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 March 31, 1998.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ______ to_______.
1-7921
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(Commission file number)
SECURITY CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3003070
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(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
1111 NORTH LOOP WEST, SUITE 400, HOUSTON, TEXAS 77008
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(Address of principal executive offices, including zip code)
(713) 880-7100
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(Registrant's telephone number, including area code)
N.A.
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(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 May 14, 1998,
there were 5,306,649 outstanding shares of Class A Common Stock, par value $
.01, and 392 outstanding shares of Common Stock, par value $ .01, of the
registrant.
<PAGE>
Security Capital Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
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For the Three Months
Ended
March 31,
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1998 1997
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(Dollars in thousands, except
per share amounts)
Product sales ................................... $ 3,123 $ 2,542
Cost of goods sold .............................. 1,591 1,052
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Gross profit .................................... $ 1,532 $ 1,490
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Selling, general and administrative ............. 1,922 1,570
Depreciation and amortization .................. 302 182
------- -------
Operating loss .................................. $ (692) $ (262)
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OTHER INCOME(EXPENSE)
Income from joint enterprise .................... $ -- $ 212
Interest income ................................. 88 89
Interest expense ................................ (422) (343)
Other income .................................... 19 (28)
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Total other income(expense) ..................... $ (315) $ (70)
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Minority interest share of net loss ............. 159 100
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Income(loss) before provision for
Federal income tax .......................... $ (848) $ (232)
Provision for Federal income taxes .............. 40 8
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Net income(loss) ................................ $ (888) $ (240)
Less preferred stock dividends .................. -- (113)
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Net income(loss) applicable to common
stockholders .................................... $ (888) $ (353)
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Net income(loss) per common share: .............. $ (.16) $ (.09)
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Weighted average shares outstanding ............. 5,626 4,060
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The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
<PAGE>
Security Capital Corporation and Subsidiaries
Consolidated Balance Sheets
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March 31, December 31,
1998 1997
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(Unaudited) (Audited)
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ASSETS ( In thousands, except
- ------ par value and shares)
Current assets:
Cash and cash equivalents ................................ $ 8,848 $ 10,041
Account receivable (net of allowance for
doubtful accounts of $89and $317) ..................... 2,514 2,746
Inventory ................................................ 5,508 4,307
Deferred tax asset ....................................... 530 539
Other current assets ..................................... 932 582
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Total current assets ..................................... 18,332 18,215
Property and equipment (net of
accumulated depreciation of $173 and $133) ............... 1,377 1,404
Intangible assets (net of accumulated
amortization of $1,304 and $1,067) .................... 12,535 12,767
Licenses and other assets ................................ 169 164
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Total Assets ............................................. $ 32,413 $ 32,550
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable ............................................. $ 1,900 $ 1,000
Current portion of long-term debt ........................ 1,714 1,339
Accounts payable ......................................... 1,549 811
Federal income tax - current ............................. -- 50
Accrued expenses and other liabilities ................... 324 496
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Total current liabilities ................................ 5,487 3,696
Long-term debt, less current portion ..................... 11,523 12,383
Other long-term liabilities .............................. 237 258
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Total Liabilities ........................................ $ 17,247 $ 16,337
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Minority interest ........................................ 1,260 1,419
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Commitments and Contingencies ............................ $ -- $ --
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STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 7,500
shares authorized; 551 shares issued .................. $ -- $ --
Class A common stock, $.01 par value,
10,000,000 shares authorized;
5,625,065 shares issued ............................... 56 56
Preferred stock, $.01 par value,
2,500,000 shares authorized; none
issued ................................................ -- --
Additional paid-in capital ............................... 67,520 67,520
Accumulated deficit ...................................... (48,455) (47,567)
Less: Treasury stock, at cost, 318,576
shares ................................................ (5,215) (5,215)
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Total Stockholders' Equity ............................... $ 13,906 $ 14,794
-------- --------
Total Liabilities and Stockholders'
Equity ................................................... $ 32,413 $ 32,550
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The accompanying notes to consolidated financial statements are an integral part
of these statements.
Page 3 of 9
<PAGE>
Security Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
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For the Three Months Ended
March 31,
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1998 1997
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(In thousands)
Cash flows from operating activities:
Net income(loss) ........................................ $ (888) $ (240)
Adjustments to reconcile net income
to net cash provided (used) by operating
activities:
Depreciation and amortization of
property and equipment, and
amortization of deferred items ..................... 302 151
Minority interest .................................... (159) (100)
Changes in operating assets and
liabilities, net of effects from
acquisition of business
Decrease in accounts receivable ................. 232 484
Increase in inventories ......................... (1,201) (114)
Decrease in other assets ........................ (346) (399)
Increase (decrease) in accounts
payable ....................................... 738 (401)
Decrease in accrued
expenses and other liabilities ................ (254) 12
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Net cash provided (used) by operating
activities .............................................. (1,576) (607)
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Cash flows from investing activities:
Purchase of property and equipment ................... (1) (22)
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Net cash provided (used) by investing
activities .............................................. (1) (22)
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Cash flows from financing activities:
Net increase in bank borrowing ....................... 900 925
Repayment of term loans .............................. (495) (481)
Repayment of other obligations ....................... (21) --
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Net cash provided (used) by financing
activities .............................................. 384 444
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Increase(decrease) in cash and cash
equivalents ............................................. (1,193) (185)
Cash and cash equivalents, beginning of
year .................................................... 10,041 8,010
Cash and cash equivalents, end of year .................. $ 8,848 $ 7,825
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The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
Page 4 of 9
<PAGE>
Security Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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(1) Accounting and Financial Reporting Policies
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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 owns, through its
90% owned subsidiary P.D. Holdings, Inc. ("P.D. Holdings"), 90% (77.5% effective
after consideration of the outstanding warrants issued in conjunction with debt
to purchase outstanding shares of common stock) of the outstanding shares of
Possible Dreams, Ltd. ("Possible Dreams"), a Delaware corporation. Possible
Dreams acquired substantially all of the assets and assumed certain liabilities
of Possible Dreams, Ltd. and Columbia National Corporation, both Massachusetts
corporations. Possible Dreams operates as an importer, designer, warehouser and
distributor of collectible Christmas figurines and ornaments and, to a lesser
extent, religious statutes. On June 27, 1997, the Company's subsidiary, Pumpkin
Masters Holdings, Inc., through its subsidiary, Pumpkin Ltd. ("Pumpkin"), both
Delaware corporations, acquired substantially all of the assets and assumed
certain liabilities of Pumpkin Ltd. d/b/a Pumpkin Masters, Inc., a Colorado
corporation. Pumpkin is engaged in the business of manufacturing and
distributing pumpkin and watermelon carving kits and related accessories. All
significant inter-company 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. Prior period financial statements are presented for comparative
purposes. 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.
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(2) Federal Income Taxes
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The Company computes deferred income taxes based on the differences 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 tax effects of the items comprising the Company's net deferred tax assets at
December 31, 1997 in the Company's statement of financial position are as
follows:
December 31, 1997
Deferred tax assets: (In thousands)
Allowance for doubtful accounts $ 189
Operating loss carry-forwards 10,744
Alternative minimum tax carryover 100
Accelerated depreciation (11)
------------------
11,022
100% Valuation allowance (10,483)
Net deferred tax asset $ 539
==================
Page 5 of 9
<PAGE>
In addition, the net deferred tax assets at March 31, 1998 has not changed
materially since December 31, 1997.
Security Capital files a consolidated Federal income tax return with its
subsidiaries. At December 31, 1997, the Company had net operating loss
carry-forwards for Federal income tax purposes of approximately $13.0 million,
the expiration dates of which are as follows:
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September 30, Amount
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(In thousands)
2002 $ 3,600
2003 1,800
2004 4,000
2005 2,400
2006 400
2007 200
2008 600
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$ 13,000
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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 carry-forwards,
including the loss on disposition of the aforementioned subsidiary, remain
subject to review by the IRS.
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(3) Earnings Per Share Calendar Year 1998 and Calendar Year 1997
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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 and had no
impact for all periods presented.
The weighted average number of shares outstanding used in the computation of
basic and fully diluted earnings per share is as follows (in thousands):
Calendar Year 1998 Calendar Year 1997
3 MONTHS 3 MONTHS
-------- --------
Basic 5,626 4,060
Fully diluted 5,626 4,060
Page of 6 of 9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Security Capital reported a net loss of $888,000 for the three month period
ended March 31, 1998. This compares to a net loss of $240,000 for the same three
month period of the prior fiscal year. The Company reported a net loss per
common share of $.16 for the three month period ended March 31, 1998 as compared
to a net loss per common share (after accrual for Class A Preferred Stock
dividends) of $.09 for the same three month period of the prior fiscal year.
Product sales of the Company increased to $3,123,000 for the current quarter as
compared to $2,542,000 for the same quarter of the prior fiscal year. This
increase in product sales of $581,000 was primarily due to increased sales of
Christmas related products and religious statutes through Possible Dreams. As
previously discussed, the Company acquired Pumpkin in the prior year just prior
to its busiest period. Historically, Pumpkin does 90% of its calendar year sales
between July and October and therefore had product sales of only $26,000 for
this quarter. Selling, general and administrative expense increased by $352,000
for the quarter to $1,922,000, as compared to $1,570,000 for the same prior year
fiscal quarter. Selling, general and administrative expense was adversely
impacted by the addition of Pumpkin's expenses of approximately $345,000 for the
current quarter. Depreciation and amortization increased by $120,000 to $302,000
in the current quarter primarily due to increased goodwill associated with the
acquisition of Pumpkin. The Company incurred interest expense of $422,000 for
the current quarter as compared to $343,000 for the same prior year fiscal
quarter. This increase in interest cost during the current quarter was
attributable to additional debt incurred to acquire Pumpkin as well as
borrowings incurred by the Company for working capital during the quarter. The
quarter was also adversely impacted by the sale of the Company's insurance
agency affiliate in the prior year, since its best quarter historically has been
the first calendar quarter of each year when it receives bonus commissions from
its insurance companies. The addition of Pumpkin's net loss for the quarter
adversely impacted the Company's results by approximately $585,000. This off
season loss, combined with the loss of income from the sale of the Company's
insurance agency affiliate, accounts for a significant amount of the Company's
first quarter net loss.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1,193,000 to $8,848,000 at March 31,
1998 as compared to $10,041,000 at December 31, 1997. The decrease in cash and
cash equivalents was primarily attributable to increased inventory purchases
during the Company's weakest seasonal period. The Company's consolidated working
capital at March 31, 1998 decreased by $1,674,000 to $12,845,000 from
$14,519,000 at December 31, 1997. This decrease in working capital was
attributable to increased short-term bank borrowing of Possible Dreams in the
amount of $900,000, as well as increased amounts owed to the Company's
suppliers.
Possible Dreams' lender has provided various credit facilities to Possible
Dreams, which included funds to partially finance the acquisition of Possible
Dreams, refinance existing bank debt of the Sellers of Possible Dreams, provide
for seasonal working capital and letter of credit requirements and to pay
transaction expenses. These 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 Company, due to certain covenants in the credit agreement,
is required to pay down its revolving line of credit to $1,000,000 for a 15
consecutive day period during the first quarter of each fiscal year. Possible
Dreams borrowed an additional $900,000 after this repayment period, from its
lender, pursuant to its revolving line of credit agreement during the current
quarter. This additional borrowing increased its indebtedness under the
revolving line of credit to $1,900,000.
Page 7 of 9
<PAGE>
The Company had no major capital expenditures during the quarter and expects no
major capital expenditures during the remainder of calendar 1998.. The Company
believes that with the addition of Pumpkin and cash and cash equivalents at
March 31, 1998, there will be sufficient cash on hand to meet the Company's
working capital and operating expenditure requirements during calendar year 1998
and to compete for other acquisition opportunities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 3 and by Rule
305 of Regulation S-K are inapplicable to the Company at this time.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS: None
(b) REPORTS ON FORM 8-K : The Company did not file any reports on Form
8-K during the fiscal quarter for which this report is submitted.
Page 8 of 9
<PAGE>
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: May 15, 1998 By: A. George Gebauer
-----------------------------------------
A. George Gebauer, President
Date: May 15, 1998 By: Larry M. Karren
-----------------------------------------
Larry M. Karren, Treasurer
(Principal Financial and Accounting
Officer)
Page 9 of 9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM SECURITY CAPITAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,848
<SECURITIES> 0
<RECEIVABLES> 2,514
<ALLOWANCES> 89
<INVENTORY> 5,508
<CURRENT-ASSETS> 18,332
<PP&E> 1,377
<DEPRECIATION> 173
<TOTAL-ASSETS> 32,413
<CURRENT-LIABILITIES> 5,487
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 13,850
<TOTAL-LIABILITY-AND-EQUITY> 32,850
<SALES> 3,123
<TOTAL-REVENUES> 3,123
<CGS> 1,591
<TOTAL-COSTS> 1,591
<OTHER-EXPENSES> 2,224
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 422
<INCOME-PRETAX> (848)
<INCOME-TAX> 40
<INCOME-CONTINUING> (888)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (888)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> 0
</TABLE>
