CompManagement leases a 70,000 square foot office building in Dublin, Ohio, which is used as its principal office facilities. The lease for the building is for a term of 15 years, which began in 1997, provides for annual rent payments, and requires CompManagement to pay all operating expenses for the building. The lease also provides for, among other things, three renewal options of five years each, an option to purchase the building, and a right of first offer with respect to the sale of such building. The lease restricts CompManagement's ability to distribute funds and/or assets to Health Power, Inc. or another affiliate unless CompManagement meets certain tangible net worth requirements. CompManagement also leases office space in Akron, Cincinnati, Cleveland, and Toledo, Ohio; Seattle, Washington; Charleston, West Virginia; Lexington, Kentucky; Richmond and Fairfax, Virginia; and Columbia, Maryland. These spaces are used as regional offices and service centers for its operations.
There are certain accounting policies that the Company believes are critical to its business and the understanding of its financial statements. These policies are discussed below. In addition, the
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company's management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. The Company's accounting policies are disclosed in the Notes to Financial Statements in this Annual Report on Form 10K. The more critical of these policies include revenue recognition, business combinations and use of management estimates.
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 recorded as deferred revenues.
Acquisitions are accounted for under the "purchase method" requiring the Company to record acquired tangible and intangible assets and assumed liabilities at fair value. The valuation of acquired assets and the resulting goodwill required certain estimates and assumptions that affect amounts reported in the Company's financial statements. Amounts recorded for tangible and intangible assets affect future results of operations through depreciation and amortization expense. In addition, all acquired assets, including goodwill, are subject to tests for impairment. Starting January 1, 2002, the Company, under SFAS No. 142 "Goodwill and Other Intangible Assets", must test goodwill for impairment at least annually, or more frequently if indications of possible impairment exist, by comparing the net assets of each "reporting unit" (an organizational grouping) with the current fair value of the reporting unit. If the current fair value of the reporting unit is less than its carrying amount, then a second test must be performed. Under the second test, the current fair value of the reporting unit is allocated to the assets and liabilities of the reporting unit, including an amount for any "implied" goodwill. If implied goodwill exceeds the net carrying amount of goodwill, no impairment loss is recorded. Otherwise, an impairment loss is recognized for the difference.
Significant estimates included within the financial statements include sales return and discount reserves, allowance for doubtful accounts, inventory obsolescence reserves, the fair value of carryforward tax benefits, and the fair value and economic lives of intangible assets.
Security Capital reported net income of $2,835,000 for the year ended December 31, 2001. This compares to net income of $1,425,000 for the year ended December 31, 2000. The Company reported basic net income per common share of $0.39 for the year ended December 31, 2001, as compared to basic net income per common share of $0.17 for the year ended December 31, 2000. This increase was primarily attributable to the inclusion in the 2001 results of the employer cost containment-related segment, acquired in late December 2000, coupled with the beneficial effects of lower interest rates on the Company's variable rate debt in 2001 and reduced debt levels in 2001 as compared with December 31, 2000 as partially offset by lower sales volumes at the seasonal products segment during 2001.
Interest expense increased by $2,384,000 or 69% to $5,826,000 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, interest expense decreased by $651,000 or 19% for the year ended December 31, 2001 as compared to the year ended December 31, 2000 with the major factors being lower interest rates on all of the Company's variable rate debt and reduced average debt levels.
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. In 2001 and 2000, the seasonal products segment received orders representing approximately 41% and 35% of its annual bookings during the first and second quarters, respectively. Possible Dreams and Pumpkin ship products throughout the year, with approximately 61% of their combined 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.
The Company's subsidiary, Possible Dreams, entered into a capital lease for an information system to replace its information system during the first quarter of 2001. The total net present value reflected in the December 31, 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 during the first quarter of 2002 when the lease payments and depreciation of the fixed asset will begin.
The Company refinanced its debt at Primrose on April 5, 2002. The terms of the new debt are as follows: $3,200,000 term loan repayable at $624,000 per quarter beginning July 15, 2002 bearing interest at an interest rate of prime plus 2.0%, an additional $4,000,000 of non-amortizing term debt with a balloon payment due in September 2003 bearing interest at LIBOR plus 1.0% and a revolving facility of $1,000,000 (of which $681,000 was drawn at closing) bearing interest at LIBOR plus 3.0% or Prime plus 0.5% expiring in September 2003. To secure this debt, Primrose has pledged all of its assets, Primrose Holdings and the Company has guaranteed the debt and the Chairman of the Company has issued a personal guarantee for $4,000,000 for which he will receive a guarantee fee of 8% per annum of the declining average quarterly balance of his guarantee. This fee has been approved by both the Audit Committee and the Board of Directors. This guarantee entitles the Chairman to a subordinated interest in Primrose's assets, and Primrose agrees to reimburse the Chairman for any amount paid by him on this guarantee. In addition, the Company agrees to reimburse the Chairman for any amount paid by him on his guarantee in the event Primrose fails to reimburse him. The Company will use its best efforts to relieve the Chairman of his personal guarantee through the Company's setting aside of funds in a designated reserve bank account. The Company estimates that it can reserve approximately $4,000,000 (the full amount of the Chairman's guarantee) by December 2002 or January 2003.
In the second quarter of 2002, the Company will record a gain on the early extinguishment of debt associated with this Primrose refinancing of approximately $400,000 relating to the repurchase of warrants net of the write-off of original issue discount and deferred financing costs associated with the original debt.
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 $5,495,000. In conjunction with this purchase, Health Power's loan agreement was amended during the first quarter of 2001, and Health Power converted the revolver balance to term during the third quarter of 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.
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 appliation encouraged. The Company expects to adopt SFAS 144 as of January 1, 2002 and it does not expect the adoption of this statement to have a significant impact on the Company's financial position and results of operations.
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 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, the 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
The amounts reflected in the 2001 quarterly table above include a restatement to record the fair value of a derivative instrument which was entered into to modify the risk of interest rate fluctuations. The net effect of this adjustment was to (reduce) increase the first, second, and third quarters' net (loss) income as reported by $(150), $28 and $(174), respectively. The net effect of this adjustment was to (reduce) increase the first, second and third quarters' basic (loss) earnings per common share as reported by $(0.02), 0.01 and $(0.03), respectively. The net effect of this adjustment was to (reduce) increase the first, second and third quarters' diluted (loss) earnings per common share as reported by $(0.02), 0.01 and $(0.02), respectively.
We have audited the accompanying consolidated statements of income, stockholders' equity, and cash flows of Security Capital Corporation and subsidiaries (the "Company") for the year ended December 31, 1999. 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 audit.
Security Capital Corporation ("Security Capital") operates as a financial buyer of established companies as portfolio investments. Primarily, Security Capital participates in the management of its portfolio companies at the board level, and encourages operating autonomy and preservation of entrepreneurial environments. Currently, Security Capital has four portfolio subsidiary activities (together with Security Capital, referred to as the "Company"), known as Health Power, Primrose, Pumpkin, and Possible Dreams. WC Holdings Inc. is a wholly-owned subsidiary with an 80% equity interest in Health Power, Inc. Health Power-through its wholly-owned subsidiary CompManagement, Inc.-provides services to corporations and their employees primarily relating to workplace health and safety occupational medical care, workers' compensation insurance and employee benefits costs. CompManagement's activities are centered primarily in Ohio and to a lesser extent in Indiana, Kentucky, Pennsylvania, West Virginia, and Washington. Primrose is a 98.5%-owned subsidiary involved in the franchising of educational child care centers, with related activities in real estate consulting and site selection services. Primrose also operates one child care center. The Primrose activities are primarily based in the southern, central and western 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 Christmas, everyday and other figurines and ornaments, primarily in the United States.
The accompanying consolidated financial statements include the accounts of Security Capital and its subsidiaries. All significant intercompany balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.
Primrose 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
Shipping and handling fees and costs are included in the cost of revenues of the seasonal products segment.
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Inventories are principally comprised of finished goods and are stated at the lower of cost or market using the first-in, first-out method.
Property and equipment are carried at cost, less accumulated depreciation. Significant renewals and betterments to property and equipment are capitalized, and maintenance and repairs that do not improve or extend the lives of the assets are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 27 years. Leasehold improvements are amortized over the shorter of the useful life or the lease term.
Goodwill relates to the cost in excess of the fair value of the net assets acquired in the purchase business combinations of Possible Dreams, Pumpkin, Primrose, WC Holdings and Trigon. Goodwill is being amortized over periods of 20 to 25 years. Patent rights, acquired in such acquisitions, are amortized over 9 to 17 years.
Deferred financing costs are amortized over the term of the related debt to interest expense using the effective income method.
Franchise agreements, curriculum and non-compete agreements related to Primrose are being amortized over periods of 21, 10 and 2 years, respectively. Remaining lives of the franchise agreements and curriculum are 18 and 7 years, respectively. The non-compete agreements were fully amortized by the end of 2001. Health provider costing lists relate to WC Holdings and are being amortized over the 4.75 years remaining life of WC Holdings access to the costing data. All such assets are being amortized on a straight-line basis.
The Company measures compensation cost for stock options issued to employees using the intrinsic value method of accounting for stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB 25, when the exercise price of the Company's stock options equals the market value of the underlying stock on the date of the grant, no compensation expense is recognized. The Company has adopted the disclosure only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." See notes 12 and 14 for a summary of the pro forma effects to reported net income as if the Company had decided to recognize compensation cost based on the fair value of the options granted as prescribed by SFAS No. 123.
Basic earnings per common share amounts are based on the weighted average number of Common and Class A Common shares outstanding. The sum of Common Stock and Class A Common Stock is used because the two classes are identical except for certain transfer restrictions. Diluted earnings per
common share are based on the weighted average shares outstanding and the dilutive effect, if any, of outstanding stock options of both the subsidiaries and the parent and convertible securities.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets", (the "statements") effective for fiscal years beginning after December 15, 2001 for pre-July 1, 2001 goodwill and other intangibles. 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. These pronouncements had no impact on the 2001 amortization expense of the Company but will result in reduced amortization expense of $3,200 for the year ended December 31, 2002.
On April 1, 2001, the Company's subsidiary, Health Power, Inc., acquired 100% of the outstanding common stock of Trigon Administrators, Inc., a third party administrator in Virginia, Maryland, and North Carolina. The results of operations of Trigon Administrators for the nine months ended December 31, 2001 have been included in the financial statements. The acquisition has been accounted
The amounts above are reflective of final purchase price allocations made during 2001. Goodwill increased by $1,163 during 2001 due to these final purchase price allocations.
The following unaudited pro forma financial information presents the combined results of the Company, Health Power, Inc and Trigon as if the acquisitions had taken place on January 1, 2000. It also includes Primrose as if the acquisition had taken place on January 1, 1999. 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:
WC Holdings, Possible Dreams, Pumpkin and Primrose each have short-term borrowing facilities under bank credit agreements. Each such agreement contains restrictive covenants which prohibit or limit certain actions, including levels of capital expenditures, investments and incurrence of additional debt, and which require the maintenance of defined levels of profitability and tangible net worth. As a result, substantially all of the subsidiaries net assets are limited from being transferred to the parent company.
Pumpkin recorded a contingent earnout obligation to its former owners that was earned on December 31, 2000. The amount recorded was determined based upon the average EBITDA during the four-year period ended December 31, 2000. The former owners are entitled to an earnout amount of $1,812, which is included in long term debt. The earnout obligation is subordinated to Pumpkins term note and revolving loan and is due in 2004.
On March 31, 2001, the Company's subsidiary, Health Power, amended its existing loan agreement relating to the lender's consent to the Trigon acquisition discussed in Note 3. The lender consented to the use of $6,000 of Health Power's revolving line of credit to pay for such acquisition, which was later reduced for purchase price reductions to $5,347, and the amendment of the ratio of funded
indebtedness to EBITDA covenant. During the third quarter of 2001, Health Power, Inc., converted the $5,347 revolver balance still outstanding from the total $6,000 it had drawn in April to term debt. This conversion was accomplished by increasing the existing term loan with Bank One, which is senior term debt payable in monthly installments through January 2007. It carries an interest rate of prime minus 1/2% or LIBOR plus 1.75% (3.89% at December 31, 2001). Concurrent with this conversion, the revolving facility was reduced from $8,000 to $4,500. Subsequent to year-end on February 28, 2002, the revolving facility was increased to $5,000 (see Note 22).
WC Holdings' subsidiary Health Power, Inc.'s agreement is a $4,500 line of credit at December 31, 2001 ($8,000 at December 31, 2000) under which $0 and $1,000 were borrowed at December 31, 2001 and 2000, respectively, at an interest rate of LIBOR plus 175 basis points (4.25% and 9% at December 31, 2001 and 2000, respectively).
Pumpkin's agreement at December 31, 2001, therefore, is a $7,500 line of credit, under which borrowing capacity is limited to a defined borrowing base. Interest is calculated at the prime rate or LIBOR plus 2.5% (4.75% at December 31, 2001) as compared to the interest rate on the revolving facility in effect at the prior year-end which was at the commercial paper rate plus 4.25% (10.61% at December 31, 2000). There were no borrowings outstanding at either balance sheet date. Borrowing capacity under the revolving facilities was $1,095 (under the new facility) and $1,560 (under the old facility) at December 31, 2001 and 2000, respectively. The new agreement expires in 2004.
Subsequent to year-end, certain debt obligations of the Company were refinanced. See Note 22 for details and for the Company's maturity schedule reflective of these refinancings.
Consistent with the bank lines of credit, most of the Company's long-term obligations carry restrictive covenants which prohibit or limit certain actions, including levels of capital expenditures, investments and incurrence of additional debt, and which require the maintenance of defined levels of profitability and tangible net worth. Most borrowings are secured by a pledge of substantially all assets at the subsidiary level, as well as by a pledge of the Company's share ownerships in the subsidiary.
Management expects to be in compliance with the covenants on all debt in the foreseeable future. Borrowings under the agreements are secured by a pledge of substantially all of the Company's assets as well as a pledge of the Company's share ownerships in the subsidiaries.
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 effective January 1, 2001. To manage interest rate risk, the corporation has entered into an interest rate swap on December 20, 2000, that effectively fixes the interest payments of its floating rate debt instruments. The impact of adoption was not material. This derivative instrument is not designated as a hedge for financial accounting purposes. The fair market value is therefore recorded in other long-term obligations, and the change in fair value is recognized in the consolidated statements of income in "other expense".
As of December 31, 2001, the unrealized derivative loss was $529 which was determined by quoted market prices. The maturity date of the derivative instrument was December 22, 2005. At December 31, 2001, the notional principal amount of this agreement was $8,500.
During the first quarter of 2001, Possible Dreams entered into a capital lease for computer equipment that expires in the first quarter of 2007. At December 31, 2001, property and equipment included the equipment under this capital lease with a cost of $607. Possible Dreams will begin amortizing this cost over the sixty-month lease term beginning on the date of final installation of the equipment, currently scheduled for the first quarter of 2002.
WC Holdings leases computer equipment under an agreement which is classified as a capital lease. At December 31, 2001, property and equipment included the equipment under this capital lease with a cost of $173. At December 31, 2001, future minimum lease payments under the capital lease obligations for the periods ending December 31 are as follows:
The Company has issued and outstanding 500,000 shares of zero coupon, redeemable, preferred stock, that have a stated liquidation value of $10 per share. Such preferred shares are convertible into Class A common stock on a 1:1 basis. The preferred shares are redeemable at the option of the Company at their liquidation value upon the earlier of (1) the date Primrose's earnings before interest, income taxes, depreciation and amortization ("EBITDA") as defined, exceeds $8,500 on a latest twelve month basis on or after April, 2002, or (2) on April 6, 2006. EBITDA for Primrose was $3,242 for the year ended December 31, 2001.
The authorized capital of the Company consists of Common Stock and Class A Common Stock. The Class A Common Stock shares are identical in rights to the Common Stock shares, except that transfer of shares of the Class A Common Stock is prohibited to a person who is, or would thereby become, a holder of 4.75% or more of the fair market value of the Common Stock and the Class A Common Stock.
During 2000, the Company retired all of the 318,575 shares then held in its treasury, returning them to their status of authorized and unissued shares of Common and Class A Common Stock. During 2001, the Company acquired 7,722 shares of Class A Common Shares when a director who resigned for personal reasons decided to exercise his vested stock options utilizing 7,722 of his previously-owned shares in lieu of cash to pay the option price due to the Company with regard to the 16,000 options he was exercising.
Pursuant to the provisions of the 2000 Long-Term Incentive Plan (which allows for the grant of up to 966,000 shares), on July 13, 2000, the Company granted options to acquire 549,000 shares of its Class A common stock at market value, which was $6.125. Of the 549,000 options granted, 48,000 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, while the remaining 501,000 vest over a five-year period in equal 20% amounts beginning on the first anniversary of the grant and annually thereafter. Additional grants, also pursuant to the provisions of the 2000 Long-Term Incentive Plan, were made during the year ended December 31, 2001 as follows: On May 16, 2001, the Company granted options to acquire 24,000 shares of its Class A common stock at an exercise price per share equal to market value, which was $10.31. 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. On July 19, 2001, the Company granted options to acquire 237,000 shares of its Class A common stock at an exercise price per share equal to market value, which was $10.85. These 237,000 options granted vest over a five-year period in equal 20% amounts beginning on the first anniversary of the grant and annually thereafter. On September 7, 2001, the Company granted options to acquire 24,000 shares of its Class A common stock at an exercise price per share equal to market value, which was $12.69. 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. The Company, not the holder, has the right to settle the options in cash.
As mentioned above, pursuant to the provisions of the 2000 Long-Term Incentive Plan, a director who resigned for personal reasons decided to exercise 16,000 vested options to purchase the Company's Class A common stock in October 2001. This resulted in a net increase in Class A shares outstanding of 8,278 when he used 7,722 previously-owned shares in lieu of cash to pay the option price due to the Company. These options would have otherwise expired 90 days after the August 17th termination of his
The minority shareholders of Pumpkin have the right to put their shares of Pumpkin to the Company for cash and the Company has the right to call the shares for cash upon the earlier of (1) June 2003, (2) payment in full of the acquisition indebtedness or (3) anytime after Pumpkin's average EBITDA exceeds $2,500 for a four year period commencing in 1997. The put and call price is determined by using a formula based on EBITDA. At the mutual agreement of the parties, settlement can occur in Security Capital Common Stock. If the senior lender (see note 9) objects to settlement in cash, the Company may issue a subordinate note. Future cash settlement of such puts and calls would result in additional purchase price consideration payable to the former owners of Pumpkin and would result in the recording of additional goodwill relating to the acquisition.
On April 3, 2001, the Company exercised its call provision relating to shares of Primrose owned by a then exiting officer. The Company repurchased 100 shares, or 0.3%, of Primrose from this officer for $50, increasing its direct ownership to 98.46%. The additional amount paid was reflected as additional cost of the acquisition of Primrose.
Compensation expense for the subsidiary options discussed above under SFAS 123 using the minimal value method and assumptions as per Note 14 would be $101, $57 and $0, for the years ended December 31, 2001, 2000, and 1999, respectively.
A summary of the Company's stock option activity and related information for the year ended December 31:
In 1999, the Company sold 1,136,364 shares of Class A Common Stock for $5,000 in a private placement to an affiliate of the Company's controlling stockholder (see Note 3).
A director who joined the Board during 2001 is a senior counsel in a law firm, which the Company engages on a regular basis to perform legal services. Total amounts paid to the law firm were $111, $64 and $437 for the years ended December 31, 2001, 2000 and 1999, respectively.
The Company rents showrooms, office space and certain equipment under operating lease agreements. The Company through its subsidiary, WC Holdings, leases a 70,000 square foot office building in Dublin, Ohio that is used as this subsidiary's principal office facilities. The lease for the building is for a term of 15 years, which began in 1997, provides for annual rent payments and requires the Company to pay all operating expenses for the building. The lease also provides for three renewal options of five years each, an option to purchase the building between the fourth and fifth years of the lease term at a price determined under a formula based on the rentable and unimproved square footage of the building, and a right of first offer to purchase the building before the landlord enters into a contract to sell the building to a third party. The lease restricts WC Holdings' subsidiary, CompManagement, Inc., from paying a dividend, or otherwise distributing funds or assets outside the ordinary course of business to Health Power, Inc. or another affiliate unless CompManagement, Inc. meets certain tangible net worth requirements. WC Holdings also leases office space in Akron, Cincinnati, Cleveland and Toledo, Ohio; Richmond and Chantilly, VA; Seattle, Washington; Charleston, West Virginia; and Lexington, Kentucky. These spaces are used as regional offices and service centers for its operations. Certain office and school space with leases expiring in April 2002, included in the following table, is rented by Primrose from Security Capital's redeemable preferred stockholder for which the rental expense will be $46 for 2002. The Company also has operating leases at other subsidiaries which contain renewal options and escalation clauses.
The Company had rent expense of $3,670, $563 and $362 for 2001, 2000 and 1999, respectively. Total rent expense includes amounts paid by WC Holdings to related parties of $177 and $174 in 2001 and 2000, respectively.
Pumpkin and Possible Dreams are parties to agreements with certain artists and inventors which require payment of royalties based upon a percentage of net sales of certain products and other formulas as stated in the agreements. Under these agreements, the Company had royalty expense of $224, $226 and $315 in 2001, 2000 and 1999, respectively.
Possible Dreams purchased approximately 82% and 76% of its supplies from two companies during 2001 and 2000, respectively. The loss of either supplier could have an adverse effect on future operating results and financial condition.
The Company is party to several legal actions arising in the ordinary course of business. In management's opinion, the Company has adequate legal defenses to these actions, such that the resolution of such matters will not have a material effect on the financial position or future operating results of the Company.
Total assets of Security Capital (the holding company) net of investments in and amounts due from subsidiaries was approximately $474 and 735, which includes approximately $405 and $200, of current assets at December 31, 2001 and 2000, respectively. In addition, the redeemable convertible preferred stock discussed in Note 9 is a holding company obligation. Holding company revenues were: $1,101, $688, and $67 for the years ended December 31, 2001, 2000, and 1999, respectively. Holding company expenses were: $1,730, $1,241, and $1,003 for the years ended December 31, 2001, 2000, and 1999, respectively.
Following the 2000 acquisition of WC Holdings and the 1999 acquisition of Primrose, the Company has three segments. The employer cost containment-related services segment consists of WC Holdings which, through its subsidiary Health Power, provides services to corporations and their employees primarily relating to industrial health and safety, industrial medical care and workers' compensation insurance. The seasonal products segment consists of Pumpkin and Possible Dreams. The Company's activities principally are in the design, importing and manufacturing of Halloween and Christmas products. The educational services segment consists of Primrose. Management evaluates performance of its segments based upon 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. The accounting policies of the segments are the same as those described in Note 1. There are no intersegment sales.
In the second quarter of 2002, the Company will record a gain on the early extinguishment of debt associated with this Primrose refinancing of approximately $400 relating to the repurchase of warrants net of the write-off of original issue discount and deferred financing costs associated with the original debt.