Primrose leases a 4,500 square foot building in Cartersville, Georgia where it maintains all its operations, sales and administrative facilities. It also leases 2,000 square feet in an adjacent building where it maintains its real estate and development facilities.
Possible Dreams leases 2,400 square feet in Atlanta, Georgia for a showroom.
Generally, all revenues are recognized when the activities prerequisite to obtaining the benefits have been completed and the amounts are realized or realizable.
Seasonal product sales are recognized in the period the merchandise is sold, which occurs when the merchandise is shipped.
The educational services segment recognizes royalties based on the monthly revenues of the franchisees. Franchise fees are collected at various intervals prior to the opening of a school and are deferred until the franchised school has commenced operations. Real estate service fees are recognized as earned. Assignment fees relate to revenue earned for site identification and preparation for the construction of the building, including zoning permits. Assignment fees are recognized upon the closing of the purchase of the property. School tuition revenue is recognized as earned over the school year. All fees received in advance of time of recognition are recorded as unearned revenue.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Revenues increased by $51,282,000 or 122% to $93,186,000 for the year ended December 31, 2001. The Company's employer cost containment-related services segment revenues increased by $52,333,000 or 4,023% to $53,634,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000, due to the inclusion of a full year of results for this segment which was acquired on December 21, 2000 and therefore only reflected ten days of activity for the year ended December 31, 2000. The Company's seasonal products segment revenues decreased by $1,859,000 or 6% to $31,900,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000, due to impact that the economic slowdown has had on the retail market. Educational segment revenues increased by $808,000 or 12% to $7,652,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000, due to same school revenue increases and the revenue contribution made by the 14 new schools opened during 2001. 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 education system revenue, or gross revenue of all educational-based child care center franchises, increased by $13,076,000 or 18% to $85,318,000, for the year ended December 31, 2001, as compared to the same period of the prior year. This increase was generated as a result of a 17% increase in the number of educational-based child care centers, which numbered 96 and 82 as of December 31, 2001 and 2000, respectively.
Selling, general and administrative expense increased by $37,412,000 or 246% to $52,642,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000, 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 $52,000 or less than 1% for the year ended December 31, 2001 as compared to the year ended December 31, 2000. The seasonal products segment's selling, general and administrative expense decreased by $702,000 or 6% for the year ended December 31, 2001 as compared to the year ended December 31, 2000, 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 $744,000 or 32% for the year ended December 31, 2001 as compared to the year ended December 31, 2000, due to an increase in staff to accommodate this segment's growth in the number of operating locations.
Amortization and depreciation expense increased by $3,630,000 or 149% to $6,066,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000, 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 $135,000 or 6% for the year ended December 31, 2001 as compared to the year ended December 31, 2000, entirely due to the seasonal products segment's amortization expense related to goodwill recorded in connection with the payment of an earnout obligation related to Pumpkin Masters. The educational services segment amortization and depreciation expense was basically unchanged from the prior year. As discussed in Note 2 of the Notes to Consolidated Financial Statements in this Report on Form 10-K, the Financial Accounting Standards Board's newly-issued SFAS No. 141 and SFAS No. 142 have had no impact on the 2001 amortization expense of the Company but will result in reduced amortization expense of $3,200,000 for 2002.
Income tax expense increased by $1,960,000 or 172% to $3,100,000 for the year ended December 31, 2001 as compared to the year ended December 31, 2000, due to the pre-tax income effects of adding the employer cost containment-related services segment in December 2000, and an increase in the effective tax rate from 41% to 47% for the years ended December 31, 2000 and 2001, respectively. This increase in the effective tax rate in 2001 reflects the Company's amortization of goodwill acquired in the December 2000 acquisition, most of which is non-deductible for income tax purposes. After the implementation of FAS 142 the Company estimates its effective tax rate will decrease by 15% to 32% for 2002.
Security Capital reported net income of $1,425,000 for the year ended December 31, 2000. This compares to net income of $1,935,000 for the year ended December 31, 1999. The Company reported basic net income per common share of $0.17 for the year ended December 31, 2000, as compared to basic net income per common share of $0.28 for the year ended December 31, 1999. For 2000 the Company's basic net income per common share was reduced by $0.18 due to a net $1,146,000 reduction in deferred tax benefit from the utilization of its net operating loss carryforward during 1999.
Revenues increased by $4,559,000 or 12% to $41,904,000 for the year ended December 31, 2000. The Company's seasonal products segment revenues increased by $642,000 or 2% to $33,759,000, due to increased demand for its products during the third and fourth quarters of 2000, which are that segment's traditionally strongest quarters. Educational segment revenues increased by $2,616,000 or 62% to $6,844,000, for the year ended December 31, 2000, due to both the demand for its services and its inclusion for the full year of 2000 compared to nine months for 1999 due to its April 1999 acquisition. As a 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 $13,741,000 or 23% to $72,242,000, for the year ended December 31, 2000, as compared to the same period of the prior year. Total royalty revenue of the educational segment earned from system revenues increased $962,000 or 23%, for the year ended December 31, 2000, as compared to the same period of the prior year. These increases were generated from a 12% increase in the number of educational-based child care centers, which numbered 82 and 73 as of December 31, 2000 and 1999, respectively. Additionally, as of December 31, 2000, this segment had awarded 42 franchise agreements in various stages of development and construction with associated unearned revenue of $2,319,000 recorded on the Company's balance sheet
as of December 31, 2000. In December 2000, the Company acquired Health Power, a provider of cost containment-related services, and now has three segments. This new segment accounted for $1,301,000 of the increase in revenues.
Selling, general and administrative expense increased by $1,757,000 to $15,230,000 for the year ended December 31, 2000. Without taking into consideration the Health Power acquisition, selling, general and administrative expense increased by $1,010,000 for the year ended December 31, 2000, as compared to the year ended December 31, 1999. The educational segment selling, general and administrative expense increased by $793,000, primarily attributable to increasing its staff to accommodate growth and to a lesser extent its inclusion for the full year of 2000 compared to nine months for 1999 due to its April 1999 acquisition. The remainder of the increase was attributable to holding company expense incurred.
Amortization and depreciation increased by $550,000 for the year ended December 31, 2000. Without taking into consideration the Health Power acquisition, amortization and depreciation increased by $446,000 for the year ended December 31, 2000, as compared to the year ended December 31, 1999. The educational segment's amortization and depreciation expense increased by $410,000, which was primarily attributable to its inclusion for the full year of 2000 compared to nine months for 1999 due to its April 1999 acquisition. The remainder of the increase, $36,000, was attributable to the seasonal products segment.
Interest expense increased by $320,000 for the year ended December 31, 2000. Without taking into consideration the Health Power acquisition, interest expense increased by $223,000 for the year ended December 31, 2000, as compared to the year ended December 31, 1999. The seasonal products segment's expense decreased by $165,000 due to reduced average debt levels. The educational segment's interest expense increased by $401,000, which was primarily attributable to its inclusion for the full year of 2000 compared to nine months for 1999 due to its April 1999 acquisition.
The Company's income tax expense increased by $1,908,000, primarily as a result of the 1999 period reflecting a $1,347,000, benefit from the utilization of net operating losses compared to $204,000 in 2000.
Cash and cash equivalents increased by $5,785,000 from $5,777,000 at December 31, 2000 to $11,562,000 at December 31, 2001. This increase was primarily attributable to cash flow generated from the employer cost containment-related segment and timing differences in the paydown of working capital revolving credit lines in the seasonal products segment.
The Company's consolidated working capital increased by $788,000 from a deficit of $7,354,000 at December 31, 2000 to a deficit of $6,566,000 at December 31, 2001. The Company typically has a deficit working capital due to the receipt of prepaid fees at both its cost containment-related services and educational segments. This increase was attributable to an increase in accounts receivable in the employer cost containment-related services and seasonal products segments coupled with the increase in cash levels as discussed above.
The Company maintains four revolving lines of credit, with a total of $6,600,000 outstanding and $6,495,000 additional availability (net of borrowing base restrictions) at December 31, 2001. Borrowings under the revolving lines of credit may be limited to a borrowing base which could restrict availability.
Total term debt, exclusive of original issue discount but inclusive of capital lease obligations, was $44,239,000 at December 31, 2001. The Company added $7,847,000 in term debt for: an additional $5,347,000 of new term debt in conjunction with its Trigon acquisition; a warrant repurchase for Pumpkin; and a new information system for Possible Dreams. The Company made payments on its term debt and capital lease obligations of $9,458,000 during the year ended December 31, 2001, decreasing its balance to $44,239,000 at December 31, 2001. Term debt in the aggregate carried an approximate 8.38% weighted average interest rate at December 31, 2001 and an approximate 9.77% weighted average interest rate for the year ended December 31, 2001. Current maturities of term debt, exclusive of original issue discount but inclusive of current capital lease obligations, were $15,680,000 at December 31, 2001.
In a loan and security agreement with an effective date of December 31, 2001 and a funded date of January 3, 2002, Possible Dreams entered into a new financing facility with LaSalle Business Credit, Inc. that provides for a $12,700,000 revolving line of credit and two separate term loans, Term Loan A for $1,500,000 and Term Loan B for $1,800,000. Amounts drawn on the new line of credit bear interest at the prime rate or LIBOR plus 2.50%. Term Loan A and Term Loan B are payable in monthly installments through December 2004 and January 2004, respectively, with Term Loan A also requiring a balloon principal payment in December 2004 of $1,075,000. Both term loans bear interest at the prime rate plus 1/2% or LIBOR plus 3%. Borrowings under the new facility are secured by substantially all of the assets of Possible Dreams. There were $213,000 in financing costs which were deferred and will be amortized over the life of the loan.
On February 28, 2002, WC Holdings fully prepaid its $6,000,000 subordinated debt with Bank One Mezzanine which carried a 20% per annum interest rate and was due to be repaid in a balloon payment in December 2005. In addition to the principal amount, WC Holdings also was required to pay $431,000 in prepayment penalties. Cash flow from operations was sufficient to prepay this note and penalties without utilizing the Bank One revolving line of credit. WC Holdings' senior term debt with Bank One was amended to allow prepayment of the subordinated debt prior to repayment of the senior term debt and to concurrently increase the revolving facility from $4,500,000 to $5,000,000 effective February 28, 2002.
This transaction was necessary and beneficial to the Company because of the following:
1.It allowed Primrose to meet an agreed-upon deadline for its refinancing, which enables Primrose to repurchase its warrants which had been issued to the previous lender for 8.03% of Primrose's stock. These warrants are included on the Consolidated Balance Sheet at December 31, 2001 in the amount of $1,334,000 but will be repurchased by Primrose for $24. 2.It allowed Primrose-concurrently with the repurchase of these warrants-to cease recording the accretion of the warrants' value based on a multiple of their EBITDA through its income statement, thereby reducing the variability of the Company's earnings. 3.It allowed the Company to avoid a potential forbearance fee with its previous lender.
Aside from the capital lease entered into at Possible Dreams, discussed earlier in this section, the Company had no other major capital expenditures during 2001 and expects no major capital expenditures during the 2002 calendar year.
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 referred to in Item 7. The seasonal products segment businesses introduced a number of new products in their 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 12 months.
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, the Company 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.
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.
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
We have audited the accompanying consolidated balance sheets of Security Capital Corporation and subsidiaries (the "Company") as of December 31, 2001 and 2000 and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security Capital Corporation and subsidiaries at December 31, 2001 and 2000 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of the operations and cash flows of Security Capital Corporation and subsidiaries for the year ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America.
Revenues from product sales are recognized in the period in which the merchandise is shipped.
relate to revenue earned for site identification and preparation for the construction of the building, including zoning permits. Assignment fees are recognized upon the closing of the purchase of the property. School tuition revenue is recognized as earned over the school year. All fees received in advance of time of recognition are recorded as unearned revenue.
Employer cost containment-related service contract revenues are derived from claims management, administrative, consulting services and managed care administration services that are recorded as earned based on the requirements and duration of the related contracts. Revenues from the managed care administration services are recognized on a monthly basis based on the contracted administrative fee with the Ohio Bureau of Workers' Compensation. In addition, contract revenues are recorded for certain incentive awards when the claims are processed to which the incentive is related and a bonus award is recorded in the year earned. Revenues on certain contracts have been deferred and are recognized in income on a pro rata basis over the related contract periods, which typically range between 3 and 12 months. Commission expense associated with these contracts is also deferred and recognized as an expense on a pro rata basis over the related contract periods. For services related to group rating contracts, fees are paid to the group's sponsor and netted against contract revenues. Contract revenues received in advance are included in deferred revenues.
A summary of the changes in the allowance for doubtful accounts for the years ended December 31 is as follows:
Prepaid catalog costs consist of the cost to produce, print and distribute catalogs. These costs are considered direct-response advertising and, as such, are capitalized as incurred and amortized over a period which is generally less than one year. Other advertising costs which are expensed when incurred were $314, $338 and $280 for 2001, 2000 and 1999, respectively.
Financial instruments consist of current assets (except inventories), current liabilities, notes payable, long-term debt and other long-term obligations. Current assets and current liabilities are carried at cost, which approximates fair value due to the short-term nature of these items. Notes payable, the additional payment obligations and long-term debt bear interest at current market rates or at fixed rates which approximate current market rates and, accordingly, their carrying values.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 on January 1, 2001. The Company uses financial instruments to manage its exposures to movements in interest rates. The use of the financial instruments modifies the exposure of these risks with the intent to reduce the risk or cost to the Company. The Company does not use derivatives for trading purposes and is not a party to leveraged derivatives. The fair value of derivatives is recorded in the consolidated balance sheets in other long-term obligations. The Company assesses changes in the fair value of their
derivative instruments and records any changes in fair market value in the consolidated statements of income as such instruments are not being accounted for as hedges.
The Company reviews long-lived assets, including goodwill and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is determined based on future undiscounted net cash flows from the use and ultimate disposition of the asset. Impairment loss is calculated as the difference between the carrying amount of the asset and its fair value. Fair value is determined primarily by using the anticipated cash flows discounted at a rate commensurate with the risk involved. As of December 31, 2001, the Company has determined that there is no need to recognize any impairment losses.
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 (41/2 years), by charges to additional paid-in capital.
Differences between the carrying value and the face amount of the debt are amortized to interest expense over the life of the debt using the effective interest method.
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, the Company 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 impact of the adoption of this statement will be determined in 2002.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations" for a disposal of a segment of a business. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company expects to adopt SFAS 144 as of January 1, 2002 and it does not expect that the adoption of this statement to have a significant impact on the Company's financial position and results of operations.
for as a purchase, with the purchase price of $5,495 preliminarily allocated as follows based on estimated fair values at the date of acquisition.
In connection with the financing of the acquisition, the Company borrowed funds under bank credit agreements (see Notes 7 and 8). Under terms of the bank credit agreements, the borrowings are secured by a pledge of all assets of the WC Holdings businesses, and by the capital stock of WC Holdings held by the Company. The costs associated with such financing were recorded as to deferred financing costs and are being amortized over the life of the related debt agreements (see Note 1).
In April 1999, the Company purchased a 98% interest in Primrose. The results of operations of Primrose have been included in the financial statements from the date of acquisition. The Company paid $26,225 in cash, issued 500,000 shares of zero coupon redeemable convertible preferred stock
valued at $2,000, and issued a warrant to a bank to purchase shares of Primrose. The acquisition was accounted for as a purchase, with the purchase price, net of cash acquired of $838, allocated as follows:
In connection with the financing of the acquisition, the Company sold 1,136,364 shares of Class A Common Stock for $5,000 in a private placement transaction with an affiliate of the Company's controlling shareholder, and borrowed funds under bank credit agreements (see Note 8). Under terms of the bank credit agreements, the borrowings are secured by a pledge of all assets of the Primrose businesses, and by the capital stock of Primrose held by the Company.
On June 13, 2001, Pumpkin entered into a three-year loan agreement with LaSalle Business Credit, Inc. The total credit facility is $10,000, consisting of a maximum term loan amount of $2,500 and a revolving loan commitment of $7,500. 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, including $900 to repurchase the full amount of outstanding warrants) and to pay the closing costs of the refinancing ($100).
Primrose's agreement is a $1,500 line of credit, under which $600 and $500 were borrowed at December 31, 2001 and 2000, respectively, at the greater of the prime rate plus 2% or the federal funds rates plus 3.5% (6.75% and 11.5% at December 31, 2001 and 2000, respectively). Additional borrowing capacity under the line was $141 at December 31, 2001. The agreement expires in 2005.
The Company has a tax sharing agreement with its subsidiaries, under which income tax liabilities at each subsidiary are determined on a stand-alone basis, with amounts payable to Security Capital as the consolidated taxpayer. With respect to Possible Dream's, Pumpkin's, Primrose's and WC Holdings and subsidiaries' term loan and bank credit arrangements, any amounts remitted to Security Capital in excess of amounts approved by the lenders are required to be set aside, and are pledged to the lenders as additional collateral for the borrowings at such subsidiaries. At December 31, 2001, no such amounts were set aside and pledged as collateral under such arrangements.
On June 13, 2001, Pumpkin entered into a three-year loan agreement with LaSalle Business Credit, Inc. The total credit facility is $10,000, consisting of a maximum term loan amount of $2,500 and a revolving loan commitment of $7,500. On June 14, 2001, Pumpkin used the new financing facilities to retire all amounts owing to Banc of America Commercial Finance Corporation ($3,247, including $900 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 or LIBOR plus 2.5%. Principal repayments are due as follows: $625 in 2001, $1,250 in 2002 and $625 in 2003. The revolver bears interest at the prime rate or LIBOR rate plus 2.5% and runs for three years through June 2004.
At December 31, 2001, future minimum lease payments under the capital lease obligation for the periods ending December 31 are as follows:
The Company has 2,500,000 shares of authorized preferred shares, $.01 par value, of which 2,000,000 shares remain issuable at December 31, 2001 and 2000.
The owners of the minority interests in Health Power, Pumpkin and Primrose have each entered into agreements with the Company providing for restrictions on the transfer of such shares, and other related share restrictions.
WC Holdings-Options to acquire 1,281 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. All such options vest over a five-year period with the exception of one grant of 360 options which vests over an eight-year period but is subject to certain acceleration provisions. If all such outstanding options had been vested and exercised at December 31, 2001, the Company's ownership share of Health Power would have been 73.47%.
Possible Dreams-Options to acquire 175 shares of Possible Dreams at approximately $1,900 per share were granted in 1996, which were cancelled on January 1, 2000. Options to acquire 87.5 shares at $1,905 per share (fair value at date of grant) and 87.5 shares at $3,810 per share of Possible Dreams stock were granted on July 1, 2000. Such options vest over five years and expire in 2009. The Company, but not the holder, has the right to settle the options in cash. In addition, warrants to purchase 250 shares of Possible Dreams Class B common shares were issued in 1996 and remain outstanding at December 31, 2001. The warrants are exercisable at the earlier of (1) May 17, 2001 or (2) repayment in full of the acquisition note and any related interest, at a price of $.01 per share and expire in 2006. Such Class B common shares would be non-voting, but would be convertible at the option of the holder into Class A voting common shares. The holder may exercise the warrants for cash. If all such outstanding options and warrants had been exercised for Possible Dream's shares at December 31, 2001, the Company's ownership share of Possible Dreams would have been 77.88%.
Pumpkin-Options to acquire a total of 39 Class A common shares of Pumpkin at $1,754 per share (fair value at date of grant) were issued in 1997 and 1998. Of these options, nine were settled for cash at their existing liability value of $82,000 on June 7, 2001 and three were settled for cash at their existing liability value of $17,000 on June 25, 2001 when the holders exercised their rights to settle the options for cash. The remaining 27 options are fully vested and expire in 2007 and 2008. On July 1, 2001, the Company granted options to acquire 27 shares of Pumpkin at the fair market value on the date of the grant, which was $9,111 per share. For all 54 outstanding options, the Company, but not the holder, has the right to settle the options in cash at the earlier of: (1) June 27, 2003 (2) repayment in full of the acquisition note and any related interest or (3) any time after average EBITDA exceeds $2,500 for a four consecutive fiscal year period commencing in 1997. If all such outstanding options had been exercised for Pumpkin shares at December 31, 2001, the Company's ownership share of Pumpkin would have been 75.25%.
Primrose-Options to acquire 2,311 common shares of Primrose at $500 per share (market value at date of grant) were issued in 1999 and expire in 2009. On June 18, 2001 and September 30, 2001, the Company cancelled 346.67 and 288.89 options, respectively, held by two former officers of Primrose. The options vest 20% per year beginning on the first anniversary of the grant. Of the 1,675.56 options outstanding at December 31, 2001, 670.22 options are fully vested. The Company, but not the holders, has the right to settle the options in cash. Warrants to acquire 2,415.3 shares of Primrose at $.01 per share were issued in connection with the acquisition in 1999. The holder may exercise the warrants at the earlier of (1) April 6, 2004, (2) any public offering of Primrose pursuant to a registration statement, a private placement or otherwise or (3) any private sale of Primrose representing 20% or more of Primrose stock, for shares of Primrose, exchange value of the warrants for an equivalent value of shares of Security Capital, or be paid for the value of the warrants in cash. If all such outstanding options and warrants had been exercised for Primrose shares at December 31, 2001, the Company's ownership share of Primrose would have been 85.08%.
Warrants to acquire shares of Possible Dreams and Primrose are redeemable at the election of the warrant holders for cash. The estimated fair value of the warrants are recorded as liabilities and changes in the estimated fair value of the warrants during a period are included in the results of operations. Warrant income (expense), classified as "Other income (expense)" was $74,000, $(559,000) and $(290,000) for the years ended December 31, 2001, 2000 and 1999, respectively (see Note 15). The warrant income for the year ended December 31, 2001 included $176,000 in income recognized when Pumpkin's warrants were repurchased for less than their recorded value as part of Pumpkin's debt refinancing discussed (in Note 8). Long-term warrant liabilities, included in "Other long-term obligations," were $1,334,000 and $2,171,000 at December 31, 2001 and 2000, respectively. Current warrant liabilities included in "Accrued expenses and other liabilities" were $718,000 and $855,000 at December 31, 2001 and 2000, respectively.
participate. Under these plans-some of which provide for Company matching contributions-participants may elect to make pre-tax contributions of up to 15% of their eligible earnings. The Company's matching contributions were $424, $25 and $0 for the years ended December 31, 2001, 2000 and 1999, respectively.
Options granted under the 2000 Long-Term Incentive plan are exercisable at the market price at the date of grant and, subject to termination of the grantee's employment or directorship, expire 10 years from the date of grant and are not transferable other than upon death. Of the 810,000 options outstanding at December 31, 2001, 738,000 are exercisable in five equal annual installments commencing one year from the date of grant and 72,000 are exercisable in three equal annual installments commencing on the date of the grant.
Pro forma information regarding net income and earnings per share as required by Statement 123 has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2001 and 2000: risk-free interest rate of 4% and 5.16%, respectively; dividend yield of 0% and 0%, respectively; volatility factor of the expected market price of the Company's common stock of .238 and .320, respectively; and a weighted-average expected life of the options of 8.5 and 9.5 years, respectively.
For the purpose of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows:
At December 31, 2001, the Company had net operating loss carry-forwards for Federal income tax purposes of approximately $13,500, the expiration dates of which are as follows: 2004-$10,401, 2005-$2,430, 2007-$398, 2008-$132, 2009 and thereafter-$139.
The items comprising the Company's net deferred tax assets are as follows at:
At December 31, 2001, 2000 and 1999, 500,000 shares of zero coupon redeemable convertible preferred shares, which were convertible into 500,000 common shares, and its related accretion was 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 and warrants were also excluded from the computation of diluted EPS at December 31, 2001, 2000 and 1999 because their inclusion would have had an antidilutive effect on consolidated EPS.
The Company has an agreement with Capital Partners, Inc. ("CPI"), a shareholder of the Company. CPI and its affiliates and principals owned 83% of the Company's common shares at both December 31, 2001 and 2000. Under the agreement, CPI provides certain advisory services and
management services related to investments, general administration, corporate development, strategic planning, stockholder relations, financial matters and general business policy. Fees paid by the Company to CPI are based upon the greater of either a fixed dollar amount or 5% of earnings before income taxes, depreciation and amortization, as defined. Subsequent to the acquisition of WC Holdings, the minimum annual fixed dollar amount is $1,085. Fees paid to CPI are generally subordinate to the rights of the lenders to the Company. In addition, the Company has agreed to pay fees to CPI for acquisition opportunities presented to the Company by CPI at usual and customary rates for investment banking fees for transactions of similar size and complexity. The agreement is renewable annually. Fees incurred by the Company to CPI were $1,191, $1,153 and $1,092 in the years ended December 31, 2001, 2000 and 1999, respectively, and are included in selling, general, and administrative expenses in the Consolidated Statements of Income. Amounts due to CPI were $266 and $188 at December 31, 2001 and 2000, respectively.
Future minimum rental commitments at December 31, 2001 are as follows:
WC Holdings, Inc. subsidiaries earned 84% of its revenues in the state of Ohio.
Pursuant to the provisions of the 2000 Long-Term Incentive Plan, on February 1, 2002, the Company granted options to a director to acquire 24,000 shares of its Class A common stock at an exercise price per share equal to market value, which was $9.65. These 24,000 options vest over a three-year period, with one-third vesting immediately upon grant and the remaining two-thirds vesting equally on each of the first and second anniversaries of the grant. Subject to termination of the grantee's directorship, these options expire ten years from the date of grant and are not transferable other than on death.
In a loan and security agreement with an effective date of December 31, 2001 and a funded date of January 3, 2002, Possible Dreams entered into a new financing facility with LaSalle Business Credit, Inc. that provides for a $12,700 revolving line of credit and two separate term loans, Term Loan A for $1,500 and Term Loan B for $1,800. Amounts drawn on the new line of credit bear interest at the prime rate or LIBOR plus 2.50%. Term Loan A and Term Loan B are payable in monthly installments through December 2004 and January 2004, respectively, with Term Loan A also requiring a balloon principal payment in December 2004 of $1,075. Both term loans bear interest at the prime rate plus 1/2% or LIBOR plus 3%. Borrowings under the new facility are secured by substantially all of the assets of Possible Dreams. There were $213 in financing costs which were deferred and will be amortized over the life of the loan.