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 September 30, 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 registrant's
classes of common stock, as of the latest practicable date: as of November 13,
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
<TABLE>
<CAPTION>
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For the Three
Months For the Nine Months
Ended Ended
September 30, September 30,
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1998 1997 1998 1997
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(Dollars in thousands, except per
share amounts)
<S> <C> <C> <C> <C>
Product sales ....................... $ 17,193 $ 14,863 $ 26,186 $ 20,895
Cost of goods sold .................. 8,098 6,837 12,669 9,454
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Gross profit ........................ $ 9.095 $ 8,026 $ 13,517 $ 11,441
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Selling, general and
administrative ...................... 3,966 4,152 8,225 7,242
Depreciation and amortization ....... 304 285 915 589
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Total operating expenses ............ 4,270 4,437 9,140 7,831
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Operating income .................... $ 4,825 $ 3,589 $ 4,377 $ 3,610
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OTHER INCOME (EXPENSE)
Income from joint enterprise ........ $ -- $ (145) $ -- $ 129
Gain on sale of beneficial
interest in joint enterprise ........ -- 1,298 -- 1,298
Interest income ..................... 89 105 268 287
Interest expense .................... (662) (690) (1,561) (1,434)
Other income ........................ -- 58 24 8
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Total other income (expense) ........ $ (573) $ 626 $ (1,269) $ 288
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Minority interest share of net
income ............................. (727) (800) (535) (714)
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Income before provision for
Federal income tax .............. $ 3,525 $ 3,415 $ 2,573 $ 3,184
Provision for Federal and state
income taxes ....................... 266 56 248 64
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Net income .......................... $ 3,259 $ 3,359 $ 2,325 $ 3,120
Less preferred stock dividends ...... -- (113) -- (338)
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Net income applicable to common
stockholders ....................... $ 3,259 $ 3,246 $ 2,325 $ 2,782
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Net income per common share: ........ $ .61 $ .80 $ .44 $ .69
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Weighted average shares
outstanding ........................ 5,307 4,060 5,307 4,060
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</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
Page 2 of 9
<PAGE>
Security Capital Corporation and Subsidiaries
Consolidated Balance Sheets
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September 30, 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 .................. $ 7,818 $ 10,041
Account receivable (net of
allowance for doubtful
accounts of $202 and $317) ................ 18,915 2,746
Inventory .................................. 6,144 4,307
Deferred tax asset ......................... 500 539
Other current assets ....................... 500 582
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Total current assets ....................... 33,877 18,215
Property and equipment (net of
accumulated depreciation of $268 and
$ 133) ..................................... 1,491 1,404
Intangible assets (net of
accumulated amortization of
$1,776 and $1,067) ........................ 12,207 12,767
Licenses and other assets .................. 179 164
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Total Assets ............................... $ 47,754 $ 32,550
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LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Note payable ............................... $ 13,544 $ 1,000
Current portion of long-term debt .......... 1,553 1,339
Accounts payable ........................... 1,505 811
Federal and state income tax -
current ................................... 27 50
Accrued expenses and other
liabilities ............................... 1,175 496
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Total current liabilities .................. 17,804 3,696
Long-term debt, less current
portion ................................... 10,684 12,383
Other long-term liabilities ................ 193 258
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Total Liabilities .......................... $ 28,681 $ 16,337
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Minority interest .......................... $ 1,954 $ 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 ........................ (45,242) (47,567)
Less: Treasury stock, at cost,
318,575 shares .......................... (5,215) (5,215)
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Total Stockholders' Equity ................. $ 17,119 $ 14,794
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Total Liabilities and
Stockholders' Equity ....................... $ 47,754 $ 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 Nine Months
Ended
September 30,
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1998 1997
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(Dollars in thousands)
Cash flows from operating activities:
Net income (loss) ............................... $ 2,325 $ 3,120
Adjustments to reconcile income
(loss) to net cash used by operating
activities:
Depreciation and
amortization of property and
equipment, and amortization of
deferred items ................................. 915 589
Net change in operating
assets and liabilities (excluding
purchased operating assets and
assumed liabilities of Pumpkin)
(Increase) in accounts receivable ............... (15,967) (13,081)
Decrease (increase) in inventories .............. (1,837) 721
Decrease (increase) in other assets ............. (89) 102
Increase (decrease) in accounts payable ......... 695 (663)
Decrease in accrued interest and
other liabilities .............................. 453 812
Minority interest in net
earnings of subsidiary ......................... 535 714
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Net cash used for operating
activities ..................................... (12,970) (7,686)
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Cash flows (used for) investing
activities
Additions to property and equipment ............. (221) (97)
Purchase of assets of Pumpkin Ltd. ..............
(net of cash acquired of $134) ................. -- (6,366)
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Cash flow used for investing
activities ..................................... (221) (6,463)
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Net cash from (used for) financing
activities
Net increase in borrowings under
line of credit ................................. 12,544 10,100
Repayment of term loans ......................... (1,576) (992)
Borrowings incurred to finance the
acquisition of Pumpkin, Ltd. ................... -- 5,000
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Cash flow from (used for) financing
activities ..................................... 10,968 14,108
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Net increase(decrease) in cash and
cash equivalents ............................... (2,223) (41)
Cash and cash equivalents, beginning
of period ...................................... 10,041 8,010
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Cash and cash equivalents, end of
period ......................................... $ 7,818 $ 7,969
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The accompanying notes to consolidated financial statements are an integral part
of these 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% on a
fully-diluted basis) 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
Valuation allowance .............. (10,483)
Net deferred tax asset ................. $ 539
========
Page 5 of 9
<PAGE>
In addition, the net deferred tax assets at September 30, 1998 have 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 remaining outstanding stock options expired during calendar year 1997
and the conversion of these options were anti-dilutive for calendar year 1997
and had no impact on all periods presented.
As of December 31, 1997, FGS and its designees converted their 30,000 shares of
Class A Preferred Stock and $1,987,500 of accrued dividends into 1,246,875 of
Class A Common Stock at a valuation of $4 per share.
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
------------------- ----------------------
9 MONTHS 3 MONTHS 9 MONTHS 3 MONTHS
-------- -------- -------- --------
Basic 5,307 5,307 4,060 4,060
Fully diluted 5,307 5,307 4,060 4,060
Page 6 of 9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS-
Security Capital reported net income of $3,259,000 and $2,325,000 for the three
and nine month periods ended September 30, 1998, respectively. This compares to
net income of $3,359,000 and $3,120,000 for the same three and nine month
periods of the prior calendar year. The Company reported net income per common
share of $.61 and $.44 for the three and nine month periods ended September 30,
1998, respectively, as compared to net income per common share (after accrual
for Class A Preferred Stock dividends) of $.80 and $.69 for the same three and
nine month periods of the prior calendar year.
Product sales of the Company increased to $17,193,000 and $26,186,000 for the
three and nine month periods ended September 30, 1998, respectively, as compared
to $14,863,000 and $20,895,000 for the same periods of the prior calendar year
primarily from strong demand for the Company's new products. Product sales
increased 16% for the quarter and 25% for the nine month period ended September
30, 1998. The Company's products are very seasonal in nature, and due to this
seasonal pattern, the Company typically records a substantial portion of its
revenues in the third and fourth calendar quarters. Even though selling, general
and administrative expense decreased by $186,000 for the third quarter, the
Company's annual expense increased by $983,000 to $8,225,000 as compared to
$7,242,000 for the same prior year period. The Pumpkin acquisition occurred on
June 27, 1997 and the prior year's selling, general and administrative expense
did not include any of Pumpkin's expense from the beginning of the year to the
date of acquisition. Depreciation and amortization increased by 7% in the
current quarter to $304,000 as compared to $285,000 for the same prior year
quarter, but for the year it increased 55% due to the addition of Pumpkin and
its related depreciation and amortization cost to the Company's consolidated
financial statements for the prior year, which did not occur until after June
27, 1997. The Company recorded other income of $626,000 and $288,000 for the
three and nine months ended September 30, 1997, as compared to other expense of
$573,000 and $1,269,000 for the same periods of the current year. The current
year's other expense consisted primarily of interest cost. During the third
quarter of 1997, the Company recognized a non-recurring gain of $1,298,000 on
the disposition of its insurance brokerage affiliate.
As previously reported, on June 12, 1998, Pumpkin acquired the business and
related assets of Our Kids for $250,000 and potential future other
consideration. The assets acquired included inventory, molds, trademarks,
supplies and accounts receivable. The Company does not consider this to be a
major acquisition and the new product lines from this acquisition did not
contribute significant revenues to the third quarter results.
YEAR 2000
The Company has been assessing the impact of the Year 2000 on its business by
conducting a review of the computer systems with date-related functionality used
in its business. The Company is in the process of taking all steps that it
believes are necessary or appropriate to ensure that such systems actively
process all dates, including those before, on or after January 1, 2000, without
loss of functionality or performance. Incremental spending for hardware upgrades
and software modifications and testing required for Year 2000 compliance is
currently estimated to be approximately $200,000, with $100,000 being incurred
in calendar year 1998 and the remainder to be incurred in calendar year 1999. It
is expected that internal Year 2000 compliance issues will be resolved by
mid-year of calendar year 1999.
The Year 2000 issue also creates risk for the Company from unforeseen problems
with Year 2000 non-compliance of its vendors, suppliers, customers and other
third parties with which the Company has a material relationship. The Company
intends to initiate formal communications with all of its significant vendors,
suppliers, customers and other material third parties to determine the extent to
which the Company is vulnerable to their own potential problems related to the
Year 2000 as soon as it receives and evaluates responses from its vendors,
suppliers, customers and other material third parties. Due to the general
uncertainty surrounding the year 2000 process, resulting in part from the
uncertainty surrounding the year 2000 readiness of the Company's vendors,
suppliers, customers and other material third parties, the Company is unable to
determine a reasonable worst case scenario at this time.
Page 7 of 9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $2,223,000, or 22%, to $7,818,000 at
September 30, 1998 as compared to $10,041,000 at December 31, 1997. However, the
Company's consolidated working capital at September 30, 1998 increased by
$1,554,000, or 11%, to $16,073,000 from $14,519,000 at December 31, 1997. The
decrease in cash and cash equivalents was primarily due to the seasonal nature
of the Company's business and the timing of its seasonal purchases of inventory.
The Company experiences a significant seasonal pattern not only in its operating
results but also in its cash flow and working capital requirements. The Company
generally has greater working capital needs in its second and third calendar
quarters and has greater cash availability in its fourth calendar quarter.
During the third quarter of the current fiscal year, the Company's bank
borrowings increased to $13,544,000 due to increased inventory purchases by
Possible Dreams and Pumpkin in anticipation of their peak shipping periods,
which are the third and fourth calendar quarters for both companies.
The Company expects no major increase in capital expenditures during the
remainder of calendar year 1998 and the first half of calendar year 1999. The
Company believes it has sufficient cash on hand to meet the Company's working
capital and operating expenditure requirements during the remainder of calendar
year 1998 and calendar year 1999 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 5. Other Information
Stockholders are hereby notified that, if they intend to submit proposals for
inclusion in the Company's Proxy Statement for its 1999 Annual Meeting of
Stockholders that do not otherwise comply with the requirements of Rule 14a-8
under the Securities Exchange Act of 1934, as amended, such proposals must be
received by the Company no later than December 31, 1998.
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: November 16 , 1998 By: A. George Gebauer
------------------------------------
A. George Gebauer, President
Date: November 16 , 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 TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,818
<SECURITIES> 0
<RECEIVABLES> 18,915
<ALLOWANCES> 202
<INVENTORY> 6,144
<CURRENT-ASSETS> 33,877
<PP&E> 1,491
<DEPRECIATION> 268
<TOTAL-ASSETS> 47,754
<CURRENT-LIABILITIES> 17,804
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 17,063
<TOTAL-LIABILITY-AND-EQUITY> 47,754
<SALES> 26,186
<TOTAL-REVENUES> 26,186
<CGS> 12,669
<TOTAL-COSTS> 12,669
<OTHER-EXPENSES> 9,140
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,561
<INCOME-PRETAX> 2,573
<INCOME-TAX> 248
<INCOME-CONTINUING> 2,325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,325
<EPS-PRIMARY> .44
<EPS-DILUTED> 0
</TABLE>
