SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 1996.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from __________ to
_________.
1-7921
(Commission file number)
SECURITY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3003070
(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
1111 NORTH LOOP WEST, SUITE 400, HOUSTON, TEXAS 77008
(Address of principal executive offices, including zip code)
(713) 880-7100
(Registrant's telephone number, including area code)
N.A.
(Former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: as of August 14,
1996, there were 4,059,391 outstanding shares of Class A Common Stock, par value
$ .01, and 393 outstanding shares of Common Stock, par value $ .01, of the
registrant.
Page 1 of 10
<PAGE>
Security Capital Corporation and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
June 30, June 30,
- --------------------------------------------------------------------------------------------
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------
(Dollars in thousands, except per
share amounts)
<S> <C> <C> <C> <C>
Product sales .................................. $ 1,453 $ -- $ 1,453 $ --
------- ------- ------- -------
Cost of goods sold ............................. 668 -- 668 --
------- ------- ------- -------
Gross profit ................................... $ 785 $ -- $ 785 $ --
------- ------- ------- -------
Selling, general and administrative ............ 1,307 334 1,589 585
------- ------- ------- -------
Operating loss ................................. $ (522) $ (334) $ (804) $ (585)
------- ------- ------- -------
OTHER INCOME
Income from joint enterprise ................... $ 114 $ 85 $ 353 $ 266
Interest income ................................ 104 135 388 381
Other income ................................... -- -- 20 --
------- ------- ------- -------
Total other income ............................. $ 218 $ 220 $ 761 $ 647
------- ------- ------- -------
Minority interest share of net loss ............ 32 -- 32 --
------- ------- ------- -------
Income(loss) before provision for
Federal income tax ......................... $ (272) $ (114) $ (11) $ 62
Provision for Federal income taxes ............. -- -- -- --
------- ------- ------- -------
Net income(loss) ............................... $ (272) $ (114) $ (11) $ 62
Less preferred stock dividends ................. (113) (113) (338) (338)
------- ------- ------- -------
Net loss applicable to common
stockholders ................................... $ (385) $ (227) $ (349) $ (276)
------- ------- ------- -------
Net loss per common share: ..................... $ (.09) $ (.06) $ (.09) $ (.07)
------- ------- ------- -------
Weighted average shares outstanding ............ 4,060 4,060* 4,060 4,060*
------- ------- ------- -------
</TABLE>
*Restated for one-for-eight reverse stock split
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
Page 2 of 10
<PAGE>
Security Capital Corporation and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
June 30, September 30,
1996 1995
- --------------------------------------------------------------------------------
(Unaudited) (Audited)
- --------------------------------------------------------------------------------
(Dollars in thousands,
except par value)
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 7,827 $ 9,794
Account receivable ................................... 3,685 --
Inventory ............................................ 5,143 --
Other current assets ................................. 427 180
-------- --------
Total current assets ................................. 17,082 9,974
Property and equipment (net of accumulated
depreciation of $187 and $353) ................. 1,107 14
Goodwill ............................................. 8,245 --
Deferred financing fees .............................. 484
Investment in and advances to joint enterprise ....... 705 653
Licenses and other assets ............................ 417 285
======== ========
Total Assets ......................................... $ 28,040 $ 10,926
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable ......................................... $ 4,823 $ --
Current portion of long-term debt .................... 750 --
Accounts payable ..................................... 72 --
Accounts payable - FGS & designee .................... 166 166
Accrued expenses and other liabilities ............... 716 464
-------- --------
Total current liabilities ............................ 6,527 630
Long-term debt, less current portion ................. 8,072 --
Subordinated debt .................................... 2,460 --
Minority interest .................................... 696 --
======== ========
Total Liabilities .................................... $ 17,755 $ 630
======== ========
Commitments and Contingencies ........................ $ -- $ --
======== ========
Class A preferred stock (redeemable), $.01
par value, 50,000 shares authorized, 30,000
shares issued (including dividends in arrears
of $1,313 and $975) ............................... $ 4,313 $ 3,975
======== ========
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 7,500 shares
authorized; 552* shares issued .................... $ -- $ --
Class A common stock, $.01 par value,
10,000,000 shares authorized; 4,377,807*
shares issued ..................................... 350 350
Preferred stock, $.01 par value, 2,500,000
shares authorized, none issued ................... -- --
Additional paid-in capital ........................... 62,238 62,238
Accumulated deficit .................................. (51,401) (51,052)
Less: Treasury stock, at cost, 318,575* shares ....... (5,215) (5,215)
======== ========
Total Stockholders' Equity ........................... $ 5,972 $ 6,321
======== ========
Total Liabilities and Stockholders' Equity ........... $ 28,040 $ 10,926
======== ========
*Restated for one-for-eight reverse stock split
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 3 of 10
<PAGE>
Security Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
For the Nine Months
Ended
June 30,
- -----------------------------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .............................................................. $ (11) $ 62
Adjustments to reconcile income (loss) to net
cash used by operating activities:
Depreciation and amortization of property and
equipment, and amortization of
deferred items ......................................................... 100 17
Net change in operating assets and liabilities
(excluding purchased operating assets and
assumed liabilities of Possible Dreams, Ltd. ..........................
and Columbia National Corporation)
Accounts receivable .................................................. (860) --
Inventories .......................................................... (1181) --
Other assets ......................................................... 57 (73)
Accounts payable ..................................................... (279) --
Accrued interest and other liabilities ............................... 5 289
------- -------
Minority interest in net earnings of subsidiary ...................... (32) --
------- -------
Net cash from (used for) operating activities ................................. (2201) 295
------- -------
Cash flow from (used for) investing activities
Additions to property and equipment ............................................ (3) --
Purchase assets of Possible
Dreams, Ltd. and Columbia National Corporation ................................. (1,936) --
(Net of cash acquired of $764)
------- -------
Cash flow from (used for) investing activities ................................. (1,939) --
------- -------
Net cash from (used for) financing activities
Proceeds from short-term bank borrowing ........................................ 2,173 --
------- -------
Cash flow from (used for) financing activities ................................ 2,173 --
------- -------
Net increase(decrease) in cash and cash equivalents ............................ (1,967) 295
Cash and cash equivalents, beginning of period ................................. 9,794 9,381
------- -------
Cash and cash equivalents, end of period ....................................... $ 7,827 $ 9,676
------- -------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 4 of 10
Security Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
(1) Accounting and Financial Reporting Policies
- --------------------------------------------------------------------------------
The accompanying consolidated financial statements include the accounts of
Security Capital Corporation and all of its subsidiaries engaged in continuing
operations ("Security Capital" or the "Company"). The Company's subsidiaries
include Possible Dreams, Ltd., a Delaware corporation, which acquired
substantially all the assets and assumed certain liabilities of Possible Dreams,
Ltd. and Columbia National Corporation, both Massachusetts corporations, on May
17, 1996. (See Note 4) All significant intercompany balances and transactions
have been eliminated in consolidation. The condensed consolidated financial
statements included herein have been prepared by Security Capital, in accordance
with the rules and regulations of the Securities and Exchange Commission,
without audit.
Security Capital's accounting and financial reporting policies conform with
generally accepted accounting principles and include adjustments in interim
periods, consisting only of normal recurring items, considered necessary for a
fair presentation of the financial statements. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although Security Capital believes that
the accompanying disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the latest Annual Report of Security Capital on
Form 10-K.
Prior period financial statements are presented for comparative purposes.
- --------------------------------------------------------------------------------
(2) Federal Income Taxes
- --------------------------------------------------------------------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes" during fiscal year 1994. SFAS No. 109
requires the Company to compute deferred income taxes based on the difference
between the financial statement basis and tax basis of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. The adoption had no effect on financial position or results
of operations because of a 100% valuation allowance applied against the deferred
tax assets.
The tax effects of the items comprising the Company's net deferred tax asset at
September 30, 1995 in the Company's statement of financial position are as
follows:
September 30, 1995
Deferred tax assets: (In thousands)
Operating loss carryforwards $ 12,635
Partnership income (139)
-----------
12,496
100% Valuation allowance (12,496)
Net deferred tax asset $ -0-
===========
The Company continued to provide a 100% valuation allowance on all net deferred
tax assets at September 30, 1995. In addition, the net deferred tax asset at
June 30, 1996 has not changed materially since September 30, 1995.
Page 5 of 10
Security Capital files a consolidated Federal income tax return with its
subsidiaries. At September 30, 1995, the Company had net operating loss
carryforwards for Federal income tax purposes of approximately $18.6 million,
the expiration dates of which are as follows:
- --------------------------------------------------------------------
September 30, Amount
- --------------------------------------------------------------------
(In thousands)
1997 $ 1,776
2000 2,304
2001 1,330
2002 3,555
2003 1,052
2004 4,974
2005 2,430
2007 398
2008 162
2009 581
- --------------------------------------------------------------------
$ 18,562
- --------------------------------------------------------------------
In addition, in connection with the disposition of a former subsidiary of the
Company, the Company incurred a tax loss amounting to approximately $26 million.
The Company believes that a substantial portion of this loss is an ordinary loss
for Federal income tax purposes which may be carried forward to 2004, although
there can be no assurance that this position would prevail, if challenged. The
Company's Federal income tax returns have been examined by the Internal Revenue
Service (the "IRS") through fiscal year 1986 and the above loss carryforwards,
including the loss on disposition of the aforementioned subsidiary, remain
subject to review by the IRS.
- --------------------------------------------------------------------------------
(3) Earnings Per Share Fiscal Year 1996 and Fiscal Year 1995
- --------------------------------------------------------------------------------
Earnings per common and common equivalent share amounts are based on the
weighted average number of shares of Common Stock and Class A Common Stock
outstanding and the dilutive effect, if any, of outstanding stock options. The
sum of Common Stock and Class A Common Stock is used because the two classes are
identical except for certain transfer restrictions imposed on the Class A Common
Stock. The assumed conversion of these options was anti-dilutive for all periods
presented, and are thus excluded from the primary and fully diluted earnings per
share calculations.
On March 20, 1996, the stockholders of the Company approved a proposal to amend
the Restated Certificate of Incorporation of the Company to effect a
one-for-eight reverse split of the Class A Common Stock and of the Common Stock.
All references to the number of Common and Class A Common shares and per share
data in the financial statements have been restated to reflect the reverse stock
split.
Page 6 of 10
The weighted average number of shares outstanding after the reverse stock split
used in the computation of primary and fully diluted earnings per share is as
follows (in thousands):
Fiscal Year 1996 Fiscal Year 1995
9 months 3 months 9 months 3 months
----- ----- ----- -----
Primary ...................... 4,060 4,060 4,060* 4,060*
Fully diluted ................ 4,060 4,060 4,060* 4,060*
*Restated for one-for-eight reverse stock split.
- --------------------------------------------------------------------------------
(4) Asset Purchase of Possible Dreams, Ltd. and Columbia National Corporation
- --------------------------------------------------------------------------------
On May 17, 1996, Possible Dreams, Ltd. ("Possible Dreams") , a Delaware
corporation, and a subsidiary of P.D. Holdings, Inc. ("Holdings"), a Delaware
corporation and a subsidiary of Security Capital Corporation, acquired
substantially all of the assets and assumed certain liabilities of Possible
Dreams Ltd., and Columbia National Corporation, (collectively, the "Sellers"),
both Massachusetts corporations. The Sellers were engaged in the business of
designing, importing, warehousing and distributing collectible Christmas
figurines and ornaments and, to a lesser extent, religious statues. The
consideration paid to the Sellers and the transaction fees and expenses incurred
as of the closing date aggregated $17,598,149. This amount consists of the
following:
Cash paid to Sellers ..................................... $ 9,878,195
Refinanced Bank Debt ..................................... 4,035,649
Notes Issued to Sellers .................................. 2,460,000
Transaction Fees and expenses ............................ 744,069
Assumption of accounts
payable and accrued liabilities .......................... 480,236
-----------
Total .................................................... $17,598,149
The assets purchased consisted of the assets used by the Sellers in the conduct
of their business, including cash, accounts receivable, inventories, prepaid
expenses, real estate, furniture, fixtures, computers, and intellectual property
rights and other intangibles. Of the cash paid to the Sellers, $2,700,000 was
provided by the Company, $300,000 was provided from the proceeds of Class A
Common Stock of Holdings purchased by an executive officer of the Sellers, and
the balance was borrowed pursuant to a credit agreement with Nationscredit
Commercial Corporation ("Nationscredit").
The credit agreement provides various credit facilities to Possible Dreams to
partially finance the acquisition, refinance existing bank debt of the Sellers,
provide for seasonal working capital and letter of credit requirements and to
pay transaction expenses. The facilities consist of a revolving credit facility
and $9,250,000 in amortizing term debt maturing from five to seven years from
the closing date. The facilities are secured by all of the acquired assets as
well as by a pledge to the Lenders under such credit agreement of the capital
stock of Possible Dreams owned by Holdings. Nationcredit was issued a warrant
excercisable for 12.5% of the Class B Common Stock, on a fully diluted basis, of
Possible Dreams in connection with the financing. The Class B Common Stock is
non-voting and convertible at any time into voting, Class A Common Stock of
Possible Dreams.
Page 7 of 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS- All reference to earnings per common share for periods
ending on December 31, 1995 or prior have been restated for the one-for-eight
stock split.
Security Capital reported a net loss of $272,000 and $11,000 for the three and
nine month periods ended June 30, 1996. This compares to a net loss of $114,000
and net income of $62,000 for the same three and nine month periods of the prior
fiscal year. The Company reported a net loss per common share (after accrual for
Class A Preferred Stock dividends) of $.09 and $.09 for the three and nine month
periods ended June 30, 1996 as compared to a net loss per share of $.06 and $.07
for the same three and nine month periods of the prior fiscal year.
On May 17, 1996, Possible Dreams, Ltd., a Delaware corporation and a subsidiary
of the Company, acquired substantially all of the assets and assumed certain
liabilities of Possible Dreams, Ltd., and Columbia National Corporation, both
Massachusetts corporations for $17,598,149. The Sellers were engaged in the
business of designing, importing, warehousing and distributing collectible
Christmas figurines and ornaments and, to a lesser extent, religious statues.
Operating revenues of the Company increased to $1,453,000 and gross profit
increased to $785,000 for the third fiscal quarter, due to the addition of
Possible Dreams to the Company's consolidated financial statements. Selling,
general and administrative expense, which increased by $973,000 for the quarter
to $1,307,000, was also, impacted by this event. The Company, however, sustained
an operating loss for the current quarter of $522,000 as compared to $334,000
for the same prior fiscal year quarter. The quarter reflects the seasonal nature
of Possible Dream's business, which is typically strongest in the first and
fourth fiscal quarters.
The Company's percentage of Bowen, Miclette, Descant & Britt ("BMD&B") net
revenues and expenses is included under the caption "Income from Joint
Enterprise". The income amounted to $114,000 and $353,000 for the three and nine
month periods ended June 30, 1996. This compares to income of $85,000 and
$266,000 for the same periods of the prior fiscal year. BMD&B's income was up
due to increased commercial and group commissions during the year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1,967,000 to $7,827,000 at June 30, 1996
as compared to $9,794,000 at September 30, 1995. The decrease in cash and cash
equivalents was primarily attributable to the $2,700,000 payment made to the
Sellers. The Company's consolidated working capital at June 30, 1996, however,
increased by $1,211,000 to $10,555,000 from $9,344,000 at September 30, 1995.
This increase in working capital was due to the impact of the new credit
agreement negotiated with Nationscredit.
One of the executive officers of the Sellers purchased $300,000 of Class A
Common Stock of Holdings as part of the purchase agreement. The remaining amount
due the Sellers was borrowed pursuant to the credit agreement with
Nationscredit. The credit agreement provides various credit facilities to
Possible Dreams to partially finance the acquisition, refinance existing bank
debt of the Sellers, provide for seasonal working capital and letter of credit
requirements and to pay transaction expenses. The facilities consist of a
revolving credit facility and $9,250,000 in amortizing term debt maturing from
five to seven years from the closing date. The facilities are secured by all of
the acquired assets as well as by a pledge to the Lenders under such credit
agreement of the capital stock of Possible Dreams owned by Holdings.
Nationcredit was issued a warrant excercisable for 12.5% of the Class B Common
Stock, on a fully diluted basis, of Possible Dreams in connection with the
financing. The Class B Common Stock is non-voting and convertible at any time
into voting, Class A Common Stock of Possible Dreams.
On March 20, 1996, the stockholders of the Company authorized a one-for-eight
reverse split of the Company's Common Stock and Class A Common Stock, which had
the effect of decreasing the number of issued shares from 35,033,880 to
approximately 4,378,359. The Company's Class A Common Stock, which is traded on
the Pacific Stock Exchange, Inc. (the "PSE"), was trading below the minimum Tier
II requirement of $1.00 per share for the continued listing of the Class A
Common Stock on the PSE. The PSE had given the Company until April 2, 1996 to
meet such $1.00 per share requirement or else the Class
Page 8 of 10
A Common Stock would be delisted from the PSE. The principal purpose of the
reverse split was to bring the Company and the Class A Common Stock into
compliance with these requirements.
The Company's working capital and operating expenditure requirements, prior to
the addition of Possible Dreams, had been funded by excess cash at the holding
company level and from dividends from the Company's insurance agency operations,
the proceeds of a rights offering in June 1994 and the sale of $3,000,000 of
Class A Preferred Stock in July 1993. The Company will probably receive less
income from its insurance agency operations due to an increase during June 1996
in the bonus percentage due officers from 25% to 50% pursuant to the terms of
the Agency Agreement. The Company believes that with the addition of Possible
Dreams and the funds expected to be generated from the Company's insurance
agency affiliate, there will be sufficient cash on hand to meet the Company's
working capital and operating expenditure requirements during the next twelve
months and to compete for other acquisition opportunities.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
(a) None
(b) The Company's Class A Preferred Stock bears a dividend of 15% per
annum payable. Upon redemption or the liquidation of the Company,
dividends on Preferred Stock are payable only out of cumulative net
income since January 1990. (At a redemption date or upon the liquidation
of the Company, accumulated but unpaid dividends are payable in full
regardless of earnings since January 1, 1990.) Therefore, since there
has been a cumulative net loss since January 1, 1990 of $1,552,000,
preferred stock dividends of $1,312,500 accrued from July 30, 1993 to
June 30, 1996 were in arrears at June 30, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS: None
(b)
DATE OF FILING DATE OF EVENT REPORTED ITEMS
-------------------------------------------------------------------
5-31-96 5-17-96 Item 5
Other events
Page 9 of 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SECURITY CAPITAL CORPORATION
Date: August 14 , 1996 By: /s/ A. George Gebauer
A. George Gebauer, President
Date: August 14 , 1996 By: /s/ Larry M. Karren
Larry M. Karren, Treasurer
(Principal Financial and
Accounting Officer)
Page 10 of 10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,827
<SECURITIES> 0
<RECEIVABLES> 3,685
<ALLOWANCES> 0
<INVENTORY> 5,143
<CURRENT-ASSETS> 17,082
<PP&E> 1,107
<DEPRECIATION> 10
<TOTAL-ASSETS> 28,040
<CURRENT-LIABILITIES> 6,527
<BONDS> 0
4,313
0
<COMMON> 350
<OTHER-SE> 5,622
<TOTAL-LIABILITY-AND-EQUITY> 28,040
<SALES> 1,453
<TOTAL-REVENUES> 1,453
<CGS> 668
<TOTAL-COSTS> 668
<OTHER-EXPENSES> 1,589
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
