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, 2001.
[ ] 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. Employer Identification No.)
incorporation or organization)
THREE 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)
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 August 14, 2001, 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.
TABLE OF CONTENTS
PAGE
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations........................ 1
Condensed Consolidated Balance Sheets.................................. 2
Condensed Consolidated Statements of Cash Flows........................ 3
Notes to the Condensed Consolidated Financial Statements............... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 13
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders.................... 13
Item 5. Other Information...................................................... 13
Item 6. Exhibits and Reports on Form 8-K....................................... 14
Security Capital Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
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For the Three Months For the Six Months
Ended June 30, Ended June 30,
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2001 2000 2001 2000
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(In thousands, except per share amounts)
Revenues:
Employer cost containment-related services $ 14,180 $ - $ 25,675 $ -
Seasonal products 5,786 7,041 8,565 10,111
Educational services 2,066 1,676 3,888 3,354
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Total revenues 22,032 8,717 38,128 13,465
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Cost of revenues:
Employer cost containment-related services 1,292 - 2,359 -
Seasonal products 3,028 3,326 4,326 4,937
Educational services 358 358 679 727
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Total cost of revenues 4,678 3,684 7,364 5,664
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Gross profit 17,354 5,033 30,764 7,801
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Selling, general and administrative expenses 12,963 3,235 24,287 6,072
Amortization and depreciation expense 1,519 596 2,958 1,187
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Operating income (loss) 2,872 1,202 3,519 542
Interest expense (1,513) (760) (2,868) (1,440)
Other income (expense) 173 (171) 19 (59)
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Income (loss) before income tax (expense) benefit and minority interest 1,532 271 949 (957)
Income tax (expense) benefit (719) (139) (604) 351
Minority interest in subsidiaries (207) 9 (158) 143
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Net income (loss) 606 141 187 (463)
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Preferred stock accretion (86) (75) (170) (149)
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Net income (loss) available to common stockholders $ 520 $ 66 $ 17 $ (612)
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Earnings (loss) per common share:
Basic $ 0.08 $ 0.01 $ - $ (0.10)
Diluted $ 0.07 $ 0.01 $ - $ (0.10)
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Weighted average shares outstanding:
Basic 6,442 6,442 6,442 6,442
Diluted 6,755 6,442 6,691 6,442
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The accompanying notes are an integral part of these condensed consolidated financial statements
1
Security Capital Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
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June 30, December 31,
2001 2000
(Unaudited) (Note 1)
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(in thousands, except share amounts)
ASSETS
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Current assets:
Cash and cash equivalents $ 795 $ 5,777
Accounts receivable (net of allowance for doubtful accounts
of $400 and $612) 14,193 9,265
Inventories 9,282 5,594
Income taxes receivable, net 1,678 1,527
Deferred tax asset 875 1,943
Other current assets
1,466 1,470
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Total current assets 28,289 25,576
Property and equipment (net of accumulated depreciation of
$1,933 and $850) 6,136 5,966
Goodwill (net of accumulated amortization of
$5,512 and $3,992) 61,044 57,836
Intangible assets (net of accumulated amortization of
$2,249 and $2,133) 9,706 9,582
Deferred tax asset 1,449 1,074
Other assets 610 523
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Total assets $ 107,234 $ 100,557
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Current portion of long-term debt and other obligations $ 13,254 $ 7,840
Accounts payable 4,119 3,371
Accrued expenses and other liabilities 3,422 3,102
Unearned revenues 10,243 12,890
Notes payable 15,127 4,200
=========== ===========
Total current liabilities 46,165 31,403
Long-term debt 26,345 34,560
Other long-term obligations 4,165 4,330
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Total liabilities 76,675 70,293
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Minority interests 3,068 2,960
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Redeemable preferred stock (liquidation value - $5,000) 2,685 2,515
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Common stock, $.01 par value, 7,500 shares authorized,
380 shares issued and outstanding - -
Class A common stock, $.01 par value, 10,000,000
shares authorized; 6,442,309 shares issued and
outstanding
65 65
Additional paid-in capital 66,612 66,782
Accumulated deficit (41,871) (42,058)
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Total stockholders' equity 24,806 24,789
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Total liabilities and stockholders' equity $ 107,234 $ 100,557
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Security Capital Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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For the Six Months Ended
June 30,
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2001 2000
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(in thousands)
Cash flows from operating activities:
Net income (loss) $ 187 $ (463)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Deferred taxes 958 (223)
Warrant obligations adjustment (223) 61
Amortization and depreciation 3,237 1,376
Minority interest in subsidiaries 158 (143)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (3,572) (4,271)
(Increase) decrease in inventories (3,688) (3,968)
(Increase) decrease in other current assets (161) 74
Increase (decrease) in accounts payable,
accrued expenses, and unearned revenues (2,238) 1,432
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Net cash used in operating activities (5,342) (6,125)
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Cash flows from investing activities:
Capital expenditures (432) (266)
Payments for acquired businesses and product lines (6,144) --
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Net cash used in investing activities (6,576) (266)
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Cash flows from financing activities:
Proceeds from long-term borrowings 2,500 --
Repayments of long-term borrowings (5,591) (2,151)
Repurchase of warrants (900) --
Proceeds from lines of credit 14,378 7,935
Repayment of lines of credit (3,451) (870)
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Net cash provided by financing activities 6,936 4,914
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Decrease in cash and cash equivalents (4,982) (1,477)
Cash and cash equivalents, beginning of period 5,777 1,813
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Cash and cash equivalents, end of period $ 795 $ 336
=================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Security Capital Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
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(1) Basis of Presentation
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The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial statements and the instructions for Form
10-Q. 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. Due to the seasonality of the
seasonal products segment, the interim results of the Company are not indicative
of full year results. Also working capital levels for this segment at June 30th
are historically quite different from those levels at the end of the third and
fourth quarters. This segment ships products throughout the year, with
approximately 56% of its shipments in the third quarter and provides extended
payment terms to some of its customers for seasonal merchandise and,
accordingly, collects a substantial portion of its accounts receivable in the
fourth calendar quarter. As a result of this sales pattern, a substantial
portion of its revenues is typically recorded in the third and fourth calendar
quarters. Also due to this seasonal pattern, the seasonal products segment has
greater working capital needs in its peak season, experiences higher borrowing
levels during the first and second quarters of the year as the segment funds its
inventory build-up and experiences greater cash availability in its fourth
calendar quarter. The balance sheet at December 31, 2000 has been derived from
the audited consolidated financial statements at that date but does not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. 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
Annual Report of Security Capital Corporation on Form 10-K for the year ended
December 31, 2000. Certain prior amounts have been reclassified to conform with
current period classifications.
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(2) Organization And Description of Business
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Security Capital Corporation ("Security Capital") operates as a holding company
that participates in the management of its subsidiaries while encouraging
operating autonomy and preservation of entrepreneurial environments. Currently,
Security Capital has four portfolio operating subsidiaries (together with
Security Capital, referred to as the "Company"), known as WC Holdings, Primrose,
Pumpkin and Possible Dreams. As a result of a December 2000 acquisition through
a 100%-owned subsidiary, WC Holdings, Inc., Security Capital Corporation has an
80% equity interest in Health Power, Inc., which provides services to
corporations and their employees primarily relating to industrial health and
safety, industrial medical care, workers' compensation insurance and the direct
and indirect costs associated therewith. Health Power's activities are primarily
centered in Ohio, Virginia and Maryland and - to a lesser extent - in other
Middle Atlantic states, Indiana, Colorado and Washington. Primrose is a
98%-owned subsidiary involved in the franchising of educational child care
centers. Primrose also operates one child care center. Currently Primrose
schools are located throughout the United States except in the Northeast and
Northwest. Pumpkin is an 80%-owned subsidiary in the business of designing and
distributing pumpkin carving kits and related accessories. Pumpkin distributes
its products primarily throughout the United States and also in Canada and
Europe. Possible Dreams is a wholly-owned subsidiary that operates as a
designer, importer and distributor of collectible figurines and giftware.
Possible Dreams distributes its products throughout the United States.
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(3) Inventories
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June 30, December 31,
2001 2000
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(in thousands)
Finished goods $ 7,948 $ 5,199
Raw materials 1,334 395
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Total $ 9,282 $ 5,594
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4
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(4) Other Income (Expense)
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For the Three Months For the Six Months
Ended June 30, Ended June 30,
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2001 2000 2001 2000
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(In thousands)
Interest income $ 14 $ 3 $ 60 $ 5
Warrant obligations adjustment 144 (176) 223 (61)
Other 15 2 15 (3)
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Total $ 173 $ (171) $ 298 $ (59)
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(5) Acquisition of Health Power, Inc.
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In December 2000, the Company formed WC Holdings, Inc., a wholly owned
subsidiary, which, in turn, purchased an 80% interest in Health Power, Inc.
Subsequent to the December 31, 2000 allocation of the purchase price, the
Company paid an additional $131,000 in acquisition related expenses which have
been allocated to goodwill at June 30, 2001.
The following unaudited pro forma financial information presents the combined
results of the Company as if the acquisition of Health Power, Inc. had taken
place at January 1, 2000. The pro forma amounts give effect to certain
adjustments, including the amortization of goodwill and intangibles, increased
interest expense and income tax effects. This pro forma information does not
necessarily reflect the results of operations as they would have been if the
business had been managed by the Company throughout these periods and is not
indicative of results that may be obtained in the future:
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For the Three For the Six
Months Months
Ended June 30, 2000 Ended June 30, 2000
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(In thousands)
Pro Forma:
Revenues $ 20,377 $ 37,213
Net income $ 1,288 $ 1,220
Earnings per common share
Basic $ 0.20 $ 0.19
Diluted $ 0.20 $ 0.19
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(6) Acquisition of Trigon Administrators, Inc.
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On April 1, 2001, the Company's subsidiary, Health Power, acquired 100% of the
common stock of Trigon Administrators, Inc., a TPA administrator in Virginia and
Maryland. The entire purchase price paid for the acquisition - $6,000,000 - was
financed through Health Power's revolving line of credit. Subsequent adjustments
to the purchase price reduced it to a $5,537,000. The Company is currently in
negotiation with the bank to convert this revolver balance to term debt. The
acquisition has been accounted for as a purchase, a preliminary allocation
of the purchase price to the net assets acquired has been completed during the
second quarter, and $4,763,000 has been allocated to goodwill based upon this
preliminary assessment.
5
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(7) Segment Disclosure
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The Company has an employer cost containment-related services segment, a
seasonal products segment and an educational services segment. The employer cost
containment-related services segment consists of WC Holdings, the seasonal
products segment consists of Pumpkin and Possible Dreams and the educational
services segment consists of Primrose. Management evaluates the performance of
its segments based upon segment income or Adjusted EBITDA, defined for the
purposes of the segment disclosures as earnings before interest, taxes,
depreciation, amortization, minority interest, management fees and non-recurring
charges or gains. Adjusted EBITDA is used to evaluate performance because the
Company believes that it is a good measurement of its ability to generate cash
flow and is a financial indicator of value and ability to incur and service
debt. Adjusted EBITDA is not a substitute for operating income or cash flow from
operating activities in accordance with accounting principles generally accepted
in the United States.
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For the Three Months For the Six Months
Ended June 30, Ended June 30,
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2001 2000 2001 2000
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(In thousands)
Revenues:
Employer cost containment-related services $ 14,180 $ - $ 25,675 $ -
Seasonal products 5,786 7,041 8,565 10,111
Educational services 2,066 1,676 3,888 3,354
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Total revenues $ 22,032 $ 8,717 $ 38,128 $ 13,465
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Segment income (Adjusted EBITDA):
Employer cost containment-related services $ 3,254 $ - $ 5,599 $ -
Seasonal products 508 1,285 (238) 616
Educational services 977 807 1,789 1,623
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Total segment income $ 4,739 $ 2,092 $ 7,150 $ 2,239
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Reconciliation to net income (loss):
Amortization and depreciation expense (1,519) (596) (2,958) (1,187)
Interest expense (1,513) (760) (2,868) (1,440)
Income tax benefit (expense) (719) (139) (604) 351
Minority interest in subsidiaries (207) 9 (158) 143
Management fees (297) (166) (574) (333)
Other income (expense) 173 (171) 298 (59)
Corporate and other expense (51) (128) (99) (177)
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Net income (loss) $ 606 $ 141 $ 187 $ (463)
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=====================================================================================================================
June 30, December 31,
2001 2000
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(in thousands)
Segment assets:
Employer cost containment-related services $ 46,450 $ 43,462
Seasonal products 31,201 27,563
Educational services 28,224 28,494
Corporate and other 1,359 1,038
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6
Total assets $ 107,234 $ 100,557
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(8) Income Taxes
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The Company has recorded income tax (expense) benefit at an effective rate of
64% and 37% for the six month periods ended June 30, 2001 and 2000,
respectively, representing the Company's estimate of its annual effective income
tax rate. The 2001 effective rate reflects the fact that the Company is
amortizing goodwill that is not deductible for income tax purposes. This
goodwill was acquired in the fourth quarter of 2000.
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(9) Earnings Per Share
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Diluted earnings per share reflect per share amounts that would have resulted if
dilutive potential common stock had been converted to common stock. The
following reconciles amounts reported in the financial statements:
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For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
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Numerator:
Net income available to
common stockholders $ 520 $ 66 $ 17 $ (612)
=======================================================
Diluted weighted average shares out standing:
Common stock 6,442 6,442 6,442 6,442
Options 313 - 249 -
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Diluted weighted average
shares out standing 6,755 6,442 6,691 6,442
=======================================================
For the three and six month periods ended June 30, 2001 and 2000, 500,000 shares
of zero coupon redeemable convertible preferred shares, which are convertible
into 500,000 common shares, were excluded from the computation of diluted
earnings per share ("EPS") because their inclusion would have had an
antidilutive effect on EPS. In addition, certain subsidiary options at and
warrants were also excluded from the computation of diluted EPS because their
inclusion would have had an antidilutive effect on consolidated EPS.
7
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(10) Subsidiary Stock and Stock Options
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WC Holdings - Options to acquire 1281 shares of Health Power, an 80%-owned
subsidiary of WC Holdings, at approximately $694 per share, the fair value at
the date of the grant, were granted to subsidiary employees during the first
quarter of 2001. Such options vest over a five-year period. If all such
outstanding options had been vested and exercised at June 30, 2001, the
Company's ownership share of Health Power would have been 73.47%.
Primrose Holdings - On April 3, 2001, the Company exercised its call provision
relating to shares of Primrose Holdings, Inc. owned by a then exiting officer.
The Company repurchased 100 shares, or 0.3%, of Primrose Holdings, Inc. from
this officer for $50,000, increasing its direct ownership to 98.5%. The Company
also cancelled options held by the same former officer for 346.67 shares of
Primrose Holdings, Inc. on June 18, 2001.
Security Capital - Pursuant to the provisions of the 2000 Long-Term Incentive
Plan, on May 16, 2001, the Company granted options to acquire 24,000 shares of
its Class A common stock at the market price at the date of the grant, which was
$10.31. These options, subject to termination of the grantee's directorship,
expire 10 years from the date of the grant, are not transferable other than on
death, and are exercisable in three equal annual installments commencing on the
date of grant.
Pumpkin - Options to acquire 9 shares of Pumpkin were settled for cash at their
existing liability value of $82,000 on June 7, 2001 when the holder exercised
her right to settle the options for cash.
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(11) New Capital Lease
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During the first quarter of 2001, Possible Dreams entered into a capital lease
for computer equipment that expires in August 2006. At June 30, 2001, property
and equipment included the equipment under this capital lease with a cost of
$606,734. Possible Dreams will begin amortizing this cost over the 60-month
lease term beginning on the date of final installation of the equipment,
currently scheduled for September 1, 2001.
Future minimum lease payments with respect to such lease are as follows:
2001 $ 46,232
2002 138,696
2003 138,696
2004 138,696
2005 138,696
2006 92,464
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693,480
Less amounts representing interest (86,746)
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$606,734
========
8
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(12) Debt
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On March 31, 2001, the Company's subsidiary, Health Power, amended its existing
loan agreement - the original terms of which are outlined in the notes to the
Company's Annual Report on Form 10-K for the year ended December 31, 2000. The
only significant terms which were altered as a result of this amendment related
to the lender's consent to the Trigon acquisition discussed in note 6 of the
Notes to the Condensed Consolidated Financial Statements in this Report on Form
10-Q, the lender's consent to the use of $6,000,000 of Health Power's revolving
line of credit to pay for such acquisition, and the amendment of the ratio of
funded indebtedness to EBITDA covenant.
On June 13, 2001, Pumpkin entered into a three-year loan agreement with LaSalle
Business Credit, Inc. The total credit facility is $10,000,000, consisting of a
maximum term loan amount of $2,500,000 and a revolving loan commitment of
$7,500,000. The amount Pumpkin is allowed to draw on the revolver is limited by
a borrowing base defined by specific accounts receivable and inventory levels.
The agreement also provides for seasonal overadvances from April 1st through
July 31st of each year during the peak of the inventory build-up period.
On June 14, 2001, Pumpkin used the new financing facilities to retire all
amounts owing to Banc of America Commercial Finance Corporation ($3,247,001,
inclusive of $900,000 to repurchase the full amount of outstanding warrants) and
to pay the closing costs of the refinancing. The term loan is a 24-month
obligation with monthly payments due July 1, 2001 through June 1, 2003. This
term note bears interest at the prime rate (7.0% at June 30, 2001) or the LIBOR
rate plus 2.5%. Principal repayments are due as follows: $625,000 in 2001,
$1,250,000 in 2002 and $625,000 in 2003. The revolver bears interest at the
prime rate or the LIBOR rate plus 2.5% and runs for three years through June
2004.
The Company's subsidiary, Primrose, has reclassified all of its term debt,
$8,078,000 at June 30, 2001, to current debt because of debt covenants which the
Company believes Primrose will not be in compliance with at March 31, 2002, but
the Company intends to refinance this debt prior to March 2002.
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(13) New Accounting Pronouncements
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In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under the
new rules, all goodwill and those intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment tests
in accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Beginning January 1,
2002, we will no longer amortize goodwill or any indefinite-lived intangible
assets. During 2002, the Company will perform the first of the required
impairment tests of goodwill and indefinite-lived intangible assets.
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(14) Subsequent Events
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Security Capital Corporation employee stock options - Pursuant to the provisions
of the 2000 Long-Term Incentive Plan, on July 19, 2001, the Company granted
options to acquire 237,000 shares of its Class A common stock at the market
price at the date of the grant, which was $10.85. These options, subject to
termination of the grantees' employment, expire 10 years from the date of the
grant, are not transferable other than on death, and are exercisable in five
equal annual installments commencing one year from the date of grant.
On August 8, 2001, the Company's subsidiary, Possible Dreams, amended its
existing loan agreement to modify the minimum EBITDA and total debt coverage
ratio covenants.
9
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 net income of $606,000 and $187,000 for the three and
six month periods ended June 30, 2001, respectively. This compares to net income
of $141,000 and a net loss of $463,000 for the same periods of the prior year.
The Company reported basic net earnings per common share of $0.08 and breakeven
for the three and six month periods ended June 30, 2001, respectively, as
compared to basic net earnings per common share of $0.01 and a basic net loss
per common share of $0.10 for the comparable periods of 2000. The primary reason
for the favorable performance was the inclusion of the employer cost
containment-related services segment in the 2001 results due to its acquisition
in late December 2000.
Overall, the Company's revenues increased by $13,315,000 or 153% and by
$24,663,000 or 183% to $22,032,000 and $38,128,000 for the three and six month
periods ended June 30, 2001, respectively, as compared to the same periods of
the prior year, primarily due to the acquisition of the employer cost
containment-related services segment. Without taking into consideration the
acquisition of this segment, revenues decreased by $865,000 or 10% and by
$1,012,000 or 8% to $7,852,000 and $12,453,000 for the three and six month
periods ended June 30, 2001, respectively, as compared to the same periods of
the prior year. The Company's seasonal products segment revenues decreased by
$1,255,000 or 18% and by $1,546,000 or 15% to $5,786,000 and $8,565,000 for the
three and six month periods ended June 30, 2001, respectively, as compared to
the same periods of the prior year, due both to timing of receipt of shippable
orders and the impact the economic slowdown has had on the collectible and
giftware market at the retail level. Educational services segment revenues
increased by $390,000 or 23% and by $534,000 or 16% to $2,066,000 and $3,888,000
for the three and six month periods ended June 30, 2001, respectively, due to
same school revenue increases coupled with the revenue contribution made by the
12 new schools opened since June of 2000. Total royalty revenue of the
educational services segment increased $226,000 or 18% and by $476,000 or 20% to
$1,453,000 and $2,906,000 for the three and six month periods ended June 30,
2001, respectively, as compared to the same periods of the prior year. These
increases were generated as a result of a 15% increase in the number of
educational-based childcare centers, which was 90 and 78 as of June 30, 2001 and
2000, respectively. As an additional performance measure of the increasing
success of the educational services segment's concept, the Company monitors the
revenues generated by its franchisees. Total educational system revenue, or
gross revenue of all educational-based child care center franchises, increased
by $3,169,000 or 18% and by $6,763,000 or 19% to $20,946,000 and $41,987,000 for
the three and six month periods ended June 30, 2001, respectively, as compared
to the same periods of the prior year. Additionally, as of June 30, 2001, this
segment had awarded 39 franchises in various stages of development and
construction with associated unearned revenue of $2,023,000 recorded on the
Company's balance sheet as of that date.
Selling, general and administrative expense increased by $9,728,000 or 301% and
by $18,215,000 or 300% to $12,963,000 and $24,287,000 for the three and six
month periods ended June 30, 2001, respectively, as compared to the same periods
of the prior year, primarily due to the acquisition of the employer cost
containment-related services segment. Without taking into consideration the
acquisition of this segment, selling, general and administrative expense
increased by $93,000 or 3% and by $498,000 or 8% for the three and six month
periods ended June 30, 2001, as compared to the same periods of the prior year.
The seasonal products segment's selling, general and administrative expense
decreased by $180,000 or 7% and by $80,000 or 2% for the three and six month
periods ended June 30, 2001, respectively, as compared to the same periods of
the prior year, primarily attributable to lower commission expense associated
with lower sales volumes. On the other hand, the educational services segment's
selling, general and administrative expense increased by $220,000 or 43% and by
$416,000 or 41% for the three and six month periods ended June 30, 2001,
respectively, as compared to the prior year, due to an increase in staff to
accommodate this segment's growth in the number of operating locations.
10
Amortization and depreciation expense increased by $923,000 or 155% and by
$1,771,000 or 149% to $1,519,000 and $2,958,000 for the three and six month
periods ended June 30, 2001, respectively, as compared to the same periods of
the prior year, primarily due to the amortization of goodwill associated with
the acquisition of the employer cost containment-related services segment.
Without taking into consideration the acquisition of this segment, amortization
and depreciation expense increased by $21,000 or 4% and by $69,000 or 6% for the
three and six month periods ended June 30, 2001, as compared to the same periods
of the prior year, entirely due to the seasonal products segment's depreciation
expense related to its showroom improvements. The educational services segment
amortization and depreciation expense was basically unchanged from the
comparable three and six month periods of the prior year.
Interest expense increased by $753,000 or 99% and by $1,428,000 or 99% to
$1,513,000 and $2,868,000 for the three and six month periods ended June 30,
2001, respectively, as compared to the same periods of the prior year primarily
due to the acquisition of the employer cost containment-related services
segment. Without taking into consideration the acquisition of this segment,
interest expense decreased by $28,000 or 4% and by $65,000 or 5% for the three
and six month periods ended June 30, 2001, respectively, as compared to the same
periods of the prior year, with the major factors being reduced average debt
levels in the educational services segment and lower interest rates.
Income tax expense increased by $955,000 to $604,000 expense for the six month
period ended June 30, 2001 from a $351,000 benefit for the comparable period in
the prior year due both to the beneficial pre-tax income effects of adding the
employer cost containment-related services segment through acquisition in
December 2000 coupled with the jump in the effective tax rate from 37% to 64%
for the six month periods ended June 30, 2000 and 2001, respectively. This
increase in the effective rate reflects the Company's amortization of goodwill
acquired in this December 2000 acquisition which is non-deductible for income
tax purposes.
SEASONALITY
The seasonal products segment consists of Possible Dreams and Pumpkin. This
segment experiences a significant seasonal pattern in its working capital
requirements and operating results. The seasonal segment for the two previous
years received orders representing approximately 36% and 37% of its annual
bookings during the first and second quarters, respectively. It ships products
throughout the year, with approximately 56% of its shipments in the third
quarter. Temporary employees are hired to accommodate peak shipping periods.
This segment provides extended payment terms to some of its customers for
seasonal merchandise and, accordingly, collects a substantial portion of its
accounts receivable in the fourth calendar quarter. Due to the seasonal pattern,
the seasonal products segment has had greater working capital needs in its peak
season and has experienced greater cash availability in its fourth calendar
quarter. As a result of this sales pattern, a substantial portion of its
revenues is typically recorded in the third and fourth calendar quarters. The
Company expects this seasonal pattern to continue for the foreseeable future.
The seasonal products segment has historically financed its operations through
internally-generated cash flow and short term seasonal borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $4,982,000 from $5,777,000 at December
31, 2000 to $795,000 at June 30, 2001. The decrease is primarily attributable to
revolving facility repayments by the employer cost containment-related services
segment and seasonal increases of working capital in the seasonal products
segment.
The Company's consolidated working capital decreased by $12,049,000, from a
deficit of $5,827,000 at December 31, 2000 to a deficit of $17,876,000 at June
30, 2001. The most significant contributor to this decrease was the $5,890,000
reclassification to current debt of the educational services segment's long-term
debt as discussed in note 12 of the Notes to the Condensed Consolidated
Financial Statements in this Report on Form 10-Q. A second major factor
accounting for this decrease was the increase in the revolving line of credit
level outstanding at the employer cost containment-related services segment due
to its financing of the $5,537,000 Trigon acquisition (discussed in note 6 of
the Notes to the Condensed Consolidated Financial Statements in this Report on
Form 10-Q) as offset by a $2,350,000 decrease in the unearned revenue liability
of this segment. This decrease was due to the normal collection and revenue
recognition pattern of worker's compensation group rating fees revenue which is
deferred and recorded as a
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liability as it is collected during the fourth quarter of each year and then
is gradually amortized to income over the course of the following fiscal
year. The working capital of the seasonal products segment decreased by
$2,573,000, primarily attributable to its seasonal pattern and the resultant
increased revolver levels during the spring and summer months.
The Company maintains four revolving lines of credit, with a total of
$15,127,000 outstanding and $6,246,000 available at June 30, 2001. Borrowings
under the revolving lines of credit may be limited to a borrowing base as
defined in the notes to the audited financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Total term debt, exclusive of original issue discount, decreased by $2,964,000
from $43,334,000 at December 31, 2000 to $40,370,000 at June 30, 2001 due to
scheduled payments on all term debt. Term debt in the aggregate had an
approximate 10.62% average interest rate and current maturities, exclusive of
original issue discount, of $14,014,000 at June 30, 2001. Term debt also has
certain covenants at the subsidiary operating company level, the more
significant of which require the subsidiary operating companies to maintain
minimum earnings before interest, taxes, depreciation and amortization
("EBITDA"), leverage ratios, interest coverage ratios, fixed charge ratios and
maximum lease expenses. As discussed in note 12 of the Notes to the Condensed
Consolidated Financial Statements in this Report on Form 10-Q, Pumpkin
refinanced its term and revolving debt during the second quarter thereby
eliminating dilutive bank warrants and significantly lowering interest expense.
The Company's subsidiary, Primrose, has reclassified all of its term debt,
$8,078,000 at June 30, 2001, to current because of debt covenants which the
Company believes Primrose will not be in compliance with at March 31, 2002, but
the Company intends to refinance this debt prior to March 2002.
The Company's subsidiary, Possible Dreams, entered into a capital lease for an
information system to replace its current system during the first quarter of
2001. The total net present value reflected in the June 30, 2001 balance sheet
as both a fixed asset and a liability was $606,734. The system is currently
being installed, and it is anticipated that it will be fully operational by
September 1, 2001 and on this operational date the lease payments and
depreciation of the fixed asset will begin. The Company expects no additional
major capital expenditures during the calendar year 2001.
Excess of cost over the fair value of net assets acquired (goodwill) is
amortized on a straight-line basis over 20 to 25 years. Management continues to
believe that the amortization periods utilized are appropriate.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under the
new rules, all goodwill and those intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment tests
in accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Beginning January 1,
2002, we will no longer amortize goodwill or any indefinite-lived intangible
assets. During 2002, the Company will perform the first of the required
impairment tests of goodwill and indefinite-lived intangible assets.
The Company's quarterly and annual revenues and other operating results have
been and will continue to be affected by a wide variety of factors that could
have a material adverse effect on the Company's financial performance during any
particular quarter or year. Such factors include, but are not limited to those
listed under Item 5. of Part II of this Report on Form 10-Q. The seasonal
products segment businesses introduced a number of new products in its target
markets in 2001 which are expected to enhance future revenues and liquidity of
the Company. However, there can be no assurance that these businesses will be
able to implement their plans to introduce such products in a timely fashion, or
that such products will meet the expectations of the Company for either revenues
or profitability. The Company believes that cash flows from operating activities
and the successful introduction of its new products and continued growth of its
franchises, as well as its available borrowings under the revolving credit
facilities, will be adequate to meet the Company's debt service obligations,
working capital needs and planned capital expenditures for at least the next
twelve months, although there can be no assurance in this regard.
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On April 1, 2001, the Company's subsidiary, Health Power, acquired 100% of the
common stock of Trigon Administrators, Inc., a TPA administrator in Virginia and
Maryland. The purchase price of $5,537,000 was financed through Health Power's
revolving line of credit. The Company is currently in negotiation with the bank
to convert this revolver balance to term debt. In conjunction with this
purchase, Health Power's loan agreement was amended as outlined in note 12 of
the Notes to the Condensed Consolidated Financial Statements in this Report on
Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risk associated with changes in interest rates. The
Company's notes payable and long-term debt bear interest primarily at 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. The effect of a one percentage point change in interest rates would have
impacted interest expense by approximately $124,000 and $249,000 for the three
and six month periods ended June 30, 2001, respectively.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 2001 Annual Meeting of Stockholders (the
"Annual Meeting") on July 19, 2001.
(b) The following directors were elected at the Annual Meeting, and
they are the only directors of the Company: Brian D. Fitzgerald, A.
George Gebauer, Samuel B. Fortenbaugh III, M. Paul Kelly and Craig R.
Stapleton.
(c) Set forth below is a description of the one matter 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.
Election of five 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
-------- --------- -------------- -----------------
Brian D. Fitzgerald 6,203,209 24,014 0
A. George Gebauer 6,203,209 24,014 0
Samuel B. Fortenbaugh III 6,203,276 23,947 0
M. Paul Kelly 6,203,276 23,947 0
Craig R. Stapleton 6,203,276 23,947 0
ITEM 5. OTHER INFORMATION
At the Annual Meeting of the Company's Board of Directors held on July 19, 2001,
the Board of Directors elected Brian D. Fitzgerald as Chairman of the Board,
President and Chief Executive Officer, A. George Gebauer as Vice Chairman of the
Board and Secretary and William R. Schlueter as Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary of the Company.
This filing contains "forward-looking" statements within the meaning of the
"safe harbor" provision of the Private Litigation Reform Act of 1995. Such
statements are based on management's current expectations and are subject to a
number of factors and uncertainties which could cause actual results to differ
materially from those described in the forward looking statements. Such factors
and uncertainties include, but are not limited to: future legislative changes
which could impact the laws governing workers' compensation insurance in Ohio
and the other states in which our employer cost containment-related services
segment
13
operates, the level of orders that are received and shipped by the Company in
any given quarter, the rescheduling and cancellation of orders by customers,
availability and cost of materials, the Company's ability to enhance its
existing products and to develop, manufacture and successfully introduce and
market new products, new product developments by the Company's competitors,
market acceptance of products of both the Company and its competitors,
competitive pressures on prices, the ability to attract and maintain
qualified personnel, significant damage to or prolonged delay in operations
at the manufacturing facilities of the Company's suppliers, interest rate and
foreign exchange fluctuations, political stability in the Pacific Rim, and
the Company's ability to attract qualified franchisees.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS: None
(b) REPORTS ON FORM 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SECURITY CAPITAL CORPORATION
Date: August 14, 2001 By: /s/ Brian D. Fitzgerald
-------------------------------------------
Brian D. Fitzgerald
President and Chief Executive Officer
Date: August 14, 2001 By: /s/ William R. Schlueter
-------------------------------------------
William R. Schlueter
Chief Financial Officer
(Principal Financial and Accounting
Officer)
14