UNITED STATES
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, 1999.
[ ] 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 _.
As of May 14, 1999, there were 6,442,309 outstanding shares of Class A
Common Stock, par value $ .01, and 380 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
(Unaudited)
For the Three Months
Ended
March 31,
----------------------
1999 1998
------- -------
(In thousands, except per
share amounts)
Product sales .................................... $ 3,335 $ 3,123
Cost of goods sold ............................... 1,750 1,591
------- -------
Gross profit ..................................... $ 1,585 $ 1,532
------- -------
Selling, general and administrative .............. 2,153 1,922
Depreciation and amortization ................... 278 302
------- -------
Operating loss ................................... $ (846) $ (692)
------- -------
OTHER INCOME(EXPENSE)
Interest income .................................. 18 88
Interest expense ................................. (339) (422)
Other income ..................................... 15 19
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Total other income(expense) ...................... $ (306) $ (315)
------- -------
Minority interest share of net loss .............. 275 159
------- -------
Income(loss) before provision for
income taxes ................................. $ (877) $ (848)
Provision (benefit) for income taxes ............. (92) 40
------- -------
Net income (loss) ................................ $ (785) $ (888)
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Net income(loss) per common share: ............... $ (.15) $ (.17)
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Weighted average shares outstanding .............. 5,306 5,306
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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
March 31, December 31,
1999 1998
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(Unaudited) (Audited)
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ASSETS
(In thousands, except par
value and shares)
Current assets:
Cash and cash equivalents .......................... $ 8,343 $ 9,133
Accounts receivable (net of
allowance for doubtful
accounts of $125 and $351) ...................... 2,717 3,279
Inventory .......................................... 6,445 5,339
Deferred tax asset ................................. 1,175 1,175
Other current assets ............................... 1,272 828
---------- ----------
Total current assets ............................... 19,952 19,754
Property and equipment (net of
accumulated depreciation of $355
and $310) ....................................... 1,537 1,507
Intangible assets (net of
accumulated amortization of
$2,174 and $1,961) .............................. 11,836 12,044
Licenses and other assets .......................... 202 196
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Total Assets ....................................... $ 33,527 $ 33,501
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LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Note payable ....................................... $ 2,650 $ 1,000
Current portion of long-term debt .................. 1,694 1,757
Accounts payable ................................... 1,305 1,265
Accrued expenses and other
liabilities ........................................ 595 576
---------- ----------
Total current liabilities .......................... 6,244 4,598
Long-term debt, less current
portion ............................................ 9,635 10,196
---------- ----------
Total Liabilities .................................. $ 15,879 $ 14,794
---------- ----------
Minority interest .................................. 1,489 1,764
---------- ----------
Commitments and Contingencies ...................... $ -- $ --
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STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
7,500 shares authorized; 539
shares issued; 380 shares
outstanding ..................................... $ -- $ --
Class A common stock, $.01 par
value, 10,000,000 shares
authorized; 5,624,361 shares
issued; 5,305,945 shares
outstanding ..................................... 56 56
Additional paid-in capital ......................... 67,520 67,520
Accumulated deficit ................................ (46,202) (45,418)
Less: Treasury stock, at cost,
318,575 shares .................................. (5,215) (5,215)
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Total Stockholders' Equity ......................... $ 16,159 $ 16,943
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Total Liabilities and
Stockholders' Equity ............................... $ 33,527 $ 33,501
---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
Page 3 of 10
<PAGE>
Security Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
------------------------
1999 1998
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(In thousands)
Cash flows from operating activities:
Net income(loss) ................................... $ (785) $ (888)
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization ................... 278 302
Minority interest ............................... (275) (159)
Changes in operating assets and
liabilities, net of effects
from acquisition of business
Decrease in accounts
receivable ............................... 562 232
Increase in inventories ..................... (1,106) (1,201)
Increase in other assets .................... (450) (346)
Increase in accounts payable ................ 40 738
Increase (decrease) in
accrued expenses and
other liabilities ................... 19 (254)
---------- ----------
Net cash provided (used) by
operating activities ............................... (1,717) (1,576)
---------- ----------
Cash flows from investing activities:
Purchase of property and
equipment ..................................... (75) (1)
---------- ----------
Net cash provided (used) by
investing activities ............................ (75) (1)
---------- ----------
Cash flows from financing activities:
Net increase in bank borrowing .................. 1,650 900
Repayment of term loans ......................... (648) (516)
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Net cash provided (used) by
financing activities ............................ 1,002 384
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Increase(decrease) in cash and cash
equivalents ..................................... (790) (1,193)
Cash and cash equivalents,
beginning of period ............................. 9,133 10,041
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Cash and cash equivalents, end of
period .......................................... $ 8,343 $ 8,848
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The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
Page 4 of 10
<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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Security Capital Corporation ("Security Capital" or, when referred together with
its subsidiaries, the "Company") owns, through its 90% owned subsidiary, P.D.
Holdings, Inc., 90% (77.5% effective after consideration of the outstanding
warrants issued in connection with the acquisition) 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, during May 1996. Possible Dreams operates as an importer,
designer, warehouser and distributor of collectible Christmas figurines and
ornaments and, to a lesser extent, religious articles.
Security Capital also owns, through its 80% owned subsidiary, Pumpkin Masters
Holdings, Inc. ("Holdings"), 100% (71.6% effective after consideration of the
outstanding warrants issued in connection with the acquisition) of the
outstanding shares of Pumpkin, Ltd. ("Pumpkin"), a Delaware corporation. Pumpkin
acquired substantially all of the assets and assumed certain liabilities of
Pumpkin, Ltd. d/b/a Pumpkin Masters, Inc. (the "Predecessor Company") in June
1997. Pumpkin is engaged in the business of manufacturing and distributing
pumpkin and watermelon carving kits (comprised primarily of tools and patterns)
and related accessories. In June 1998, Pumpkin acquired the business and related
assets, patents and trademarks of Our Kids. Our Kids is engaged in the business
of selling kits primarily consisting of sidewalk chalk.
In addition to Possible Dreams and Pumpkin, Security Capital also owns, through
its 98.1% owned subsidiary, Primrose Holdings, Inc. ("Primrose"), a Delaware
corporation (89.7% effective after consideration of the outstanding warrants
issued in connection with the acquisition), the outstanding shares of common
stock of Primrose School Franchising Company ("PSFC"), Metrocorp Properties,
Inc. ("Metrocorp") and The Jewel I, Inc. d/b/a Primrose Country Day School
("PCDS"). Primrose acquired all of the outstanding shares of capital stock of
PSFC, Metrocorp and PCDS, Georgia corporations, on April 6, 1999. PSFC is a
franchisor of educational based childcare centers throughout the southern and
central United States. Metrocorp is in the business of providing real estate
consulting and site selection services for franchisors of PSFC. PCDS is an
educational based childcare center owned and operated by Primrose in Georgia.
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.
Page 5 of 10
<PAGE>
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(2) 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, 1998 in the Company's statement of financial position are as
follows:
December 31, 1998
-----------------
Deferred tax assets: (In thousands)
Allowance for doubtful accounts ......... $ 284
Operating loss carry-forwards ........... 10,095
Alternative minimum tax carryover ....... 141
Accelerated depreciation ................ (11)
-----------------
10,509
100% Valuation allowance ................ (9,334)
-----------------
Net deferred tax asset ...................... $ 1,175
=================
The Company files a consolidated Federal income tax return with its subsidiaries
using a September 30 fiscal year reporting basis.
At December 31, 1998, the Company had net operating loss carry-forwards for
Federal income tax purposes of approximately $29.7 million, the expiration dates
of which are as follows:
September 30, Amount
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(In thousands)
2002 .................................................. $ 1,700
2003 .................................................. 1,800
2004 .................................................. 22,600
2005 .................................................. 2,400
2006 .................................................. 400
2007 .................................................. 200
2008 .................................................. 600
--------------
$ 29,700
--------------
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(3) Earnings Per Share Calendar Year 1999 and Calendar Year 1998
- --------------------------------------------------------------------------------
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.
Page 6 of 10
<PAGE>
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 1999 CALENDAR YEAR 1998
3 MONTHS 3 MONTHS
------------------ ------------------
Basic ................................ 5,306 5,306
Fully diluted ........................ 5,306 5,306
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(4) Subsequent Event - Acquisition of Primrose
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On April 6, 1999, Primrose acquired all of the outstanding shares of common
stock (the "Shares") of PSFC, Metrocorp and PCDS ( PCDS, together with PSFC and
Metrocorp, the "Companies") from Paul L. Erwin and The Paul L. Erwin Grantor
Retained Annuity Trust (together with Paul L. Erwin, the "Shareholders")(the
"Primrose Acquisition").
The consideration paid the to the Shareholders for the Shares was $26,650,000,
consisting of $24,650,000 in cash ($1,500,000 of which is to be held in escrow
for 18 months) and 500,000 shares of Zero Coupon Convertible Preferred Stock of
Security Capital, which have a liquidation value of $10 per share, are
convertible into 500,000 shares of Class A Common Stock and are valued at
$2,000,000. Of the cash paid to the Shareholders, $12,750,000 was paid by
Security Capital, $5,000,000 of which was provided by Security Capital through a
private placement to Security Capital's controlling stockholder of 1,136,364
shares of Class A Common Stock, and the balance was borrowed pursuant to the
Credit Agreement described below. Of the 26,000 shares of Common Stock, par
value $.01 per share, of Primrose issued in connection with the Primrose
Acquisition, Security Capital owns 25,500 shares and management of PSFC owns 500
shares.
In connection with the closing of the Primrose Acquisition, Canadian Imperial
Bank of Commerce, as administration agent ("CIBC") for the lenders
(collectively, the "Lenders") named in the Credit Agreement, dated as of April
6, 1999 (the "Credit Agreement"), among Primrose and CIBC, provided term loans
to Primrose in an aggregate principal amount of $13,150,000, the proceeds of
which term loans were used in part to refinance certain existing debt of PSFC,
to finance the Primrose Acquisition and to pay fees and Primrose expenses
incurred in connection with the Primrose Acquisition. PSFC became obligated on
the term loans through a Joinder and Assumption Agreement between it and CIBC.
In addition, the Lenders are to make available to Primrose, and to PSFC pursuant
to the Joinder and Assumption Agreement, revolving credit loans in an aggregate
principal amount at any one time not to exceed $2,500,000. The facilities are
secured by all of the assets of the Companies as well as by a pledge to the
Lenders of the capital stock of the Companies owned by Primrose. In addition,
Metrocorp and PCDS agreed to guarantee the loans pursuant to a Subsidiaries
Guarantee, dated as of April 6, 1999, among CIBC, Metrocorp and PCDS.
In connection with this financing, Primrose issued to CIBC Capital, an affiliate
of CIBC ("CIBC Capital"), a Warrant to purchase 2,415.3 shares of the Common
Stock of Primrose (the "Primrose Warrant"). In addition, Security Capital issued
to CIBC Capital a Warrant to purchase shares of the Class A Common Stock of
Security Capital in exchange for the Primrose Warrant. The Warrants and related
Warrant Agreement provide for certain restrictions on transfer, registration
rights and anti-dilution protection.
In addition, the Companies and Primrose became parties to the Consolidated
Income Tax Sharing Agreement, dated May 17, 1996, among Security Capital, P.D.
Holdings, Inc., a Delaware corporation, and Possible Dreams, Ltd., a Delaware
corporation, and, pursuant to a Joinder Agreement dated as of June 27, 1997,
Pumpkin Ltd., whereby Primrose will calculate and pay to Security Capital the
amount of its income tax liability calculated as if Primrose were not part of a
consolidated group. Security Capital will pay to the relevant tax authorities
its tax liability, taking into account its own tax position and the utilization
to its tax loss carryforwards.
Page 7 of 10
<PAGE>
In connection with the Primrose Acquisition, Security Capital agreed to provide
management advisory services to the Companies in the areas of corporate
development, strategic planning, investment and financial matters and general
business policies pursuant to a Management Advisory Services Agreement in return
for a fee equal to the greater of $250,000 or 5% of the Companies' annual EBITDA
(as defined in the Stock Purchase Agreement). Security Capital entered into a
Third Amendment to Advisory Services Agreement with Capital Partners, Inc., a
Connecticut corporation ("Capital Partners"), pursuant to which Capital Partners
agreed to assist Security Capital in providing the management advisory services
in return for an increase in the annual advisory fee payable to Capital Partners
under the Advisory Services Agreement equal to the greater of $250,000 or 5% of
the Companies' annual EBITDA (as defined in the Stock Purchase Agreement dated
as of April 6, 1999, by and among Primrose, Security Capital, and the
Shareholders). The advisory fee payable to Capital Partners is subordinate to
the rights of the Lenders.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Security Capital reported a net loss of $785,000 for the three-month period
ended March 31, 1999. This compares to a net loss of $888,000 for the same
three-month period of the prior fiscal year. The Company reported a net loss per
common share of $.15 for the three month period ended March 31, 1999 as compared
to a net loss per common share of $.17 for the same three-month period of the
prior fiscal year.
Product sales of the Company increased to $3,335,000 for the current quarter as
compared to $3,123,000 for the same quarter of the prior fiscal year. This
increase in product sales of $212,000 was primarily due to sales from Our Kids
sidewalk chalk through Pumpkin. Without taking into consideration the purchase
of Our Kids in June 1998, sales decreased by $59,000 compared to the prior
period. Selling, general and administrative expense increased by $231,000 for
the quarter to $2,153,000, as compared to $1,922,000 for the same prior year
fiscal quarter, primarily attributable to Pumpkin increasing its staff to
accommodate its growth. Depreciation and amortization decreased by $24,000 to
$278,000. The Company incurred interest expense of $339,000 for the current
quarter as compared to $422,000 for the same prior year fiscal quarter. This
decrease in interest expense of $83,000 was due to a $1,395,000 reduction in
debt on March 31, 1999 compared to March 31, 1998 and was primarily attributable
to note payments made by Pumpkin.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $790,000 to $8,343,000 at March 31, 1999
as compared to $9,133,000 at December 31, 1998. 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, 1999 decreased by
$1,448,000 to $13,708,000 from $15,156,000 at December 31, 1998. This decrease
was primarily attributable to Possible Dreams' and Pumpkin's normal operating
activities during their traditional weakest seasonal period.
Cash and cash equivalents decreased by $7,383,000 to $960,000 at May 7, 1999 as
compared to $8,343,000 at March 31, 1999. Approximately $6,083,000 of the
decrease was attributable to the cash used to help finance the purchase of the
Companies and to the issuance of 1,136,364 shares of Class A Common Stock at
$4.40 per share. The remainder of the decrease, $1,300,000, resulted primarily
from Pumpkin's acquisition of inventory.
Possible Dreams maintains a $10,000,000 revolving line of credit ("LOC").
Possible Dreams increased its LOC balance by $1,650,000, from $1,000,000 at
December 31, 1998 to $2,650,000 at March 31, 1999. Pumpkin maintains a
$3,500,000 revolving LOC, which is limited to the borrowing base as defined in
the Company's Annual Report or Form 10-K. Pumpkin did not borrow against its LOC
during the three-month period ended March 31, 1999. Primrose maintains a
$2,500,000 revolving LOC.
Page 8 of 10
<PAGE>
Security Capital does not have adequate funds to compete for new acquisitions at
this time. As of May 7, 1999, Security Capital had approximately $300,000 of
cash and cash equivalents on hand, which should be sufficient to meet its
operating expenses for the remainder of calendar year 1999. Possible Dreams,
Pumpkin and Primrose have sufficient cash and cash equivalents on hand or
available through their respective revolving LOC's at May 7, 1999 to meet their
respective working capital and operating expenditure requirements.
The Company had no major capital expenditures during the quarter and expects no
major capital expenditures during the remainder of calendar year 1999.
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 $100,000, with $65,000 incurred in the
first quarter of calendar year 1999 and the remainder to be incurred in the
second quarter of calendar year 1999. It is expected that internal Year 2000
compliance issues will be resolved by the middle 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
has initiated 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 and is currently evaluating 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's notes payable and long-term debt bear interest at both fixed and
variable rates. The Company is subject to increases and decreases in interest
expense on its variable rate debt resulting from fluctuations in the interest
rates on such debt.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K: On April 6, 1999, the Company filed a Current
Report on Form 8-K disclosing under Item 2. thereof the Primrose Acquisition.
Page 9 of 10
<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 13, 1999 By: /s/ A. GEORGE GEBAUER
A. George Gebauer, President
Date: May 13, 1999 By: /s/ LARRY M. KARREN
Larry M. Karren, Treasurer
(Principal Financial and Accounting Officer)
Page 10 of 10
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,343
<SECURITIES> 0
<RECEIVABLES> 2,717
<ALLOWANCES> 125
<INVENTORY> 6,445
<CURRENT-ASSETS> 19,952
<PP&E> 1,537
<DEPRECIATION> 355
<TOTAL-ASSETS> 33,527
<CURRENT-LIABILITIES> 6,244
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 16,103
<TOTAL-LIABILITY-AND-EQUITY> 33,527
<SALES> 3,335
<TOTAL-REVENUES> 3,335
<CGS> 1,750
<TOTAL-COSTS> 1,750
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 339
<INCOME-PRETAX> (877)
<INCOME-TAX> (92)
<INCOME-CONTINUING> (785)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (785)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
