Ended December 31, 2002 and 2001 ....................................... F-4
Consolidated Statements of Cash Flows of Intrepid Capital Corporation and Subsidiaries for
the Years Ended December 31, 2002 and 2001 ........................................................ F-5
Notes to Consolidated Financial Statements......................................................... F-6
25
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Intrepid Capital Corporation
We have audited the accompanying consolidated balance sheets of Intrepid Capital
Corporation and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Intrepid Capital Corporation and subsidiaries as of December 31, 2002 and 2001,
and the results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in note 1, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," effective January 1,
2002.
KPMG LLP
Jacksonville, Florida
March 20, 2003
F-1
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
ASSETS 2002 2001
------------- -------------
Current assets:
Cash and cash equivalents $ 310,966 641,577
Investments, at fair value 128,724 81,935
Accounts receivable 30,966 130,504
Taxes receivable 439,000 --
Prepaid and other assets 227,213 164,859
------------- -------------
Total current assets 1,136,869 1,018,875
Notes receivable (note 3) 323,919 323,919
Equipment and leasehold improvements, net of accumulated
depreciation of $239,515 in 2002 and $199,934 in 2001 428,537 360,348
Identifiable intangible assets, less accumulated amortization
of $111,401 in 2002 (notes 2 and 11) 779,823 891,224
Goodwill, less accumulated amortization of $7,131 in 2002
and 2001 (notes 2 and 11) 3,598,789 3,598,789
------------- -------------
Total assets $ 6,267,937 6,193,155
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 310,958 209,984
Accrued expenses 396,555 651,865
Current portion of notes payable (note 5) 600,000 3,725,000
Other 105,187 196,380
------------- -------------
Total current liabilities 1,412,700 4,783,229
Pension plan obligation (note 4) 212,826 214,989
Notes payable, less current portion (note 5) -- 100,000
------------- -------------
Total liabilities 1,625,526 5,098,218
------------- -------------
Stockholders' equity (note 6):
Preferred stock, Class A $.01 par value. Authorized 5,000,000 shares;
issued 1,166,666 shares at December 31, 2002 (aggregate
liquidation preference $3,634,247) 3,500,000 --
Common stock, $.01 par value. Authorized 15,000,000 shares;
issued 3,400,183 and 3,350,180 shares at December 31, 2002
and 2001, respectively 34,002 33,502
Treasury stock, at cost - 1,000 shares (3,669) (3,669)
Additional paid-in capital 3,482,168 3,616,915
Accumulated deficit (2,370,090) (2,551,811)
------------- -------------
Total stockholders' equity 4,642,411 1,094,937
------------- -------------
$ 6,267,937 6,193,155
============= =============
Commitments (note 10)
See accompanying notes to consolidated financial statements.
F-2
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2002 and 2001
2002 2001
------------ ------------
Revenues:
Investment management fees (note 9) $ 3,484,115 809,430
Investment banking revenues (note 8) 7,578,218 993,751
Commissions 878,024 1,350,295
Other 260,151 152,668
------------ ------------
Total revenues 12,200,508 3,306,144
------------ ------------
Expenses:
Compensation and benefits (note 8) 7,192,389 2,381,449
Brokerage and clearing 207,571 265,311
Advertising and marketing 787,677 240,987
Professional and regulatory fees (note 8) 2,131,766 289,344
Occupancy and maintenance 652,076 372,500
Depreciation and amortization 269,679 86,066
Interest expense 115,104 61,619
Other 662,525 278,412
------------ ------------
Total expenses 12,018,787 3,975,688
------------ ------------
Income (loss) from continuing operations before income taxes 181,721 (669,544)
Income tax benefit (note 7) -- (251,784)
Income (loss) from continuing operations 181,721 (417,760)
Discontinued operations - loss from discontinued operations (note 3) -- (597,620)
------------ ------------
Net income (loss) 181,721 (1,015,380)
------------ ------------
Dividends on preferred stock 134,247 --
Net income (loss) available to common shareholders $ 47,474 (1,015,380)
============ ============
Income (loss) per common share - Basic:
Income (loss) from continuing operations $ 0.01 (0.18)
Discontinued operations -- (0.25)
------------ ------------
Net income (loss) available to common shareholders per share $ 0.01 (0.43)
============ ============
Income (loss) per common share - Diluted:
Income (loss) from continuing operations $ 0.01 (0.18)
Discontinued operations -- (0.25)
------------ ------------
Net income (loss) available to common shareholders per share $ 0.01 (0.43)
============ ============
Basic weighted average shares outstanding 3,350,270 2,341,649
============ ============
Diluted weighted average shares outstanding 3,426,679 2,341,649
============ ============
See accompanying notes to consolidated financial statements.
F-3
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2002 and 2001
ADDITIONAL
PREFERRED COMMON TREASURY PAID-IN ACCUMULATED
STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
---------- ------ ------ ---------- ---------- ----------
Balance at December 31, 2000 $ -- 23,190 (3,669) 2,687,227 (1,536,431) 1,170,317
Common stock issued to Broadland
Capital, L.P. upon warrant exercise (note 6) -- 312 -- (312) -- --
Common stock and warrants issued
to acquire ICC (note 2) -- 10,000 -- 930,000 -- 940,000
Net loss -- -- -- -- (1,015,380) (1,015,380)
---------- ------ ------ ---------- ---------- ----------
Balance at December 31, 2001 -- 33,502 (3,669) 3,616,915 (2,551,811) 1,094,937
Conversion of note payable to AJG Financial
Services, Inc. (note 5) 3,500,000 -- -- -- -- 3,500,000
Dividends on preferred stock -- -- -- (134,247) -- (134,247)
Common stock issued to Broadland
Capital, L.P. upon warrant exercise (note 6) -- 500 -- (500) -- --
Net income -- -- -- -- 181,721 181,721
---------- ------ ------ ---------- ---------- ----------
Balance at December 31, 2002 $3,500,000 34,002 (3,669) 3,482,168 (2,370,090) 4,642,411
========== ====== ====== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2002 and 2001
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 47,474 (1,015,380)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 269,679 86,066
Loss on sale of discontinued operation -- 566,000
Loss on disposal of equipment 12,815 --
(Purchases) sales of investments, net 17,042 (6,185)
Net trading profits (63,831) (15,751)
Change in assets and liabilities:
Accounts and taxes receivable (339,462) (18,502)
Prepaid and other assets (62,354) 154,975
Accounts payable and accrued expenses (154,336) 368,561
Pension plan obligation (2,163) --
Other liabilities (91,193) 26,096
Discontinued operations - working capital changes -- (227,533)
------------ ------------
Net cash used in operating activities (366,329) (81,653)
------------ ------------
Cash flows from investing activities:
Purchase of equipment (267,609) (6,824)
Sale of equipment 28,327 --
Proceeds from sale of discontinued operations -- 584,496
Acquisition of ICC, net of cash acquired -- (3,099,058)
------------ ------------
Net cash used in investing activities (239,282) (2,521,386)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 1,900,000 3,500,000
Principal payments on notes payable (1,625,000) (675,000)
------------ ------------
Net cash provided by financing activities 275,000 2,825,000
------------ ------------
Net increase (decrease) in cash and cash equivalents (330,611) 221,961
Cash and cash equivalents at beginning of year 641,577 419,616
------------ ------------
Cash and cash equivalents at end of year $ 310,966 641,577
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 111,104 56,524
============ ============
Cash paid during the year for income taxes $ 439,000 --
============ ============
Supplemental disclosure of non-cash transactions:
Preferred stock issued to AJG upon conversion of AJG Note $ 3,500,000 --
============ ============
Preferred stock dividends accrued but not paid $ 134,247 --
============ ============
Receipt of notes receivable in connection with sale of discontinued operations $ -- 323,919
============ ============
Notes payable issued or assumed in ICC acquisition $ -- 125,000
============ ============
Common stock and warrants issued to acquire ICC $ -- 940,000
============ ============
See accompanying notes to consolidated financial statements.
F-5
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
OPERATIONS
(A) ORGANIZATION
Intrepid Capital Corporation (the "Company"), incorporated in
1998, is a Florida-based financial services holding company
that conducts its business through its wholly owned
subsidiaries, Intrepid Capital Management ("ICM") and Allen C.
Ewing & Co. ("Ewing").
ICM, a registered investment advisor, manages equity,
fixed-income, and balanced portfolios for public and private
companies, labor unions, endowments, foundations, and high net
worth individuals and families. ICM has received authority to
act as an investment manager in several states to meet the
needs of its customers throughout the United States.
Ewing is a registered broker-dealer with the Securities and
Exchange Commission ("SEC") and a member of the National
Association of Securities Dealers, Inc. ("NASD") and the
Securities Investor Protection Corporation ("SIPC").
In a transaction effective December 31, 2001, the Company
acquired all of the outstanding stock of ICC Investment
Advisors, Inc., the operations of which are conducted through
its wholly-owned subsidiary, The Investment Counsel Company
("ICC"). Subsequent to the acquisition, ICC was merged with
and into ICM.
In a transaction effective October 30, 2001, the Company
discontinued its resinous material operations formerly
conducted through Enviroq Corporation (Enviroq) by selling all
of the issued and outstanding capital stock of Sprayroq, Inc.
("Sprayroq"), Enviroq's 50% owned subsidiary. Enviroq remains
a wholly-owned subsidiary of the Company to hold the
promissory notes received in connection with the sale, but
conducts no operations currently, as its operations consisted
solely of its investment in Sprayroq.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries: ICM, Ewing and
Enviroq. Results of operations of acquired companies are
included from the date of acquisition forward in accordance
with purchase accounting. All significant intercompany
balances and transactions have been eliminated in
consolidation.
(C) INVESTMENT MANAGEMENT FEES
The Company earns an investment management fee from each of
its customers based on the outstanding balance of assets under
management. The fee is calculated quarterly based on a
percentage of the individual customer's account balance at the
beginning of the period. All customers are billed on the first
day of the quarter and the Company earns this fee ratably such
that by the end of the reporting period no deferred income
remains.
F-6
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(D) INVESTMENT BANKING REVENUES
Investment banking revenues are earned by providing advisory
services to clients on corporate finance matters, including
mergers and acquisitions and the issuance of public stock.
Investment banking revenues are recognized when earned, which
generally coincides with closing of the underlying
transaction.
(E) COMMISSION REVENUE
Commissions are earned on securities transactions with a
clearing broker-dealer initiated on behalf of customers.
Additional commissions are also earned on sales of mutual fund
shares and variable annuities and are received directly from
the related fund or issuer. All commission revenue is
recognized as income when earned. Included within accounts
receivable are amounts due from National Financial Services,
LLC, the Company's clearing broker-dealer, which represent
monies earned but not yet received from this entity.
(F) CASH AND CASH EQUIVALENTS
Any financial instruments which have an original maturity of
ninety days or less when purchased are considered cash
equivalents.
(G) INVESTMENTS
Investments consist of the Company's investment in Intrepid
Capital, L.P., of which the Company serves as the general
partner. The Company has classified all investments as trading
securities. Trading securities are recorded at fair value
based on the last sale or bid price reported by national
securities exchanges. Trading security transactions are
recorded on the trade date. Unrealized holding gains and
losses are included in net trading profits. Dividends and
interest income are recognized when earned.
(H) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are carried at cost, less
accumulated depreciation. Depreciation is calculated
principally on the straight-line method over the estimated
useful lives, or lease term if shorter, of the underlying
assets, which range from three to ten years. Significant
additions or improvements extending the useful life are
capitalized, while normal maintenance and repairs are charged
to expense as incurred. The Company reviews its equipment and
leasehold improvements for impairment whenever events or
changes in circumstances indicate that the carrying value of
an asset may not be recoverable.
F-7
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(I) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to 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 expected to apply to taxable income in the years 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.
(J) GOODWILL
Goodwill consists of excess purchase price over net tangible
assets and identifiable intangible assets acquired in purchase
acquisitions. Goodwill has historically been amortized over
the estimated period of benefit from the acquired assets,
which was 15 years. The Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("FAS 142") effective January 1, 2002. Accordingly,
goodwill is no longer amortized effective January 1, 2002.
FAS 142 states that goodwill should be tested for impairment
for each reporting unit on an annual basis and between annual
tests if indicators of impairment are present. The Company has
performed its annual impairment review by comparing the net
book value for each reporting unit, including assigned
goodwill, to the reporting unit's estimated fair value. Based
on this assessment, management concluded that no impairment
adjustment was necessary.
(K) INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("FAS 141")
effective July 1, 2001. Identifiable intangible assets
acquired in purchase acquisitions are separately identified in
accordance with FAS 141. Management has assessed identifiable
intangible assets to have finite lives of 10 years.
Identifiable intangible assets are amortized using accelerated
methods over the estimated useful lives of the identifiable
intangible assets. Management assesses the recoverability of
identifiable intangible assets whenever events or
circumstances indicate they may be impaired.
(L) EARNINGS PER SHARE
Net income per share of common stock is computed based upon
the weighted average number of common shares and share
equivalents outstanding during the year. Stock warrants and
convertible instruments, when dilutive, are included as share
equivalents. Diluted earnings per share for the year ended
December 31, 2002 assumes dilutive warrants and convertible
instruments to purchase shares of common stock have been
exercised using the treasury stock method.
F-8
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(M) ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires the Company's 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.
(N) PENSION PLAN OBLIGATION
The Company assumed a defined benefit pension plan obligation
through the acquisition of ICC. The obligation is valued using
a discounted cash flow method based on the assumed average
annual increase in CPI percentage, discount rate and the
expected life of the individual covered by the obligation.
(O) COMPREHENSIVE INCOME
No differences between total comprehensive income (loss) and
net income (loss) existed in the financial statements reported
for the years ended December 31, 2002 and 2001.
(P) STOCK OPTION PLAN
The Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
in accounting for its fixed plan stock options. 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. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation"
("FAS 123") established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based
compensation plans. As allowed by FAS 123, the Company has
elected to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure
requirements of FAS 123.
In December 2002, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure" ("FAS 148"). FAS 148 provides alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation.
FAS 148 also requires prominent disclosure in both annual and
interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the
method used on reported results. The transitional guidance and
annual disclosure requirements of FAS 148 are effective for
fiscal years ending after December 15, 2002.
F-9
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
In December 1998, the Company adopted an Incentive Stock
Option Plan (the "ISO") pursuant to which the Company may
grant stock options to officers and key employees. Stock
options are granted with an exercise price equal to, or above,
the stock's fair market value at the date of grant.
No stock options were granted under the ISO during 2002. On
December 28, 2001, stock options to purchase 270,000 shares
were issued under the ISO. The options vest over a four year
period and have an exercise price of $1.375 and a term of ten
years. At December 31, 2002, there were 380,000 additional
shares available for grant under the ISO.
The per share weighted-average fair value of stock options
granted on December 28, 2001 was $0.95 using the Black-Scholes
option-pricing model with the following weighted average
assumptions: expected dividend yield 0%, risk free interest
rate of 6%, expected volatility 50%, and an expected life of
10 years.
As permitted under FAS 148 and FAS 123, the Company has
elected to continue to apply the provisions of APB 25 and
provide the pro forma disclosures required by FAS 148 and FAS
123. Accordingly, no compensation cost has been recognized for
its stock options in the consolidated financial statements.
Had the Company determined compensation cost based on the fair
value at the date of grant for its stock options under SFAS
123, the Company's net income (loss) would have been reduced
to the pro forma amounts indicated below:
2002 2001
--------- ------------
Reported net income (loss) available to common shareholders $ 47,474 (1,015,380)
Deduct total stock-based employee compensation expense
determined under fair value based methods for all
awards, net of related tax effects (39,757) --
--------- ------------
Net income (loss) available to common shareholders - pro forma $ 7,717 (1,015,380)
========= ============
Basic net income (loss) per share
Reported net income (loss) per share $ 0.01 (0.43)
========= ============
Pro forma basic net income (loss) per share $ -- (0.43)
========= ============
Diluted net income (loss) per share
Reported net income (loss) per share $ 0.01 (0.43)
========= ============
Pro forma diluted net income (loss) per share $ -- (0.43)
========= ============
F-10
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(Q) RECENTLY ANNOUNCED ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board
issued Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45
introduces new disclosure and liability recognition
requirements for guarantees of debt that fall within its
scope. ICAP has adopted FIN 45. The liability recognition
requirements will be applied for all guarantees entered into
or modified after December 31, 2002.
In January 2003, the Financial Accounting Standards Board
issued Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("FIN 46"). FIN 46 addresses consolidation
by business enterprises of variable interest entities which do
not effectively disperse risk among parties involved. FIN 46
requires an enterprise to consolidate the operations of a
variable interest entity if the enterprise absorbs a majority
of the variable interest entity's expected losses, receives a
majority of its expected residual returns, or both. The
provisions of FIN 46 are effective for financial statements
issued after January 31, 2003 and ICAP has adopted FIN 46 as
of that date. ICAP has a variable interest in Intrepid
Capital, L.P., a private investment partnership in which ICAP
serves as the general partner and from which ICAP receives
investment management fees. ICAP's maximum exposure to loss as
a result of its involvement with Intrepid Capital, L.P. is
limited to its investment of $128,724 at December 31, 2002 and
annual investment management fees which approximated $60,000
for the year ended December 31, 2002.arket price of the
underlying
(2) ACQUISITIONS
On December 31, 2001, the Company acquired 100% of the outstanding
capital stock of ICC and has accounted for this transaction under the
purchase method of accounting. The Company expects the acquisition to
significantly enhance its investment management segment in many areas
including improved distribution capabilities, increased investment
management revenues, and increase efficiencies through economies of
scale.
The Company acquired the ICC capital stock in exchange for (i) cash of
$2,835,365, (ii) 1,000,000 shares of the Company's common stock, with
attached warrants to purchase an additional 100,000 shares and (iii)
the assumption of all ICC liabilities. The common stock issued was
valued at $0.94 per share, the bid price on the date of acquisition,
less a discount for certain restrictions on the shares issued. The
warrants issued carry an exercise price of $6.00 and a term of six
years. The underlying shares are also restricted with an implied
volatility of zero. Therefore, no value has been separately attributed
to the warrants.
F-11
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The aggregate purchase price consisted of the following:
Cash paid $ 2,835,365
Stock and stock warrants issued 940,000
Direct costs 330,017
------------
Total purchase price $ 4,105,382
============
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.
Current assets $ 93,184
Fixed assets 72,375
Intangible assets 4,456,122
-------------
Total assets acquired 4,621,681
-------------
Current liabilities (241,310)
Long term liabilities (274,989)
-------------
Total liabilities assumed (516,299)
-------------
Total purchase price $ 4,105,382
=============
Intangible assets consist of goodwill and separately identifiable
intangible assets with finite lives. Identifiable intangible assets are
attributable to the estimated fair value of acquired investment
management contracts and customer relationships and are being amortized
using accelerated methods over their estimated useful lives of 10
years.
The following unaudited pro forma financial information presents the
consolidated results of operations for 2001 as if the purchase of ICC
had occurred on January 1, 2001. Pro forma total revenues would have
been $5,284,348, pro forma net loss would have been $1,511,516 and pro
forma basic and diluted net loss per share would have been $0.45 in
2001.
(3) DISCONTINUED OPERATIONS
On October 30, 2001, the Company sold all of the issued and outstanding
capital stock of Sprayroq, Enviroq's 50% owned subsidiary, for cash in
the amount of $584,496 and two promissory notes in the aggregate
principal amount of $323,919. The promissory notes bear interest at 7%
with interest payable annually and a single principle payment at
maturity of November 1, 2006. Enviroq's operations consisted solely of
its investment in Sprayroq, and the Company has reported its operations
as discontinued for all periods presented.
F-12
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
A loss on sale of discontinued operations of $566,000 was recorded as
follows:
Loss on sale of discontinued operations:
Proceeds
Cash $ 584,496
Notes 323,919
-------------
908,415
Net book value of assets of discontinued operations (1,106,163)
Accrued severance costs (130,000)
Income tax expense on taxable gain (238,252)
-------------
$ (566,000)
=============
(4) PENSION PLAN OBLIGATION
The Company assumed a defined benefit pension plan obligation through
the acquisition of ICC. The obligation is related to a non-qualified
plan which covers a former employee/stockholder of ICC. The benefit is
adjusted annually by the percentage increase in the Consumer Price
Index - All Urban Consumers ("CPI") and is paid on a quarterly basis.
Current annual payments are approximately $19,000. The adjusted annual
benefit is not to exceed $25,000. There are no plan assets associated
with this pension plan obligation.
Actuarial present value of benefit obligations:
2002 2001
--------- ---------
Accumulated benefit obligation $ 212,826 214,989
========= =========
Projected benefit obligation $ 212,826 214,989
========= =========
The assumptions used to determine the actuarial present value of the
benefit obligation are as follows:
Average annual increase in CPI percentage 2.58%
Discount rate 8.00%
Expected life 19.5 years
F-13
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(5) NOTES PAYABLE
The notes payable at December 31, 2002 and 2001 consist of the
following:
2002 2001
----------- -----------
Subordinated convertible promissory notes payable to former
shareholders of Ewing, interest only due quarterly at 8%,
unsecured, principal payment due annually through maturity
on December 31, 2003, $100,000 repaid in January 2003 $ 200,000 200,000
Note payable to a bank, interest at LIBOR plus 2.5% (3.9% at
December 31, 2002), principal plus interest originally due
on February 28, 2003 and extended until July 2003 400,000 --
Note payable to AJG Financial Services, Inc., converted into
shares of the Company's Convertible Class A Preferred Stock -- 3,500,000
Note payable to First Florida Capital payable in a single
installment of principal plus interest on July 5, 2002,
interest at 6% -- 50,000
Line of credit payable in a single installment of principal plus
interest, repaid on February 1, 2002, interest at 6% -- 75,000
----------- -----------
600,000 3,825,000
Less current portion 600,000 3,725,000
----------- -----------
$ -- 100,000
=========== ===========
On March 29, 2002, the note payable to AJG Financial Services, Inc.
("AJG") was converted into 1,166,666 shares of the Company's
Convertible Class A Preferred Stock. The Company's Convertible Class A
Preferred Stock issued to AJG is a cumulative pay-in-kind preferred
stock with a stated value of $3.00 per share and each share is
convertible into one share of the Company's common stock. Dividends are
to be paid semi-annually in cash or Convertible Class A Preferred Stock
at an annual rate of 5%. Dividends of $134,247 are accrued but not paid
at December 31, 2002.
The subordinated convertible promissory notes are convertible, at the
option of the holders, into common stock of the Company at any time
after August 1, 2000. The number of shares to be issued upon conversion
is determined by dividing the aggregate principal amount outstanding,
including accrued and unpaid interest, by $4.00.
Principal maturities on the notes payable at December 31, 2002 of
$600,000 all occur in 2003. The Company considers the carrying value of
its notes payable to be a reasonable estimation of their fair value
based on the current market rates available for debt of the same
remaining maturities.
F-14
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(6) STOCKHOLDER'S EQUITY
In 1998, pursuant to the terms of a consulting agreement, the Company
issued a warrant to Broadland Capital Partners, L.P. ("Broadland"), a
former affiliate director of the Company. The warrant entitled
Broadland to purchase up to 150,000 shares of the Company's common
stock at $.75 per share, subject to certain vesting requirements and
conditions to exercise. Broadland exercised 100,000 and 50,000 shares
in 2002 and 2001, respectively, using a cashless exercise, which
resulted in the issuance of 50,000 and 31,250 shares, respectively.
The Company also granted AJG an option to purchase that number of
shares of the Company's common stock that, upon full exercise thereof
and subject to certain vesting requirements, would give AJG beneficial
ownership of 51% of the outstanding common stock on a fully-diluted
basis. The exercise price for shares of the Company's common stock
underlying the option, which expires on December 31, 2004 if it is not
previously exercised, is $3.00 per share, subject to adjustment upon
the occurrence of certain events. Of the shares of the Company's common
stock underlying the option, 43.75% of the shares vested upon the
issuance of the option, and the remaining 56.25% of the shares will
vest at such time as AJG makes an additional investment in the Company
in accordance with the terms of an investment agreement. The underlying
option shares are restricted with an implied volatility of zero.
Therefore, no value has been separately attributed to the option. As of
December 31, 2002, the option had partially vested such that AJG could
purchase up to 1,832,877 shares of common stock.
(7) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31 was
allocated as follows:
2002 2001
------ ----------
Loss from continuing operations $ -- (251,784)
Loss from discontinued operations -- 13,532
Loss on sale of discontinued operations -- 238,252
------ ----------
$ --
====== ==========
Income tax benefit attributable to loss from continuing operations
differed from the amounts computed by applying the U.S. Federal income
tax rate of 34% to loss before income taxes as a result of the
following:
2002 2001
---------- ----------
Tax expense (benefit) at statutory federal rate $ 61,785 (227,645)
Amortization of intangible assets 42,332 1,039
Life insurance premiums 27,704 30,085
State tax expense (benefit) 6,542 (20,818)
Change in valuation allowance (159,548) (35,399)
Other 21,185 954
---------- ----------
$ -- (251,784)
========== ==========
F-15
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
Income tax benefit attributable to income from continuing operations
for the year ended December 31, 2001 consists of:
CURRENT DEFERRED TOTAL
---------- ---------- ----------
Year ended December 31, 2001:
U.S. Federal $ (230,966) -- (230,966)
State (20,818) -- (20,818)
---------- ---------- ----------
$ (251,784) -- (251,784)
========== ========== ==========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities as of
December 31 are presented below:
2002 2001
---------- ----------
Deferred tax assets:
Net unrealized losses on investments $ -- 54
Deferred compensation -- 69,966
Net operating loss carryforward 118,739 206,684
---------- ----------
Total gross deferred tax assets 118,739 276,704
Deferred tax liabilities - other (2,678) (1,095)
---------- ----------
Net deferred tax assets before valuation allowance 116,061 275,609
Deferred tax asset valuation allowance (116,061) (275,609)
---------- ----------
Net deferred tax assets $ -- --
========== ==========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon
projections for future taxable income over the periods which the
deferred tax assets are deductible, management does not believe it is
more likely than not the Company will realize the benefits of these
deductible differences and, accordingly, has provided for a valuation
allowance.
F-16
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(8) SIGNIFICANT CONTRACT
Investment banking revenues earned for the year ended December 31,
2002, includes approximately $7.2 million earned under a single
contract with the Federal Deposit Insurance Corporation ("FDIC") to
manage the loan portfolio of Hamilton Bank, N.A., a national bank
located in Miami, Florida, for which the FDIC was acting as receiver.
The contract, which is nonrecurring, ended on June 30, 2002, and the
Company has collected all amounts earned under the agreement. Costs
incurred specifically in connection with servicing the FDIC contract
included approximately $1.4 million in professional and regulatory
expenses and $3.0 million in compensation and benefit expenses.
(9) RELATED PARTY TRANSACTIONS
The Company performs certain investment management functions for
Intrepid Capital, L.P. and during 2002 and 2001, received $117,431 and
$43,266, respectively, for such services.
(10) COMMITMENTS
Leases are accounted for as operating leases with rental payments
recorded on a straight-line basis over the term of the lease regardless
of when payments are due. The future minimum rental obligations under
the leases are as follows: YEAR ENDING DECEMBER 31, AMOUNT
2003 $ 420,332
2004 434,967
2005 337,633
2006 337,060
2007 238,783
Thereafter 317,006
----------
$2,085,781
==========
Rent expense for the years ended December 31, 2002 and 2001 was
$431,698 and $264,787, respectively.
Ewing is subject to the Securities and Exchange Commission's Net
Capital Rule (Rule 15c3-1) which requires the maintenance of minimum
net capital and requires that the ratio of aggregate indebtedness to
net capital, both as defined, shall not exceed 15 to 1. The SEC is
empowered to restrict Ewing's business activities should its aggregate
indebtedness to net capital ratio exceed 15 to 1. At December 31, 2002,
Ewing had net capital of $222,980, which was $122,980 in excess of its
required capital of $100,000. At the same date, Ewing's ratio of
aggregate indebtedness to net capital was 0.40 to 1.0. Accordingly,
Ewing was in compliance with the net capital requirements.
F-17
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
The option granted to AJG, as discussed in note 6, was 43.75% vested at
December 31, 2002. The remaining 56.25% of the shares will vest at such
time as AJG makes an additional investment in the Company in accordance
with the terms of an investment agreement.
(11) GOODWILL AND INTANGIBLE ASSETS
The Company has determined that certain identifiable intangible assets
exist which are attributable to the estimated fair value of investment
management contracts and customer relationships which were acquired
through the purchase of ICC and have been allocated to the investment
management segment. Management has assessed the recoverability of the
identifiable intangible assets and has determined there to be no
impairment based on its estimates and analysis of future cash flows.
Management will continue to assess the recoverability whenever events
or circumstances indicate they may be impaired and monitor the future
results of the investment management segment. At December 31, 2002,
identifiable intangible assets amounted to $779,823, net of accumulated
amortization of $111,401. Amortization expense was $111,401 for the
year ended December 31, 2002 and the Company estimates the annual
aggregate amortization expense for succeeding years to be
approximately: 2003, $114,000; 2004, $97,000; 2005, $82,000; 2006,
$70,000; and 2007, $59,000.
As of December 31, 2002, the Company completed its initial annual
impairment test for goodwill with no impairment being required and
therefore, there were no changes in the carrying amount of goodwill
during 2002. Goodwill for each of the reportable segments is summarized
as follows as of December 31, 2002:
Investment management segment $ 3,564,898
Investment banking segment 33,891
------------
$ 3,598,789
============
Prior to the Company's adoption of FAS 142, goodwill was amortized. The
following table summarizes and presents adjusted net income (loss) to
exclude goodwill amortization expense recognized for the years ended
December 31, 2002 and 2001:
2002 2001
------------ ------------
Reported net income (loss) available to common shareholders $ 47,474 (1,015,380)
Add back goodwill amortization -- 56,434
------------ ------------
Adjusted net income (loss) available to common shareholders $ 47,474 (958,946)
============ ============
Basic net income (loss) per share
Reported net income (loss) per share $ 0.01 (0.43)
Add back goodwill amortization -- 0.02
------------ ------------
Adjusted basic net income (loss) per share $ 0.01 (0.41)
============ ============
Diluted net income (loss) per share
Reported net income (loss) per share $ 0.01 (0.43)
Add back goodwill amortization -- 0.02
------------ ------------
Adjusted diluted net income (loss) per share $ 0.01 (0.41)
============ ============
F-18
INTREPID CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002 and 2001
(12) SEGMENTS
During 2002 and 2001, the Company operated in two principal segments,
investment management and investment banking. The operations of Enviroq
formerly constituted a separate operating segment and have been
reclassified as discontinued operations. The Company assesses and
measures operating performance based upon the net income (loss) derived
from each of its operating segments, exclusive of the impact of
corporate expenses. The revenues and net income (loss) for each of the
reportable segments are summarized as follows for the years ended
December 31, 2002 and 2001:
2002 2001
------------ ------------
Revenues:
Investment management segment $ 3,489,425 824,838
Investment banking segment 8,600,599 2,423,283
Corporate 774,886 438,274
Intersegment revenues (664,402) (380,251)
------------ ------------
$ 12,200,508 3,306,144
============ ============
Income (loss) from continuing operations:
Investment management segment $ (594,742) (255,004)
Investment banking segment 1,556,449 166,090
Corporate (799,986) (328,846)
------------ ------------
$ 181,721 (417,760)
============ ============
As discussed in note 8, the results of operations for the investment
banking segment in 2002 were significantly influenced by a nonrecurring
contract with the FDIC.
The total assets for each of the reportable segments are summarized as
follows as of December 31, 2002 and 2001. Non segment assets consist
primarily of cash, certain investments and other assets, which are
recorded at the parent company level.
2002 2001
---------- ----------
Assets:
Investment management segment $4,729,825 4,719,199
Investment banking segment 387,289 343,446
Other 1,150,823 1,130,510
---------- ----------
$6,267,937 6,193,155
========== ==========
F-19