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 September 30, 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
(Commission file number)
SECURITY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3003070
(State or other jurisdiction of (I.R.S. Employee Identification No.)
Incorporation or organization)
ONE PICKWICK PLAZA, SUITE 310 GREENWICH, CT. 06830
(Address of principal executive offices, including zip code)
(203) 625-0770
(Registrant's telephone number, including area code)
(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 November 16, 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 13
<PAGE>
Security Capital Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues
Educational services revenue . 1,450 -- 2,591 --
Seasonal products sales ...... $ 18,853 $ 17,193 $ 27,503 $ 26,186
-------- -------- -------- --------
Total revenues ............... $ 20,303 $ 17,193 $ 30,094 $ 26,186
-------- -------- -------- --------
Cost of revenues
Educational services costs ... $ 358 $ -- $ 657 $ --
Seasonal products costs ...... 8,371 8,098 12,873 12,669
-------- -------- -------- --------
Total cost of revenues ....... $ 8,729 $ 8,098 $ 13,530 $ 12,669
-------- -------- -------- --------
Gross profit ................. $ 11,574 $ 9,095 $ 16,564 $ 13,517
-------- -------- -------- --------
Selling, general and
administrative ............. 4,562 3,966 9,888 8,225
Depreciation and amortization 617 304 1,431 915
-------- -------- -------- --------
Operating income ............. $ 6,395 $ 4,825 $ 5,245 $ 4,377
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Interest income .............. $ 3 $ 89 $ 30 $ 268
Interest expense ............. (975) (662) (2,123) (1,561)
Other income (expense) ....... 21 -- (27) 24
-------- -------- -------- --------
Total other expense .......... $ (951) $ (573) $ (2,120) $ (1,269)
-------- -------- -------- --------
Income before provision for
income taxes and minority
interest ................... $ 5,444 $ 4,252 $ 3,125 $ 3,108
Income tax expense ........... 466 266 260 248
Minority interest in income of
consolidated subsidiaries . 985 727 651 535
-------- -------- -------- --------
Net income ................... $ 3,993 $ 3,259 $ 2,214 $ 2,325
-------- -------- -------- --------
Earnings per share:
Basic ........................ $ .61 $ .61 $ .34 $ .44
Diluted ...................... $ .58 $ .61 $ .34 $ .44
-------- -------- -------- --------
Weighted average shares
outstanding:
Basic ........................ 6,442 5,306 6,044 5,306
Diluted ...................... 6,942 5,306 6,368 5,306
-------- -------- -------- --------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
Page 2 of 13
<PAGE>
Security Capital Corporation and Subsidiaries
Consolidated Balance Sheets
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ -----------
ASSETS (IN THOUSANDS, EXCEPT PAR VALUE AND SHARES)
Current assets:
Cash and cash equivalents ................... $ 566 $ 9,133
Accounts receivable (net of
allowance for doubtful accounts
of $175 and $351) ........................ 21,459 3,279
Notes receivable, current portion ........... 42 --
Inventory ................................... 6,077 5,339
Deferred tax asset .......................... 1,175 1,175
Other current assets ........................ 837 828
-------- --------
Total current assets ........................ $ 30,156 $ 19,754
Property and equipment (net of
accumulated depreciation of
$419 and $310) ........................... 1,760 1,507
Notes receivable, less current
portion .................................. 389 --
Intangible assets (net of
accumulated amortization of
$3,032 and $1,961) ....................... 39,340 12,044
Licenses and other assets ................... 213 196
-------- --------
Total Assets ................................ $ 71,858 $ 33,501
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ............................... $ 14,322 $ 1,000
Current portion of long-term debt ........... 3,568 1,757
Accounts payable ............................ 2,062 1,265
Unearned revenue ............................ 1,793 --
Accrued expenses and other
liabilities .............................. 2,008 576
-------- --------
Total current liabilities ................... $ 23,753 $ 4,598
Long-term debt, less current
portion .................................. 18,180 10,196
-------- --------
Total Liabilities ........................... $ 41,933 $ 14,794
-------- --------
Minority interest ........................... $ 2,663 $ 1,764
-------- --------
Zero Coupon Redeemable/Convertible
Preferred Stock, $.01 par value,
500,000 shares authorized and issued,
$5,000,000 liquidation value on
April 6, 2006 ............................ $ 2,135 $ --
-------- --------
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; 6,760,725 shares
issued; 6,442,309 shares
outstanding .............................. 68 56
Additional paid-in capital .................. 73,478 67,520
Accumulated deficit ......................... (43,204) (45,418)
Less: Treasury stock, at cost,
318,575 shares ........................... (5,215) (5,215)
-------- --------
Total Stockholders' Equity .................. $ 25,127 $ 16,943
-------- --------
Total Liabilities and
Stockholders' Equity ..................... $ 71,858 $ 33,501
-------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
Page 3 of 13
<PAGE>
Security Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
-------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net Income ........................................ $ 2,214 $ 2,325
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization .................. 1,576 915
Minority interest .............................. 651 535
Loss on disposition of property and equipment .. 29 --
Changes in operating assets and liabilities, net
of effects from acquisition of business
(Increase) decrease in accounts receivable . (17,327) (15,967)
(Increase) decrease in inventories ......... (738) (1,837)
(Increase) decrease in other assets ........ 314 (89)
Increase (decrease) in accounts payable .... 477 695
Increase (decrease) in unearned revenue .... 193 --
Increase (decrease) in accrued expenses
and other liabilities .................... 170 453
-------- --------
Net cash used in operating activities ............. (12,441) (12,970)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ............ (194) (221)
Acquisition of subsidiaries, net of
cash acquired ............................... (25,033) --
-------- --------
Net cash used in investing activities ............. (25,227) (221)
-------- --------
Cash flows from financing activities:
Proceeds from line of credit, net .............. 13,321 12,544
Proceeds from term borrowing ................... 13,150 --
Payments on term borrowings .................... (2,370) (1,576)
Issuance of Stock .............................. 5,000 --
-------- --------
Net cash provided by financing activities ......... 29,101 10,968
-------- --------
Decrease in cash and cash equivalents ............. (8,567) (2,223)
Cash and cash equivalents, beginning of period .... 9,133 10,041
-------- --------
Cash and cash equivalents, end of period .......... $ 566 $ 7,818
-------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
Page 4 of 13
<PAGE>
Security Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(1) Financial Statements
The balance sheet at December 31, 1998 is condensed financial information taken
from the audited balance sheet as restated. The interim financial statements are
unaudited. In the opinion of management, all adjustments (which consist only of
normal recurring adjustments) necessary to present fairly the financial position
and results of operations for the interim periods presented have been made. 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/A.
(2) Organization
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.
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
September 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 September 1998, Pumpkin acquired the
business and related assets, patents and trademarks of Our Kids. Our Kids is
engaged in the business of selling sidewalk chalk products.
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 conjunction 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.
Page 5 of 13
<PAGE>
(3) Accounting Policies
INTERIM REPORTING
All costs subject to recurring year-end adjustments have been estimated and
allocated ratably to the quarters. Income tax expense has been provided based
upon the estimated tax rate for the respective years after excluding
infrequently occurring items whose specific tax effect is reported during the
same interim period as the related transaction.
INTANGIBLE ASSETS
Intangible assets consist of cost in excess of the fair value of the net assets
acquired in the acquisition of PSFC, Metrocorp and PCDS (goodwill), franchise
agreements, curriculum, and non-compete agreements, which are all being
amortized on a straight-line basis as follows:
Goodwill 25 years
Franchise agreements 21 years
Curriculum 10 years
Non-compete 3 years.
REVENUE RECOGNITION
Primrose recognizes royalties as revenue based on the monthly revenues of the
franchisees. Franchise and real estate service fees are collected at various
intervals prior to the opening of an educational based childcare center and are
deferred until the franchised educational based childcare center has commenced
operations.
Primrose assignment fee revenue is recognized in two intervals. A portion of the
revenue is recognized at the date of assignment and the other portion is
deferred until the franchised educational based childcare center has commenced
operations.
Primrose school tuition revenue is recognized as earned over the school year.
PREFERRED SHARE ACCRETION
Differences between the carrying value of redeemable preferred shares and their
redemption value are accreted using the interest method over the remaining
estimated period to redemption, by charges to additional paid-in capital.
DEBT DISCOUNT AMORTIZATION
Differences between the carrying value of debt and the face amount of the debt
are amortized to interest expense over the term of the debt using the interest
method.
(4) 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.
The net income per share reported for the three and nine-month periods ending
September 30, 1999 was decreased by $66,239 and $135,277 for the accretion of
the redeemable/convertible preferred stock to calculate basic net income per
common share.
Page 6 of 13
<PAGE>
(5) Acquisition of Primrose
On April 6, 1999, Primrose acquired (the "Primrose Acquisition") 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 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 PSFS 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 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 September 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 13
<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.
Preliminary allocation of the purchase price:
Cash paid to seller ............ $ 24,650,000
Preferred stock issued to seller 2,000,000
------------
26,650,000
Assets acquired ................ (2,568,000)
Liabilities assumed ............ 2,879,000
Acquisition costs .............. 1,585,000
------------
$ 28,546,000
============
The Company's preliminary allocation of the purchase price is subject to the
receipt of final valuations and appraisals of certain assets acquired and
liabilities assumed, as well as the valuation of the preferred shares. In
addition, cash proceeds to the seller of $1,500,000 have placed in escrow. Final
resolution of such items could result in adjustments to the amounts shown above.
Assuming the purchase occurred as of January 1, 1998, pro forma results of
operations would have been as follows:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1999 1998
-------------- --------------
Revenues ................ $ 33,256,000 $ 31,040,000
Net Income .............. 2,294,000 1,960,000
Earnings per common share
Basic ................ $ 0.33 $ 0.27
Diluted .............. $ 0.33 $ 0.27
-------------- --------------
(6) Debt
In April 1999, the Company obtained a term loan in the amount of $13,150,000
from CIBC, which it used to repay certain acquired indebtedness related to
Primrose and to finance the acquisition of Primrose. In addition, the Company
obtained a revolving credit loan facility in the amount $2,500,000. The term
loan and any borrowings under the revolving credit loan facility are secured by
all assets of the Primrose subsidiaries and by a pledge of the Company's capital
stock in such subsidiaries.
The term loan bears interest at LIBOR plus 3%, or 8.5%, and is due in quarterly
installments through April 6, 2005.
The revolving credit loan facility bears interest at 9.75%.
Page 8 of 13
<PAGE>
(7) Redeemable/Convertible Preferred Stock
The Company issued 500,000 zero coupon, redeemable, convertible, preferred
shares in connection with the Primrose Acquisition. Such shares have a stated
liquidation value of $10 per share, and are convertible into 500,000 shares of
Class A Common Stock of the Company. The preferred shares become redeemable at
their liquidation value at the earlier of (1) the date Primrose's earnings
before interest, taxes, depreciation and amortization exceeds $8,900,000 on a
latest twelve month basis on or after April 6, 2002 or (2) at their maturity
date of April 6, 2006.
(8) Stockholders' Equity
During the nine month period ended September 30, 1999, the Company sold
1,136,364 shares of Class A Common Stock for $5,000,000 in a private placement
to the Company's controlling stockholder.
During the nine month period ended September 30, 1999, the Company issued a
warrant to its bank to purchase 2,415.3 shares of its Primrose subsidiary, at a
price per share of $.01. Such warrants were issued in connection with the bank's
granting of the term loan related to Primrose. In addition, the Company issued a
warrant to the bank to obtain Class A Common Shares of the Company in exchange
for the Primrose warrant. The Company has preliminarily estimated the fair value
of the warrants to be $1,105,000, and has recorded the transaction as a
reduction to the carrying value of the bank debt and as an increase to
additional paid-in capital. The warrants provide for certain restrictions on
transfer, registration rights, and anti-dilution protection.
(9) Segment Disclosure
Following the Primrose Acquisition in April 1999, the Company has two segments.
The educational segment consists of the Primrose, a franchisor of
educational-based childcare centers throughout the southern and central United
States. The seasonal products segment consists of the Company's activities in
the design, importing, and manufacturing of Halloween and Christmas products.
Management evaluates performance of its segments based upon results before
interest, taxes, depreciation, amortization, minority interests and nonrecurring
gains or losses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues from external customers:
Educational services ............. $ 1,450 $ -- $ 2,591 $ --
Seasonal products ................ 18,853 17,193 27,503 26,186
-------- -------- -------- --------
Total Revenue .................... $ 20,303 $ 17,193 $ 30,094 $ 26,186
-------- -------- -------- --------
Segment income:
Educational services ............. $ 654 $ -- $ 1,063 $ --
Seasonal products ................ 6,542 5,287 6,235 5,729
-------- -------- -------- --------
Total segment income ............. $ 7,196 $ 5,287 $ 7,298 $ 5,729
-------- -------- -------- --------
Corporate & Other ................ $ (1,752) $ (1,035) $ (4,173) $ (2,621)
-------- -------- -------- --------
Income before provision for income
taxes and minority interest .... $ 5,444 $ 4,252 $ 3,125 $ 3,108
-------- -------- -------- --------
</TABLE>
Page 9 of 13
<PAGE>
Corporate & other includes non-segment corporate expenses, depreciation and
amortization, interest income, interest expense and other income (expense).
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ -----------
(IN THOUSANDS)
Segment assets:
Educational services ......... $29,520 $ --
Seasonal products ............ 40,946 25,257
Corporate & Other ............ 1,392 8,244
------- -------
Total Assets ................. $71,858 $33,501
------- -------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements of the Company and the related notes thereto appearing elsewhere in
this Report on Form 10-Q. Additional information concerning factors that could
cause results to differ materially from those forward-looking statements is
contained under "Part II -- Item 5. Other Information."
RESULTS OF OPERATIONS
Security Capital reported a net income of $3,993,000 and $2,214,000 for the
three and nine-month periods ended September 30, 1999, respectively. This
compares to a net income of $3,259,000 and $2,325,000 for the same three and
nine-month periods of the prior fiscal year. The Company reported basic net
income per common share of $.61 and $.34 for the three and nine-month periods
ended September 30, 1999, respectively, as compared to basic net income per
common share of $.61 and $.44 for the same three and nine-month periods of the
prior fiscal year.
Revenues increased by $3,110,000 and $3,908,000 to $20,303,000 and $30,094,000
for the three and nine-month periods ended September 30, 1999, respectively.
This represented an increase of 18% and 15% for the three and nine-month periods
ended September 30, 1999, respectively. Without taking into consideration the
acquisitions of Our Kids in September 1998, and Primrose in April 1999, revenues
increased by $1,389,000 and $1,046,000 for the three and nine-month periods
September 30, 1999, respectively, as compared to the same three and nine-month
periods of the prior fiscal year. The increase was primarily attributable to
strong demand for the Company's seasonal products segment during that segment's
traditionally strongest quarter. Educational segment revenues were $1,450,000
and $2,591,000 for the three and six-month periods September 30, 1999,
respectively. Total education system revenue, or gross revenue of all
educational based childcare center franchises increased $3,617,236 and
$10,592,458, or 34% and 33%, for the three and nine-month periods ended
September 30, 1999, respectively, as compared to the historical pre-acquisition
records of Primrose. Total royalty revenue Primrose earned from system revenues
increased $261,719 and $752,521, or 36% and 35%, for the three and nine-month
periods ended September 30 1999, as compared to the historical pre-acquisition
records of Primrose. These increases were generated from a 21% increase in the
number of educational based childcare centers, which was 69 and 57 as of
September 30, 1999 and 1998, respectively. Primrose has awarded 32 franchise
agreements with associated unearned revenue of $1,793,000 recorded on its
balance sheet as of September 30, 1999. This segment has recently increased its
support staff to a level sufficient to accommodate growth of up to 24
educational based childcare centers per year.
Page 10 of 13
<PAGE>
Selling, general and administrative expense increased by $596,000 and $1,663,000
for the three and nine-month periods ended September 30, 1999, respectively.
Without taking into consideration the Primrose Acquisition, selling, general and
administrative expense increased $100,000 and $671,000 for the three and
nine-month periods ended September 30, 1999, respectively, as compared to the
same three and nine-month periods of the prior fiscal year. The increase was
primarily due to the seasonal products segment increasing its staff to
accommodate growth and the development of new products.
Depreciation and amortization increased by $313,000 and $516,000 for the three
and nine-month periods ended September 30, 1999, respectively. Without taking
into consideration the Primrose Acquisition, depreciation and amortization
decreased by $44,000 and $133,000 for the three and nine-month periods ended
September 30, 1999, respectively, as compared to the same three and nine-month
period of the prior fiscal year. The decrease was primarily due to decreased
amortization expense related to fully amortized intangible assets of the
seasonal products segment.
Interest expense increased by $313,000 and $562,000 for the three and nine-month
periods ended September 30, 1999, respectively. Without taking into
consideration the Primrose Acquisition, interest expense decreased by $52,000
and $109,000 for the three and nine-month periods ended September 30, 1999,
respectively, as compared to the same three and nine-month periods of the prior
fiscal year. The decrease is primary due to reduced average debt levels of the
seasonal products segment.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $8,567,000, from $9,133,000 at December
31, 1998 to $566,00 at September 30, 1999. Approximately $6,500,000 of the
decrease in cash and cash equivalents was primarily attributable to net effects
of the common stock issuance, the Primrose Acquisition, and Primrose's operating
cash flow from April 6, 1999 through September 30, 1999. The seasonal products
segments cash and cash equivalents decreased $1,800,000 for the nine-month
period ended September 30, 1999. This segment experiences a significant seasonal
pattern not only in its operating results but also in its cash flow and working
capital requirements. The remaining decrease of $200,000 resulted from the net
uses of the Company's educational segment for its normal operating expenses.
The Company's consolidated working capital decreased by $8,753,000, from
$15,156,000 at December 31, 1998 to $6,403,000 at September 30, 1999.
Approximately $10,500,000 of the decrease was primarily attributable to the
Primrose Acquisition and an additional $500,000 used for its normal operating
expenses and its increased staff as discussed above. The seasonal products
segment's increase in working capital was approximately $2,200,000 for the
nine-month period ended September 30, 1999 which was primarily generated by its
earnings in the third quarter due to its seasonal pattern.
The Company's education segment maintains a $2,500,000 revolving line of credit,
which had a balance of $500,000 at September 30, 1999. The seasonal products
segment, in aggregate, maintains a $15,000,000 revolving line of credit, which
had a balance of $13,822,000 on September 30, 1999 which is due to its seasonal
pattern. Portions of the revolving lines of credit may be limited to a borrowing
base as defined in the Company's Annual Report or Form 10-K.
At this time Security Capital does not have reserves of internal funds on hand
available for new acquisitions. However, the Company believes it has the ability
to acquire such funds if and when the Company deems it necessary to compete for
possible future acquisitions. As of November 11, 1999, Security Capital had
approximately $200,000 of cash and cash equivalents on hand, which is sufficient
to meet its operating expenses for the remainder of calendar year 1999. Its
subsidiaries all have sufficient cash and cash equivalents on hand or available
through their respective revolving lines of credit at November 11, 1999 to meet
their respective working capital and operating expenditure requirements for the
remainder of calendar year 1999.
The Company had no major capital expenditures during the quarter and expects no
major capital expenditures during the remainder of calendar year 1999.
Page 11 of 13
<PAGE>
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 $120,000, with $75,000 incurred in the
nine-month period ended September 30, 1999, and the remainder to be incurred in
the fourth quarter of calendar year 1999. It is expected that internal Year 2000
compliance issues will be resolved by December 1, 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 5. OTHER INFORMATION.
This filing contains certain forward-looking statements such as the Company's or
the management's intentions, hopes, beliefs, expectations, strategies,
predictions or any other variation thereof or comparable phraseology of the
Company's future activities or other future events or conditions within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including, without limitation,
variations in quarterly results, volatility of the Company's stock price,
development by competitors of new or superior products or services, or entry
into the market of new competitors, the sufficiency of the Company's working
capital and the ability to assimilate and integrate acquisitions and to continue
it acquisition program. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and, therefore, there can be no
assurance that the forward-looking statements included in this filing will prove
to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as representation by the Company or any other person that
the objectives and plans of the Company will be achieved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS: None
Page 12 of 13
<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 22, 1999 By:
A. George Gebauer
President
Date: November 22, 1999 By:
William R. Schlueter
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 13 of 13
<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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 566
<SECURITIES> 0
<RECEIVABLES> 21,459
<ALLOWANCES> 0
<INVENTORY> 6,077
<CURRENT-ASSETS> 30,156
<PP&E> 2,179
<DEPRECIATION> 419
<TOTAL-ASSETS> 71,858
<CURRENT-LIABILITIES> 22,753
<BONDS> 0
0
2,135
<COMMON> 68
<OTHER-SE> 25,059
<TOTAL-LIABILITY-AND-EQUITY> 71,858
<SALES> 30,094
<TOTAL-REVENUES> 30,094
<CGS> 13,530
<TOTAL-COSTS> 13,530
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,123)
<INCOME-PRETAX> 3,125
<INCOME-TAX> 651
<INCOME-CONTINUING> 5,245
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,124
<EPS-BASIC> .34
<EPS-DILUTED> .34
</TABLE>
