<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 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 May 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.
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TABLE OF CONTENTS
<Table>
<Caption>
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............................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 11
Part II Other Information
Item 5. Other Information........................................................ 12
Item 6. Exhibits and Reports on Form 8-K......................................... 12
</Table>
This Amendment No. 1 on Form 10-Q/A is being filed to restate the Company's
Condensed Consolidated Financial Statements for the three months ended March
31, 2001 to properly reflect the non-deductibility of goodwill recorded in
connection with the Health Power acquisition and its effect upon the
Company's income tax provision. The impact on the Condensed Consolidated
Statement of Operations for the three months ended March 31, 2001, Condensed
Consolidated Balance Sheet at March 31, 2001 and the Condensed Consolidated
Statement of Cash Flows for the three months ended March 31, 2001 is as
follows:
<Table>
<Caption>
For the Three Months Ended
March 31, 2001
-----------------------------
Amount
Previously As
Reported Restated
-------- --------
(in thousands except per share amounts)
Condensed Consolidated Statement of Operations
Income tax benefit $ 271 $ 115
Net loss (263) (419)
Net loss to common stockholders (347) (503)
Basic and Diluted loss per common share (0.05) (0.08)
<Caption>
March 31, 2001
-----------------------------
Amount
Previously As
Reported Restated
-------- --------
(in thousands)
Condensed Consolidated Balance Sheet
Deferred tax asset 1,182 1,026
Total assets 100,245 100,089
Accumulated deficit (42,321) (42,477)
Total stockholders' equity 24,442 24,286
Total liabilities and stockholders' equity 100,245 100,089
<Caption>
For the Three Months Ended
March 31, 2001
-----------------------------
Amount
Previously As
Reported Restated
-------- --------
(in thousands)
Condensed Consolidated Statement of Cash Flows
Net loss (263) (419)
Deferred taxes 254 410
</Table>
This Amendment No. 1 also changes Note 7, "Segment Disclosure", to reflect
the above change in the income tax benefit line, the net loss line, the
corporate and other assets line and the total assets line, Note 8, "Income
Taxes", by changing the effective tax rate as a result of the above change
and Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" to reflect the changes to net loss and net loss per
common share as discussed in the first paragraph thereof under "Results of
Operations".
<Page>
Security Capital Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<Table>
<Caption>
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For the Three Months
Ended March 31,
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2001 2000
(as restated,
see Note 1)
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(in thousands
except per share amounts)
Revenues:
Employer cost containment-related service revenue $ 11,495 $ --
Net seasonal products sales 2,779 3,070
Educational services revenues 1,822 1,678
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Total revenues 16,096 4,748
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Cost of revenues:
Employer cost containment-related service cost of revenue 1,067 --
Seasonal products cost of sales 1,298 1,611
Educational services cost of revenues 321 369
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Total cost of revenues 2,686 1,980
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Gross profit 13,410 2,768
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Selling, general and administrative 11,324 2,837
Amortization and depreciation 1,439 591
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Operating income (loss) 647 (660)
Interest expense (1,355) (680)
Other income 125 112
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Loss before income tax benefit and minority interests (583) (1,228)
Income tax benefit 115 490
Minority interests in subsidiaries 49 134
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Net loss (419) (604)
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Preferred stock accretion (84) (74)
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Net loss to common stockholders $ (503) $ (678)
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Loss per common share:
Basic $ (0.08) $ (0.11)
Diluted $ (0.08) $ (0.11)
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Weighted average shares outstanding:
Basic 6,442 6,442
Diluted 6,442 6,442
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</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<Page>
Security Capital Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
<Table>
<Caption>
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March 31, December 31,
2001 2000
(Unaudited) (Note 1)
(as restated,
see Note 1)
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(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 4,993 $ 5,777
Accounts receivable (net of allowance for doubtful accounts of
$889 and $1,057) 9,152 9,265
Inventories 6,288
Income taxes receivable, net 5,594
1,445 1,527
Deferred tax asset 1,950 1,943
Other current assets 1,629 1,470
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Total current assets 25,457 25,576
Property and equipment (net of accumulated depreciation of
$1,362 and $850) 6,334 5,966
Goodwill (net of accumulated amortization of
$4,736 and $3,992) 57,036 57,836
Intangible assets (net of accumulated amortization of
$2,358 and $2,133) 9,718 9,582
Deferred tax asset 1,026 1,074
Other assets 518 523
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Total assets $ 100,089 $ 100,557
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and other obligations $ 13,874 $ 7,840
Accounts payable 3,401 3,371
Accrued expenses and other liabilities 3,192 3,102
Unearned revenues 14,073 12,890
Notes payable 4,154 4,200
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Total current liabilities 38,694 31,403
Long-term debt 26,257 34,560
Other long-term obligations 5,342 4,330
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Total liabilities 70,293 70,293
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Minority interests 2,911 2,960
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Redeemable preferred stock (liquidation value - $5,000) 2,599 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 66,698 66,782
Accumulated deficit (42,477) (42,058)
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Total stockholders' equity 24,286 24,789
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Total liabilities and stockholders' equity $ 100,089 $ 100,557
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</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<Page>
Security Capital Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<Table>
<Caption>
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For the Three Months Ended
March 31,
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2001 2000
(as restated,
see Note 1)
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(in thousands)
Cash flows from operating activities:
Net loss $ (419) $ (604)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Deferred taxes 410 (346)
Warrant obligation adjustment (79) (115)
Amortization and depreciation 1,460 683
Minority interests in subsidiaries (49) (134)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 128 1,179
(Increase) decrease in inventories (694) (779)
(Increase) decrease in other current assets (88) 89
Increase (decrease) in accounts payable,
accrued expenses, and unearned revenues 1,481 286
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Net cash provided by operating activities 2,150 259
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Cash flows from investing activities:
Capital expenditures (211) (143)
Payments for acquired businesses and product lines (292) --
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Net cash used in investing activities (503) (143)
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Cash flows from financing activities:
Proceeds from long-term borrowings -- --
Repayments of long-term borrowings (2,385) (1,008)
Proceeds from lines of credit 954 1,200
Repayment of lines of credit (1,000) (750)
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Net cash used in financing activities (2,431) (558)
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Decrease in cash and cash equivalents (784) (442)
Cash and cash equivalents, beginning of period 5,777 1,813
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Cash and cash equivalents, end of period $ 4,993 $ 1,371
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</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<Page>
Security Capital Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
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(1) Basis of Presentation
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The Company has restated its Condensed Consolidated Financial Statements for
the three months ended March 31, 2001 to properly reflect the
non-deductibility of goodwill recorded in connection with the Health Power,
Inc. acquisition described in Note 5 below and its effect upon the Company's
income tax provision. The impact on the Company's Condensed Consolidated
Statement of Operations for the three months ended March 31, 2001, Condensed
Consolidated Balance Sheet at March 31, 2001 and Condensed Consolidated
Statement of Cash flows for the three months ended March 31, 2001 is as
follows:
<Table>
<Caption>
For the Three Months Ended
March 31, 2001
-----------------------------
Amount
Previously As
Reported Restated
-------- --------
(in thousands except per share amounts)
Condensed Consolidated Statement of Operations
Income tax benefit $ 271 $ 115
Net loss (263) (419)
Net loss to common stockholders (347) (503)
Basic and Diluted loss per common share (0.05) (0.08)
<Caption>
March 31, 2001
-----------------------------
Amount
Previously As
Reported Restated
-------- --------
(in thousands)
Condensed Consolidated Balance Sheet
Deferred tax asset 1,182 1,026
Total assets 100,245 100,089
Accumulated deficit (42,321) (42,477)
Total stockholders' equity 24,442 24,286
Total liabilities and stockholders' equity 100,245 100,089
<Caption>
For the Three Months Ended
March 31, 2001
-----------------------------
Amount
Previously As
Reported Restated
-------- --------
(in thousands)
Condensed Consolidated Statement of Cash Flows
Net loss (263) (419)
Deferred taxes 254 410
</Table>
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles 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. The
balance sheet at December 31, 2000 has been derived from the audited 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 and - to a lesser extent - in Washington and West Virginia.
Primrose is a 98%-owned subsidiary involved in the franchising of educational
child care centers. Primrose also operates one child care center. Primrose is
primarily based in the southern, central and western sections of the United
States. Pumpkin is an 80%-owned subsidiary in the business of manufacturing and
distributing pumpkin carving kits and related accessories. Pumpkin's activities
are centered in the United States. Possible Dreams is a wholly-owned subsidiary
that operates as an importer, designer and distributor of collectible figurines
and giftware.
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(3) Inventories
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<Table>
<Caption>
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March 31, December 31,
2001 2000
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(in thousands)
Finished goods $ 5,584 $ 5,199
Raw materials 704 395
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Total $ 6,288 $ 5,594
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</Table>
<Page>
<Table>
<Caption>
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(4) Other Income (Expense)
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For the Three Months
Ended March 31,
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2001 2000
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(in thousands)
Interest income $ 46 $ 2
Warrant obligation adjustment 79 115
Other -- (5)
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Total $ 125 $ 112
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</Table>
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(5) Acquisition of Health Power, Inc.
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WC Holdings, Inc.
In December 2000, the Company formed WC Holdings, Inc., a wholly owned
subsidiary, who, 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 $126 in acquisition related expenses which have been
allocated to goodwill at March 31, 2001.
The following unaudited pro forma financial information presents the combined
results of the Company and Health Power, Inc as if the acquisition 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 during these periods and is not
indicative of results that may be obtained in the future:
<Table>
<Caption>
---------------------------------------------------------------
For the Three Months
---------------------------------------------------------------
Ended March 31, 2000
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Pro Forma: (in thousands)
Revenues $ 16,836
Net loss $ (68)
Loss per common share
Basic $ (.02)
Diluted $ (.02)
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</Table>
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(6) Earnings Per Share
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WC Holdings - Options to acquire 1,242 shares of Health Power, Inc., 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 March 31, 2001, the
Company's ownership share of Health Power, Inc. would have been 73.65%.
At March 31, 2001 and 2000, 500,000 shares of zero coupon redeemable
convertible preferred shares, which were 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, subsidiary options granted to subsidiary management at Primrose,
Possible Dreams and Health Power, Inc. were excluded from the computation of
diluted EPS for the three months ended March 31, 2001 and 2000, and Security
Capital options granted to Company officers and directors were excluded from
the same computation at March 31, 2001, because their inclusion would have
had an antidilutive effect on consolidated EPS.
<Page>
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(7) Segment Disclosure
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The Company has an employer cost containment-related service segment, a
seasonal products segment and an educational services segment. The employer
cost containment-related service segment consists of WC Holdings, the
educational services segment consists of Primrose, and the seasonal products
segment consists of Pumpkin and Possible Dreams. 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 expense,
management fees and non-recurring charges or gains. EBITDA is used to
evaluate performance because the Company feels that it is the true
measurement of its ability to generate cash flow and is a widely-accepted
financial indicator of value and ability to incur and service debt. 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.
<Table>
<Caption>
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For the Three Months Ended
March 31,
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2001 2000
(restated)
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(in thousands)
Revenues from external customers:
Employer cost containment-related services $ 11,495 $ --
Seasonal products 2,779 3,070
Educational services 1,822 1,678
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Total revenues $ 16,096 $ 4,748
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Segment income (adjusted EBITDA):
Employer cost containment-related services $ 2,345 $ --
Seasonal products (746) (669)
Educational services 812 815
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Total segment income 2,411 $ 146
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Reconciliation to net income (loss):
Amortization and depreciation expense (1,439) (591)
Interest expense (1,355) (680)
Income tax benefit 115 490
Minority interest in subsidiaries 49 134
Management fees (277) (166)
Other income 125 112
Corporate and other expense (48) (49)
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Net loss $ (419) $ (604)
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March 31, December 31,
2001 2000
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(in thousands)
Segment assets:
Employer cost containment-related services $ 43,349 $ 43,462
Seasonal products 27,275 27,563
Educational services 28,429 28,494
Corporate and other 1,036 1,038
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Total assets $ 100,089 $ 100,557
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</Table>
<Page>
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(8) Income Taxes
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The Company has recorded income tax benefit at a rate of 20% and 38% for the
three month periods ended March 31, 2001 and 2000, respectively, representing
the Company's estimate of the annual effective income tax rate.
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(9) 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 March 31, 2001, property
and equipment includes 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 slated to be September 1, 2001.
Future minimum lease payments with respect to such lease are as follows:
<Table>
2001 $ 46,232
2002 138,696
2003 138,696
2004 138,696
2005 138,696
2006 92,464
-------------------------------------------------
693,480
Less amounts representing interest (86,746)
---------
$606,734
</Table>
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(10) Debt
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On March 31, 2001 the Company's subsidiary, Health Power, Inc., 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
the Subsequent Event footnote of this Report on Form 10-Q, the lender's consent
to the use of $6,000,000 of its revolving line of credit to pay for such
acquisition, and the amendment of the ratio of funded indebtedness to EBITDA
covenant.
At March 31, 2001, Possible Dreams was not in compliance with its fixed charge
covenant. Possible Dreams has received a waiver and expects to be in compliance
by the end of the second quarter.
The Company's subsidiary, Primrose, has reclassified all of its term debt,
$8,598,000 at March 31, 2001, to current because of debt covenants which we know
will not be met at March 31, 2002, but the Company has the intent and believes
it has the ability to refinance this debt prior to March 2002.
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(11) New Accounting Pronouncements
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The Financial Accounting Standards Board has issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This statement was effective
for the Company on January 1, 2001, and addresses the accounting for derivative
instruments and hedging activities. The Company has not entered into such types
of transactions in the past and does not believe that the adoption of this new
statement will have a material effect on the Company's financial statements in
the future.
<Page>
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(12) Subsequent Events
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On April 1, 2001, the Company's subsidiary, Health Power, Inc., acquired 100% of
the common stock of Trigon Administrators, Inc., a TPA administrator in Virginia
and Maryland. 100% of the acquisition - $6,000,000 - was financed through its
revolving line of credit. This acquisition will be accounted for as a
purchase.
On April 3, 2001, the Company canceled options for 346.67 shares of Primrose
Holdings, Inc. and exercised its call provision relating to shares of Primrose
Holdings, Inc. owned by an exiting officer. The Company repurchased 100 shares,
or 0.3%, of Primrose Holdings, Inc. for $50,000, increasing its direct ownership
to 98.5%.
<Page>
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."
As discussed in Note 1 to the Condensed Consolidated Financial Statements,
the Company has restated its financial statements for the three months ended
March 31, 2001. THe accompanying discussion gives effect to that restatement.
RESULTS OF OPERATIONS
Security Capital reported a net loss of $419,000 for the three months ended
March 31, 2001. This compares to a net loss of $604,000 for the three months
ended March 31, 2000. The Company reported basic net loss per common share of
$0.08 for the three months ended March 31, 2001, as compared to basic net loss
per common share of $0.11 for the three months ended March 31, 2000.
Revenues increased by $11,348,000 or 239% to $16,096,000 for the three months
ended March 31, 2001, as compared to the same period 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 $147,000 or 3% to $4,601,000 for the three months ended
March 31, 2001, as compared to the same period of the prior year. The Company's
seasonal products segment revenues decreased by $291,000 or 9% to $2,779,000 for
the three months ended March 31, 2001, as compared to the same period of the
prior year due to timing on receipt of shippable orders. The first quarter is
that segment's traditionally slowest quarter. Educational segment revenues
increased by $144,000 or 9% to $1,822,000, for the three months ended March 31,
2001, due to the demand for its services. Total royalty revenue of the
educational segment earned from system revenues increased $250,000 or 21% to
$1,452,000, for the three months ended March 31, 2001, as compared to the same
period of the prior year. These increases were generated from a 12% increase in
the number of educational-based childcare centers, which was 85 and 76 as of
March 31, 2001 and 2000, respectively. As an additional performance measure of
the increasing success of the educational segment's concept, the Company
monitors the revenues generated by its franchisees. Total education system
revenue, or gross revenue of all educational-based child care center franchises
increased $3,538,000 or 21% to $20,993,000, for the three months ended March 31,
2001, as compared to the same period of the prior year. Additionally, as of
March 31, 2001, this segment had awarded 42 franchise agreements in various
stages of development and construction with associated unearned revenue of
$2,317,855 recorded on the Company's balance sheet as of March 31, 2001.
Selling, general and administrative expense increased by $8,487,000 to
$11,324,000 for the three months ended March 31, 2001, as compared to the same
period of the prior year primarily due to the acquisition of of the employer
cost containment-related services segment. Without taking into consideration the
acquisition of this segment, selling, general and administrative expense
increased by $300,000 for the three months ended March 31, 2001, as compared to
the same period of the prior year. The seasonal products segment's selling,
general and administrative expense increased by $105,000, primarily attributable
to inventory handling costs associated with increased purchasing and inventory
received at its warehouse. The educational segment's selling, general and
administrative expense increased by $115,000, primarily attributable to
increasing its staff to accommodate expected growth. The remainder was
attributable to holding company expense incurred.
Amortization and depreciation expense increased by $848,000 to $1,439,000 for
the three months ended March 31, 2001, as compared to the same period 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, amortization and depreciation expense increased by
$48,000 for the three months ended March 31, 2001, as compared to the same
period of the prior year. The seasonal products segment's amortization and
depreciation expense increased by $42,000, primarily attributable to
depreciation expense related to its showroom improvements. The educational
segment amortization and depreciation expense increased by $8,000, as compared
to the same period of the prior year.
<Page>
Interest expense increased by $675,000 to $1,355,000 for the three months ended
March 31, 2001, as compared to the same period 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 $36,000 for the three months ended March 31, 2001, as
compared to the same period of the prior year. The seasonal products segment's
interest expense increased by $13,000, primarily attributable to an increase in
its average debt levels related to its seasonal borrowings. The educational
segment interest expense decreased by $49,000, primarily attributable to its
reduced average debt levels.
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 $784,000 from $5,777,000 at December 31,
2000 to $4,993,000 at March 31, 2001. The employer cost containment-related
services segment's cash decreased by $920,000 and is primarily attributable to
payments made on its revolving line of credit. The seasonal products segments
cash increased by $51,000 which was primarily funded with borrowing from its
revolving line of credit. The educational services segment's cash remained
relatively unchanged, and the remaining increase of $85,000 is primarily
attributable to increased payables associated with the holding company.
The Company's consolidated working capital decreased by $7,410,000, from a
deficit of $5,827,000 at December 31, 2000 to a deficit of $13,237,000 at
March 31, 2001. The most significant contributor to this decrease was the
$6,411,000 reclassification of the educational services segment's long-term
portion of their debt to current as discussed in footnote 10 of this Report
on Form 10-Q. The employer cost containment-related services segment's
working capital decreased by $389,000 and is primarily attributable to the
reduction of deferred tax benefits associated with the use of its net
operating loss carry forward. Additionally, this segment generally has
deficit working capital due to prepayment of fees which are recorded as
unearned revenue on the balance sheet. The unearned revenue recorded on the
Company's March 31, 2001 balance sheet attributable to this segment was
$11,755,000. The seasonal products segment working capital decreased by
$929,000 which was primarily attributable to its seasonal pattern. Aside from
the aforementioned debt reclassification, the educational segment's working
capital increased by approximately $308,000 primarily due to its operating
results. The remaining increase of $11,000 was primarily due to the holding
company's activities.
The Company in aggregate maintains four revolving lines of credit, with
$4,154,000 outstanding and $9,896,000 available at March 31, 2001. The Company's
employer cost containment-related services segment maintains an $8,000,000
revolving line of credit, which had no balance outstanding and $8,000,000
available at March 31, 2001. The seasonal products segment, in aggregate,
maintains two revolving lines of credit, which had combined balances of
$3,654,000 outstanding and $1,196,000 available at March 31, 2001. This
segment's revolving line of credit will continue to increase through the third
quarter due to its seasonal pattern. The Company's educational services segment
maintains a $1,500,000 revolving line of credit, which had a balance of $500,000
outstanding and $700,000 available at March 31, 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.
<Page>
Total term debt decreased by $3,124,000 from $43,334,000 at December 31, 2000 to
$40,210,000 at March 31, 2001 due to scheduled payments on all term debt. Term
debt in the aggregate has an approximate 11.53% average interest rate and
current maturities of $13,874,000. Term debt also has certain covenants at the
subsidiary operating Company level, the more significant of which requires the
subsidiary operating Companies to maintain minimum earnings before interest,
taxes, depreciation and amortization ("EBITDA"), leverage ratio, interest
coverage ratio, fixed charge ratio and maximum lease expense. At March 31, 2001,
Possible Dreams was not in compliance with its fixed charge covenant. Possible
Dreams has received a waiver and expects to be in compliance by the end of the
second quarter.
The Company's subsidiary, Primrose, has reclassified all of its term debt,
$8,598,000 at March 31, 2001, to current because of debt covenants which we know
will not be met at March 31, 2002, but the Company has the intent and believes
it has the ability 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. The total net present value
recorded as a fixed asset and as a liability at March 31, 2001 was $606,734. The
system is currently being installed and is running parallel as of March 9, 2001.
It is anticipated that it will be fully operational by September 1, 2001. 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.
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 Company
introduced a number of new products in its target markets in 2000 and plans to
introduce additional products in 2001 which are expected to enhance future
revenues and liquidity of the Company. However, there can be no assurance that
the Company will be able to implement its 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.
On April 1, 2001, the Company's subsidiary Health Power, Inc. acquired 100% of
the common stock of Trigon Administrators, Inc., a TPA administrator in Virginia
and Maryland. The purchase price of $6,000,000 was financed through its
revolving line of credit. In conjunction with this purchase, Health Power's
loan agreement was amended as outlined in footnote 10 of 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 $125,000 for the three months ended
March 31, 2001.
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
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 managements 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: 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 Company's suppliers'
manufacturing facility, and interest rate and foreign exchange fluctuations,
political stability in the Pacific Rim, and its 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 Amendment No. 1 on Form 10-Q/A to be
signed on its behalf by the undersigned, thereunto duly authorized.
SECURITY CAPITAL CORPORATION
Date: August 14, 2001 By: /s/ Brian D. Fitzgerald
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Brian D. Fitzgerald
President
Date: August 14, 2001 By: /s/ William R. Schlueter
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William R. Schlueter
Chief Financial Officer
(Principal Financial and Accounting
Officer)