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, 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 August 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
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For the Three
Months For the Six Months
Ended Ended
June 30, June 30,
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1998 1997 1998 1997
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(Dollars in thousands, except per
share amounts)
Product sales ...................... $ 5,870 $ 3,490 $ 8,993 $ 6,032
Cost of goods sold ................. 2,980 1,565 4,571 2,617
------- ------- ------- -------
Gross profit ....................... $ 2,890 $ 1,925 $ 4,422 $ 3,415
------- ------- ------- -------
Selling, general and
administrative ..................... 2,337 1,520 4,259 3,090
Depreciation and amortization ...... 309 122 611 304
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Total operating expenses ........... 2,646 1,642 4,870 3,394
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Operating income (loss) ............ $ 244 $ 283 $ (448) $ 21
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OTHER INCOME (EXPENSE)
Income from joint enterprise ....... $ -- $ 62 $ -- $ 274
Interest income .................... 91 93 179 182
Interest expense ................... (477) (401) (899) (744)
Other income ....................... 5 (22) 24 (50)
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Total other expense ................ $ (381) $ (268) $ (696) $ (338)
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Minority interest share of net
income(loss) ....................... 33 (14) 192 86
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Income(loss) before provision
for Federal income tax ............. $ (104) $ 1 $ (952) $ (231)
Provision for Federal and state
income taxes ....................... (58) -- (18) 8
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Net income(loss) ................... $ (46) $ 1 $ (934) $ (239)
Less preferred stock dividends ..... -- (112) -- (225)
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Net loss applicable to common
stockholders ....................... $ (46) $ (111) $ (934) $ (464)
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Net loss per common share: ......... $ (.01) $ (.03) $ (.18) $ (.11)
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Weighted average shares
outstanding ........................ 5,307 4,060 5,307 4,060
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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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June 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 ................ $ 7,876 $ 10,041
Account receivable (net of
allowance for doubtful
accounts of $101 and $317) ............ 6,895 2,746
Inventory ................................ 9,418 4,307
Deferred tax asset ....................... 500 539
Other current assets ..................... 833 582
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Total current assets ..................... 25,522 18,215
Property and equipment (net of
accumulated depreciation of $223
and $133) ................................ 1,431 1,404
Intangible assets (net of
accumulated amortization of
$1,540 and $1,067) .................... 12,434 12,767
Licenses and other assets ................ 174 164
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Total Assets ............................. $ 39,561 $ 32,550
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LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Note payable ............................. $ 8,769 $ 1,000
Current portion of long-term debt ........ 1,865 1,339
Accounts payable ......................... 2,333 811
Federal and state income tax -
current .................................. (96) 50
Accrued expenses and other
liabilities .............................. 403 496
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Total current liabilities ................ 13,274 3,696
Long-term debt, less current
portion .................................. 10,984 12,383
Other long-term liabilities .............. 215 258
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Total Liabilities ........................ $ 24,473 $ 16,337
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Minority interest ........................ 1,228 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 ...................... (48,501) (47,567)
Less: Treasury stock, at cost,
318,575 shares ........................ (5,215) (5,215)
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Total Stockholders' Equity ............... $ 13,860 $ 14,794
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Total Liabilities and
Stockholders' Equity ..................... $ 39,561 $ 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 Six Months
Ended
June 30,
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1998 1997
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(Dollars in thousands)
Cash flows from operating activities:
Net income (loss) ............................... $ (934) $ (239)
Adjustments to reconcile income
(loss) to net cash used by operating
activities:
Depreciation and
amortization of property and
equipment, and amortization
of deferred items ......................... 612 304
Net change in operating assets and
liabilities (excluding purchased
operating assets and assumed
liabilities of Pumpkin)
Increase in accounts receivable ....... (3,947) (2,071)
Increase in inventories ............... (5,112) (1,334)
Increase in other assets .............. (403) (394)
Increase in accounts payable .......... 1,747 126
Decrease in accrued interest and
other liabilities .................... (567) (211)
Minority interest in net earnings
of subsidiary ........................ (191) (86)
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Net cash used for operating activities ......... (8,795) (3,905)
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Cash flows (used for) investing activities
Additions to property and equipment ............. (117) (84)
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Cash flow used for investing
activities ...................................... (117) (84)
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Net cash from (used for) financing activities
Net increase in borrowings under
line of credit .................................. 7,769 4,325
Repayment of term loans ......................... (979) (639)
Purchase of assets of Pumpkin
Masters, Inc. (net of cash acquired
of $134) ........................................ (43) (1,366)
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Cash flow from (used for) financing
activities ...................................... 6,747 2,320
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Net increase(decrease) in cash and
cash equivalents ................................ (2,165) (1,669)
Cash and cash equivalents, beginning
of period ....................................... 10,041 8,010
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Cash and cash equivalents, end of
period .......................................... $ 7,876 $ 6,341
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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
100% Valuation allowance (10,483)
Net deferred tax asset $ 539
============
Page 5 of 9
<PAGE>
In addition, the net deferred tax assets at June 30, 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 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 its 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
6 MONTHS 3 MONTHS 6 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 a net loss of $46,000 and $934,000 for the three and
six month periods ended June 30, 1998, respectively. This compares to net losses
of $111,000 and 464,000 for the same three and six month periods of the prior
calendar year. The Company reported a net loss per common share of $.01 and $.18
for the three and six month periods ended June 30, 1998, respectively, as
compared to a net loss per common share (after accrual for Class A Preferred
Stock dividends) of $.03 and $.11 for the same three and six month periods of
the prior calendar year.
Product sales of the Company increased to $5,870,000 and $8,993,000 for the
three and six month periods ended June 30, 1998, respectively, due to strong
demand for the Company's products. This represents an increase of 68% for the
quarter and 49% for the six month period ended June 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. Part of the increase in product sales ($599,000) for
the quarter was attributable to the addition of Pumpkin to the Company's
consolidated financial statements in the current year, since the acquisition
occurred at the end of the second quarter on June 27, 1997 and none of its
product sales were included in the second quarter of 1997. Selling, general and
administration expense increased by 54% to $2,337,000 for the quarter as
compared to $1,520,000 for the same prior year quarter, primarily due to
increased marketing and commission costs and the addition of Pumpkin selling,
general and administrative expense to the Company's consolidated financial
statements. Depreciation and amortization increased by 153% in the current
quarter to $309,000 as compared to $122,000 for the same prior year quarter. The
increase was due to the addition of Pumpkin and its related depreciation and
amortization cost to the Company's consolidated financial statements in the
current quarter. Other expense increased 42% to $381,000 in the current quarter
as compared to $268,000 in the same prior year quarter. This increase was
primarily due to the net effect of increased interest cost due to the
acquisition of Pumpkin and the reduction in income in the current year due to
the sale in the prior year of the Company's insurance agency affiliate.
On June 12, 1998 Pumpkin acquired the business and related assets of Our Kids
for $250,000 and potential future other considerations. The assets acquired
included inventory, molds, trademarks, supplies and accounts receivable. The
Company does not consider this a major acquisition and the new product lines did
not contribute significant revenues to the second quarter results.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $2,165,000, or 22% to $7,876,000 at June
30, 1998 as compared to $10,041,000 at December 31, 1997. The decrease in cash
and cash equivalents was primarily due to the seasonal nature of the Company's
business.. The Company's consolidated working capital at June 30, 1998,
decreased by $2,271,000, or 16% to $12,248,000 from $14,519,000 at December 31,
1997. 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 second quarter, the Company's bank borrowings increased by
$7,769,000 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. The Company believes it has 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.
Page 7 of 9
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its 1998 Annual Meeting of Stockholders (the "Annual
Meeting") on June 11, 1998.
(b) The following directors were elected at the Annual Meeting and are the
only directors whose terms of office as directors continued after the
Annual Meeting: William T. Bozarth, Brian D. Fitzgerald, A. George Gebauer
and Thomas J. Gochberg.
(c) Set forth below is a description of the matters voted upon at the
Annual Meeting, including the number of votes cast for, as well as the
number of votes withheld and broker non-votes, as to each nominee for
election as a director.
1.Election of four directors, each to serve until the next Annual
Meeting of Stockholders and until his successor is duly elected and
qualified.
Nominees Votes For Votes Withheld Broker-Non-Votes
William T. Bozarth 4,928,611 36,278 -0-
Brian D. Fitzgerald 4,929,379 35,510 -0-
A. George Gebauer 4,929,276 35,613 -0-
Thomas J. Gochberg 4,928,843 36,046 -0-
(d) A proposal to amend the Restated Certificate of Incorporation to
delete Article 12 was approved by the shareholders.
Votes For Votes Against Broker- Non- Votes
Stockholder Votes 4,536,125 31,497 393,610
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 not otherwise complying 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 March 27, 1999.
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: August 14 , 1998 By: A. George Gebauer
------------------------------------
A. George Gebauer, President
Date: August 14 , 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 QUAILIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,876
<SECURITIES> 0
<RECEIVABLES> 6,895
<ALLOWANCES> 101
<INVENTORY> 9,418
<CURRENT-ASSETS> 25,522
<PP&E> 1,431
<DEPRECIATION> 223
<TOTAL-ASSETS> 39,561
<CURRENT-LIABILITIES> 13,274
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 13,804
<TOTAL-LIABILITY-AND-EQUITY> 39,561
<SALES> 8,993
<TOTAL-REVENUES> 8,993
<CGS> 4,571
<TOTAL-COSTS> 4,571
<OTHER-EXPENSES> 4,870
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 899
<INCOME-PRETAX> (952)
<INCOME-TAX> (18)
<INCOME-CONTINUING> (934)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (934)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
