Primrose School Franchising Company leases a 4,500 square foot building in Cartersville, Georgia where it maintains all its operations, sales and administrative facilities. The Company also leases 2,000 square feet in an adjacent building where it maintains its real estate and development facilities.
Primrose Country Day School leases a campus consisting of three sets of building with a total of 8,000 square feet located in Georgia where it maintains its educational child care operations.
Revenues increased by $7,327,000 to $37,345,000 for the year ended December 31, 1999. This represents an increase of 24% for the year ended December 31, 1999. Without taking into consideration the acquisitions of Our Kids in September 1998, and Primrose, the educational segment, in April 1999, revenues increased by $2,828,000 for the year ended December 31, 1999, as compared to the year ended December 31, 1998. The increase was primarily attributable to demand for the Company's seasonal products segment during the third and fourth quarters of 1999, which are that segment's traditionally strongest quarters. Educational segment revenues were $4,228,000 for the year ended December 31, 1999. As a measure of the increasing success of the educational segments 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 $14,335,000, or 32%, for the year ended December 31, 1999, as compared to the historical pre-acquisition records of that segment. Total royalty revenue the educational segment earned from system revenues increased $1,016,000, or 34%, for the year ended December 31, 1999, as compared to the historical pre-acquisition records of the educational segment. These increases were generated from an 18% increase in the number of educational based childcare centers, which was 73 and 62 as of December 31, 1999 and 1998, respectively. This segment has awarded 31 franchise agreements with associated unearned revenue of $1,631,000 recorded on the Company's balance sheet as of December 31, 1999. This segment has recently increased its support staff to a level sufficient to accommodate growth of up to 24 educational based childcare centers per year.
Depreciation and amortization increased by 32% to $888,000 for the year ended December 31, 1998 from $671,000 for the year ended December 31, 1997. The Company's 1998 depreciation and amortization expense was 32% greater than the previous year as a result of Pumpkin's acquisition occurring during the middle of the prior year.
Interest expense was also impacted by the timing of Pumpkin's acquisition. Interest expense for calendar year 1998 was up slightly by $232,000 to $2,385,000. The Company's increased interest cost in 1997 was due to the impact of the timing of the Pumpkin acquisition in June 1997 of the prior year. In 1998, interest cost savings resulted from the payment during 1998 of $2,027,000 of the Company's term loans.
The Company decreased the valuation allowance for the deferred tax asset by $1,149,000 and $1,444,000 for the years ended December 31, 1998 and 1997, respectively, attributable to the Company's expected utilization of its net operating loss carry forward.
On July 17, 1997 the Company sold, effective June 30, 1997, its beneficial interest in FIS, a Texas corporation, to Bowen, Miclette, Descant and Britt for consideration of $1,526,000 and recognized a gain of approximately $1,149,000 (net of tax). In an unrelated transaction, the Company in December 1997 sold Foster Insurance Managers Inc. ("FIM") for $265,000 in cash to Tri-Star Insurance Services, Ltd., a Kentucky corporation. The Company recognized no gain as part of this transaction. The Company no longer has any interest in the insurance brokerage business as a result of these two transactions.
The Company's education segment maintains a $2,500,000 revolving line of credit, which had a balance of $500,000 outstanding and $2,000,000 available at December 31, 1999. The seasonal products segment, in aggregate, maintains a revolving line of credit, which had a balance of $750,000 outstanding and $4,492,000 available at December 31, 1999. The low balance was due to its seasonal pattern. Portions of the revolving lines of credit may be limited to a borrowing base as defined in the note to these financial statements.
In connection with the Primrose acquisition on April 6, 1999, the Company issued 500,000 shares of Zero Coupon Convertible Redeemable Preferred Stock with a liquidation value of $10 per share and valued at $2,000,000. The Company also sold 1,136,364 shares of Class A Common Stock in a private placement for $5,000,000 or $4.40 per share, which used the proceeds for the Primrose acquisition.
At this time Security Capital does not have reserves of internal funds on hand available for new acquisitions. However, the Company believes it has the ability to acquire such funds if and when the Company deems it necessary to compete for possible future acquisitions. As of March 20, 2000, Security Capital had approximately $2,196,000 of cash and cash equivalents on hand. The Company's subsidiaries all have sufficient cash and cash equivalents on hand or available through their respective revolving lines of credit at March 20, 2000, to meet their respective working capital and operating expenditure requirements for the remainder of calendar year 2000.
The Company had no major capital expenditures during the calendar year 1999 and expects no major capital expenditures during the calendar year 2000.
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, 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. The Company has introduced a number of new products in its target markets in 1999 and 1998, and plans to introduce additional products in 2000 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 the foreseeable future, although there can be no assurance in this regard.
The Company has assessed the impact of the Year 2000 on its business by conducting a review of the computer systems with date-related functionality used in its business. The Company has experienced no material adverse effects from Year 2000 issues. Incremental spending for hardware upgrades and software modifications and testing required for Year 2000 compliance was approximately $120,000, which was capitalized.
This Annual Report on form 10-K contains "forward-looking" statements within the meaning of the "safe harbor" provision of the Private Litigation Reform Act of 1995. Such statements are base 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.
We have audited the accompanying consolidated balance sheets of Security Capital Corporation and subsidiaries (the "Company") as of December 31, 1999 and 1998 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period 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 audits.
The preparation of financial statements in conformity with generally accepted accounting principles 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.
Balance at beginning of year ....... $ 214 $ 119 $ 70 Provisions ......................... 182 200 104 Deductions ......................... (183) (105) (55) ----- ----- ----- Balance at end of year ............. $ 213 $ 214 $ 119 ===== ===== =====
Inventories, comprised of finished goods are stated at the lower of cost or market, using the first-in, first-out method.
The Company reviews long-lived assets, including 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, 1999, the Company had not recognized 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, by charges to additional paid-in capital.
Differences between the carrying value and the face amount of the debt are amortized over the life of the debt using the effective interest method.
The Financial Accounting Standards Board has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is 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.
Goodwill ................................................ $ 18,937 Intangibles, principally franchise agreements ........... 9,522 Other assets ............................................ 1,773 Unearned revenue ........................................ (1,600) Accrued liabilities ..................................... (1,244) -------- $ 27,388 ========
The following unaudited pro forma financial information presents the combined results of the Company and Primrose as if the acquisition had taken place on January 1, 1998. 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:
Revenue ....................... $ 40,655 $ 37,806 Net income .................... 1,396 1,794 Basic earnings per share ...... .22 .28 Diluted earnings per share .... $ .22 $ .28
Revenue .................................................. $ 26,239 Net income from continuing operations .................... 1,179 Basic earnings per share from continuing operations ...... .27 Diluted earnings per share from continuing operations .... $ .27
In 1997, the Company sold its beneficial interest in two insurance-related businesses in two separate transactions, recognizing a gain upon sale of approximately $1,149 after tax, and net income from operations of $66 prior to divestiture. These businesses were classified as discontinued operations in the statement of income.
Primrose, Pumpkin and Possible Dreams each have short-term borrowing facilities under bank credit agreements (the "agreements"). Each such agreement contains restrictive covenants which prohibit or limit certain actions, including levels of capital expenditures, investments, incurrance of additional debt, and the maintenance of defined levels of profitability and tangible net worth. In March 2000, the agreements for Possible Dreams and Primrose were amended to waive technical violation of certain covenants which existed as of December 31, 1999, and to change the covenant thresholds on a prospective basis. Based upon the amendments, management expects to be in compliance with the covenants 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 subsidiary.
Possible Dreams Tranche B Term Loan, payable in seven annual installments commencing upon the repayment of Tranche A Term Loan, is due no later than April 1, 2003; interest payable monthly at the commercial paper rate plus 6% (11.52 % at December 31, 1999) ....................... 3,500 3,500
Possible Dreams Subordinated promissory notes, interest rates from 10 - 14% (10% at December 31, 1999), principal due on May 31, 2003; interest payable semi-annually on May 1 and November 1 ................ 1,960 1,960
Pumpkin Tranche B Term Loan, payable in eight quarterly installments commencing upon repayment of the Tranche A Term Loan but no later than October 1, 2001; interest payable monthly at the commercial paper rate plus 6.5% (approximately 12.52% at December 31, 1999) ......................... 2,000 2,000
Primrose Tranche A Term loan, payable in twenty-four quarterly installments ranging from $438 to $688 through March 31, 2005; interest payable quarterly at the Eurodollar rate plus the applicable margin as defined in the credit agreement (8.95% at December 31, 1999) ............... 11,837 --
Pumpkin additional earnout payment obligations (see Note 3) ............................. 160 258 -------- -------- 22,074 12,198 Less unamortized debt discount ......................... (1,153) (245) Less current portion ................................... (3,617) (1,757) -------- --------
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, Primrose's and Pumpkin's term loan and bank credit arrangements, any amounts remitted to Security Capital in excess of amounts approved by the lender are required to be set aside, and are pledged to the lenders as additional collateral for the borrowings at such subsidiaries. At December 31, 1999, no such amounts were set aside and pledged as collateral under such arrangements.
Warrants to acquire shares of Possible Dreams, Pumpkin 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 expense, classified as "Other (expense) income" was $290, $180 and $149 in the years ended December 31, 1999, 1998 and 1997, respectively. Warrant liabilities, included in "other long-term obligations," were $2,466 and $1,070 at December 31, 1999 and 1998, respectively.
During 1997, all shares of the Company's then-outstanding Class A, redeemable, convertible, preferred shares were converted by the holder into Class A common stock.
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, 1999.
Pumpkin - Options to acquire a total of 39 Class A common shares of Pumpkin at $1,754 per share were issued in 1997 and 1998. Such options are exercisable in 2000 and 2001, and expire in 2007 and 2008. The holder, has the right to settle the options in cash at the earlier of (1) three years of employment (2) June 27, 2003 (3) repayment in full of the acquisition note and any related interest or (4) any time after average EBITDA exceeds $2,500 for a four year period commencing in 1997. In addition, warrants to purchase 100 shares of Pumpkin's Class B common stock at $.01 per share were issued in 1997 and remain outstanding at December 31, 1999. Class B common shares would be non-voting, but would be convertible into Class A voting shares at the option of the holder. The warrants are exercisable at the earlier of (1) June 27, 2002 or (2) repayment in full of the acquisition note and any related interest. Such warrants expire in 2007. The holder may exercise the warrants for cash. If all such outstanding options and warrants had been exercised for Pumpkin shares at December 31, 1999, the Company's ownership share of Pumpkin would have been 69%.
Primrose - Options to acquire 2,311 common shares of Primrose at $500 per share were issued in 1999 and expire in 2009. 231 options are currently exercisable. The holder 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 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, 1999, the Company's ownership share of Primrose would have been 84%.
YEAR ENDED DECEMBER 31 ----------------------------------- 1999 1998 1997 ----- ----- -----
At December 31, 1999, the Company had net operating loss carry-forwards for Federal income tax purposes of approximately $25,447, the expiration dates of which are as follows: 2003 - $645, 2004 - $21,702, 2005 - $2,430, 2007 - $397, 2008 - $133, 2009 and thereafter - $140.
Future minimum rental commitments at December 31, 1999 are as follows:
2000 $ 465 2001 403 2002 298 2003 208 2004 115 Thereafter - -------
Possible Dreams purchased approximately 88% and 48% of its supplies from two companies during 1999 and 1998, respectively. The loss of either supplier could have an adverse effect on Possible Dreams' results of operations 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 defences to these actions, such that the resolution of such matters will not have a material effect on the financial position or results of operations of the Company.