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 June 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
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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)
ONE PICKWICK PLAZA, SUITE 310 GREENWICH, CT. 06830
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(Address of principal executive offices, including zip code)
(203) 625-0770
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(Registrant's telephone number, including area code)
1111 NORTH LOOP WEST, SUITE 400, HOUSTON, TEXAS 77008
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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 August 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
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For the Three
Months For the Six Months
Ended Ended
June 30, June 30,
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1999 1998 1999 1998
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(In thousands, except per share amounts)
Revenues $ 6,456 $ 5,870 $ 9,791 $ 8,993
Cost of goods sold 2,752 2,980 4,502 4,571
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Gross profit $ 3,704 $ 2,890 $ 5,289 $ 4,422
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Selling, general and
administrative 3,472 2,337 5,625 4,259
Depreciation and amortization 536 309 814 611
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Operating income (loss) $ (304) $ 244 $ (1,150) $ (448)
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OTHER INCOME (EXPENSE)
Interest income $ 9 $ 91 $ 27 $ 179
Interest expense (809) (477) (1,148) (899)
Other income (expense) (63) 5 (48) 24
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Total other expense $ (863) $ (381) $ (1,169) $ (696)
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Minority interest share of net
loss $ 59 $ 33 $ 334 $ 192
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Loss before provision for
Income taxes $ (1,108) $ (104) $ (1,985) $ (952)
Income tax benefit (114) (58) (206) (18)
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Net loss $ (994) $ (46) $ (1,779) $ (934)
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Basic net loss per common share $ (.18) $ (.01) $ (.32) $ (.18)
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Diluted net loss per common share $ (.18) $ (.01) $ (.32) $ (.18)
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Basic weighted average shares
outstanding 5,842 5,306 5,842 5,306
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Diluted weighted average shares
outstanding 5,842 5,306 5,842 5,306
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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
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June 30, December 31,
1999 1998
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ASSETS (In thousands, except par value and shares)
Current assets:
Cash and cash equivalents $ 632 $ 9,133
Accounts receivable (net of
allowance for doubtful accounts
of $146 and $351) 7,128 3,279
Notes receivable, current portion 30 -
Inventory 9,417 5,339
Deferred tax asset 1,175 1,175
Other current assets 1,479 828
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Total current assets 19,861 19,754
Property and equipment (net of
accumulated depreciation of
$412 and $310) 1,842 1,507
Notes receivable, less current
portion 406 -
Intangible assets (net of
accumulated amortization of
$2,685 and $1,961) 39,829 12,044
Licenses and other assets 207 196
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Total Assets $ 62,145 $ 33,501
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LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Note payable $ 8,692 $ 1,000
Current portion of long-term debt 3,444 1,757
Accounts payable 3,017 1,265
Unearned revenue 1,773 -
Accrued expenses and other
liabilities 842 576
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Total current liabilities 17,768 4,598
Long-term debt, less current
portion 19,429 10,196
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Total Liabilities $ 37,197 $ 14,794
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Minority interest $ 1,679 $ 1,764
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Zero Coupon Redeemable/Convertible
Preferred Stock, $.01 par value,
500,000 shares authorized and
issued, $5,000,000 liquidation
value on April 6, $ 2,069 $ -
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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 73,544 67,520
Accumulated deficit (47,197) (45,418)
Less: Treasury stock, at cost,
318,575 shares (5,215) (5,215)
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Total Stockholders' Equity $ 21,200 $ 16,943
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Total Liabilities and
Stockholders' Equity $ 62,145 $ 33,501
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The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
Page 3 of 13
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Security Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows
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For the Six Months Ended
June 30,
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1999 1998
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(In thousands)
Cash flows from operating
activities:
Net loss $ (1,779) $ (934)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 871 612
Minority interest (334) (191)
Changes in operating assets and
liabilities, net of effects
from acquisition of business
Increase in accounts
receivable (3,001) (3,947)
Increase in inventories (4,078) (5,112)
Increase in other assets (284) (403)
Increase in accounts payable 1,434 1,747
Increase in unearned revenue 172 -
Decrease in accrued
expenses And other
liabilities (993) (567)
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Net cash used in operating
activities (7,992) (8,795)
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Cash flows from investing activities:
Purchases of property and
equipment (130) (117)
Acquisition of subsidiaries, net
of cash acquired (25,033) (43)
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Net cash used in investing
activities (25,163) (160)
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Cash flows from financing activities:
Proceeds from line of credit, net 7,692 7,769
Proceeds from term borrowing 13,150 -
Payments on term borrowings (1,188) (979)
Issuance of Stock 5,000 -
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Net cash provided by financing
activities 24,654 6,790
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Decrease in cash and cash
equivalents (8,501) (2,165)
Cash and cash equivalents,
beginning of period 9,133 10,041
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Cash and cash equivalents, end of
period $ 632 $ 7,876
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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)
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(1) Financial Statements
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The balance sheet at December 31, 1998 is condensed financial information taken
from the audited balance sheet. 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.
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(2) Organization
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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.
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 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.
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(3) Accounting Policies
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INTERIM REPORTING
All costs subject to recurring year-end adjustments have been estimated and
allocated ratably to the quarters. Income tax (benefit) 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.
Page 5 of 13
<PAGE>
INTANGIBLE ASSETS Intangible assets consist of cost in excess of the fair value
of the net assets acquired in the Acquisition of Primrose (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
Cirriculum 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 retained earnings (if any) or to
additional paid-in capital.
DEBT DISCOUNT AMORTIZATION
Differences between the carrying value of debt and the face amount of the debt
are amortized as interest expense over the term of the debt using the interest
method.
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(4) Earnings Per Share Calendar Year 1999 and Calendar Year 1998
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Earnings per common and common equivalent share amounts are based on the
weighted average number of shares of Common Stock and Class A Common Stock
outstanding and the dilutive effect, if any, of outstanding stock options. The
sum of Common Stock and Class A Common Stock is used because the two classes are
identical except for certain transfer restrictions imposed on the Class A Common
Stock. The assumed conversion of these options was anti-dilutive and had no
impact for all periods presented.
The net loss reported for the three and six-month periods ended June 30, 1999
was increased by $69,038 for the accretion of the redeemable/convertible
preferred stock to calculate the net loss per common 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 1999 Calendar Year 1998
6 Months 6 Months
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Basic 5,842 5,306
Fully diluted 5,842 5,306
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(5) 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
Page 6 of 13
<PAGE>
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 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
of its tax loss carryforwards.
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.
The Company's preliminary allocation of the purchase price is subject to the
receipt of final valuations and apprisals 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.
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(6) Debt
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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 Primrose Acquisition. In addition, the Company
obtained a revolving credit loan facility in the amount $2,500,000. The term
loan
Page 7 of 13
<PAGE>
and any borrowings under the revolving credit loan facility are secured by all
assets of Primrose and by a pledge of its capital stock.
The term loan bears interest at 8.5% and is due in quarterly installments
through April 6, 2005.
The revolving credit loan facility bears interest at 9.75%.
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(7) Redeemable Preferred Stock
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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 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 at its maturity date of April
6, 2006.
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(8) Stockholders' Equity
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During the quarter ended June 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 quarter ended June 30, 1999, the Company issued a warrant to its bank
to purchase 2,415.3 shares of Primrose, 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.
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(9) Segment Disclosure
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The Company has two reportable segments: education and seasonal products. The
education segment consists of Primrose Holdings, Inc., a franchisor of
educational based childcare centers throughout the southern and central United
States. The seasonal products segment consists of Pumpkin Masters Holdings,
Inc., and P.D. Holdings, Inc., which are designers, importers and manufacturers
of Halloween and Christmas products.
The Company evaluates performance based on profit or loss from operations before
interest, taxes, depreciation, amortization, minority interest and exclusive of
nonrecurring gains or losses.
Page 8 of 13
<PAGE>
<TABLE>
<CAPTION>
Education Seasonal Products Other Total
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Six Months Ended Six Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Segment Income or (Loss):
Revenues from
external customers .... $ 1,142 $ - $ 8,649 $ 8,993 $ - $ - $ 9,791 $ 8,993
Intersegment revenues .... $ - $ - $ - $ - $ - $ - $ - $ -
Segment income (loss) .... $ 347 $ - $ (445) $ 443 $ (237) $ (279) $ (335) $ 164
Reconciliation of Segment
Disclosure to Consolidated
Income Statement:
Segment income (loss) .... $ 347 $ - $ (445) $ 443 $ (237) $ (279) $ (335) $ 164
Depreciation expense ..... 8 - 95 90 - - 103 90
Amortization expense ..... 286 - 426 522 - - 712 522
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Operating income (loss) .. $ 53 $ - $ (966) $ (169) $ (237) $ (279) $ (1,150) $ (448)
============================================================================================
Segment Assets ........... $ 30,428 $ - $ 30,224 $ 31,916 $ 1,493 $ 7,645 $ 62,145 $ 39,561
============================================================================================
</TABLE>
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."
Page 9 of 13
<PAGE>
RESULTS OF OPERATIONS
Security Capital reported a net loss of $994,000 and $1,779,000 for the three
and six-month periods ended June 30, 1999, respectively. This compares to a net
loss of $46,000 and $934,000 for the same three and six-month periods of the
prior fiscal year. The Company reported a net loss per common share of $.18 and
$.32 for the three and six-month periods ended June 30, 1999, respectively, as
compared to a net loss per common share of $.01 and $.18 for the same three and
six-month periods of the prior fiscal year.
Revenues increased by $586,000 and $798,000 to $6,456,000 and $9,791,000 for the
three and six-month periods ended June 30, 1999, respectively. This represented
an increase of 10% and 8% for the three and six-month periods ended June 30,
1999, respectively. Without taking into consideration the acquisitions of Our
Kids in June 1998, and Primrose in April 1999, revenues decreased by $556,000
and $344,000 for the three and six-month periods June 30, 1999, respectively, as
compared to the same three and six-month periods of the prior fiscal year. The
decrease was primarily attributable to the timing and shipments of the Company's
seasonal products segment during that segment's traditionally weakest quarter.
The education segment revenues were $1,142,000 for the period April 6, 1999
through June 30, 1999. Total education system revenue, i.e., total franchisee
gross revenues, increased $3,884,233 and $6,975,222, or 37% and 33%, for the
three and six-month periods ended June 30, 1999, respectively, as compared to
the historical pre-acquisition records of Primrose. Total royalty revenue
Primrose earned from system revenues increased $272,726 and $489,000, or 38% and
34%, for the three and six-month periods ended June 30 1999, as compared to the
historical pre-acquisition records of Primrose. These increases were generated
from a 29% increase in the number of educational based childcare centers, which
was 67 and 52 as of June 30, 1999 and 1998, respectively. This segment has
signed 28 franchise agreements with associated unearned revenue of $1,773,000
recorded on its balance sheet as of June 30, 1999. Subsequent to this reporting
period this segment has made the strategic decision to increase its support
staff to a level sufficient to accommodate growth of up to 20 educational based
childcare centers per year.
Selling, general and administrative expense increased by $1,135,000 and
$1,366,000 for the three and six-month periods ended June 30, 1999,
respectively. Without taking into consideration the Primrose Acquisition,
selling, general and administrative expense increased $340,000 and $541,000 for
the three and six-month periods ended June 30, 1999, respectively, as compared
to the same three and six-month periods of the prior fiscal year. The increase
was primarily due to the seasonal products segment increasing its staff to
accommodate its expected growth.
Depreciation and amortization increased by $227,000 and $203,000 for the three
and six-month periods ended June 30, 1999, respectively. Without taking into
consideration the Primrose Acquisition, depreciation and amortization decreased
by $65,000 and $89,000 for the three and six-month periods ended June 30, 1999,
respectively, as compared to the same three and six-month period of the prior
fiscal year.
Interest expense increased by $332,000 and $249,000 for the three and six-month
periods ended June 30, 1999, respectively. Without taking into consideration the
Primrose Acquisition, interest expense increased or (decreased) by $26,000 and
($57,000) for the three and six month periods ended June 30, 1999, respectively,
as compared to the same three and six-month periods of the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $8,501,000, from $9,133,000 at December
31, 1998 to $632,000 at June 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 June 30, 1999. The seasonal products segments
cash and cash equivalents decreased $1,900,000 for the six-month period ended
June 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.
Page 10 of 13
<PAGE>
The Company's consolidated working capital decreased by $13,063,000, from
$15,156,000 at December 31, 1998 to $2,093,000 at June 30, 1999. Approximately
$10,500,000 of the decrease was primarily attributable to the Primrose
Acquisition. The seasonal products segment's decrease in working capital was
approximately $2,300,000 for the six-month period ended June 30, 1999. This
segment generally has greater working capital needs in its second and 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 $200,000 at June 30, 1999. The seasonal products segment,
in aggregate, maintains a $13,500,000 revolving line of credit, which had a
balance of $8,492,000 on June 30, 1999. Portions of the revolving lines of
credit may be limited to a borrowing base as defined in the Company's 1998
Annual Report on Form 10-K.
At this time Security Capital does not have reserves of internal funds 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 August 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 August 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.
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 $75,000 incurred in the
six-month period ended June 30, 1999, and the remainder to be incurred in the
third quarter of calendar year 1999. It is expected that internal Year 2000
compliance issues will be resolved by the end of the third quarter 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Page 11 of 13
<PAGE>
(a) The Company held its 1999 Annual Meeting of Stockholders (the "Annual
Meeting") on June 22, 1999.
(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-
ITEM 5. OTHER INFORMATION.
This filing contains certain forward-looking statements such as the Company's or
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 as amended 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: 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 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: August 16, 1999 By:
------------------------------------
A. George Gebauer
President
Date: August 16, 1999 By:
------------------------------------
William R. Schlueter
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 13 of 13
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
----------- -------------
27 FINANCIAL DATA SCHEDULE
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 632
<SECURITIES> 0
<RECEIVABLES> 7,128
<ALLOWANCES> 146
<INVENTORY> 9,417
<CURRENT-ASSETS> 19,861
<PP&E> 1,842
<DEPRECIATION> 412
<TOTAL-ASSETS> 62,145
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 21,132
<TOTAL-LIABILITY-AND-EQUITY> 62,145
<SALES> 9,791
<TOTAL-REVENUES> 9,791
<CGS> 4,502
<TOTAL-COSTS> 4,502
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,148
<INCOME-PRETAX> (1,985)
<INCOME-TAX> (206)
<INCOME-CONTINUING> (1,779)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,779)
<EPS-BASIC> (.32)
<EPS-DILUTED> (.32)
</TABLE>
