**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-K**

 

**(Mark One)**

 
| ý                                               | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                           |
| **For the fiscal year ended December 31, 2005** |
|                                                 |
| **OR**                                               |
|                                                 |
| o                                                    | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition period from       to       **

 

**Commission File Number: 1-7921**

 

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**SECURITYCAPITAL CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **13-3003070**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

**Eight Greenwich Office Park**

**Greenwich, Connecticut 06831**

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: **(203) 625-0770**

 

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OFTHE ACT:

 

| **Title of each class**     | ** ** | **Name of each exchange on which registered** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------|
| Class A Common Stock, $0.01 par value |       | American Stock Exchange                                                     |

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OFTHE ACT:

**None.**

 

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Indicateby check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes  o  No  ý

 

Indicateby check mark if the Registrant is not required to file reports pursuant to Section 13or 15(d) of the Exchange Act. Yes  o No  ý

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days. Yes ý No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý

 

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

LargeAccelerated Filer  o               AcceleratedFiler  o                                    Non-accelerated Filer ý

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o  No ý

 

Asof June 30, 2005, 6,770,967 shares of the Registrant’s voting stock wereoutstanding, of which 5,597,632 shares were held by affiliates of theRegistrant. The aggregate market value of the remaining 1,173,335 shares ofvoting stock held by non-affiliates (based upon the closing price of theRegistrant’s Class A Common Stock on June 30, 2005 of $13.43) was $15,757,889.

 

Asof March 24, 2006, 7,148,587 shares of the Registrant’s Class ACommon Stock and 380 shares of the Registrant’s Common Stock were outstanding.

 

**DocumentsIncorporated by Reference**

Part IIIincorporates information by reference from the Registrant’s definitive ProxyStatement to be filed for its 2006 Annual Meeting of Stockholders. Part IVincorporates certain exhibits by reference from the Registrant’s previousfilings.

 

 

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**TABLE OF CONTENTS**

 
|          |                                                                                                                   |   |
|---------------|------------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                   |   |
| PART I   |                                                                                                                   |   |
|          |                                                                                                                   |   |
| Item 1.  | Business                                                                                                               |   |
| Item 1A.      | Risk Factors                                                                                                           |   |
| Item 1B.      | Unresolved Staff Comments                                                                                              |   |
| Item 2.  | Properties                                                                                                             |   |
| Item 3.  | Legal Proceedings                                                                                                      |   |
| Item 4.  | Submission of Matters to a Vote of Security Holders                                                                    |   |
|          |                                                                                                                   |   |
| PART II  |                                                                                                                   |   |
|          |                                                                                                                   |   |
| Item 5.  | Market for the Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   |
| Item 6.  | Selected Financial Data                                                                                                |   |
| Item 7.  | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                            |   |
| Item 7A. | Quantitative and Qualitative Disclosures  About Market Risk                                                            |   |
| Item 8.  | Financial Statements and Supplementary  Data                                                                           |   |
| Item 9.  | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                                  |   |
| Item 9A. | Controls and Procedures                                                                                                |   |
| Item 9B.      | Other Information                                                                                                      |   |
|          |                                                                                                                   |   |
| PART III |                                                                                                                   |   |
|          |                                                                                                                   |   |
| Item 10. | Directors and Executive Officers of the  Registrant                                                                    |   |
| Item 11. | Executive Compensation                                                                                                 |   |
| Item 12. | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                        |   |
| Item 13. | Certain Relationships and Related  Transactions                                                                        |   |
| Item 14. | Principal Accountant Fees and Services                                                                                 |   |
|          |                                                                                                                   |   |
| PART IV  |                                                                                                                   |   |
|          |                                                                                                                   |   |
| Item 15. | Exhibits and Financial Statement Schedules                                                                             |   |

 

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**PART I**

 

**ITEM 1.BUSINESS**

 

**General**

 

SecurityCapital Corporation (“Security Capital”, the “Company”, “we”, “us” and “our”)operates as a holding company that actively participates in the management ofits subsidiaries. We conduct business through our two operating subsidiaries,Primrose Holdings, Inc. (“Primrose”) and WC Holdings, Inc. (“WC”). Wehave a 98.5% ownership interest in Primrose and an 84.4% ownership interest inWC. Each subsidiary has a certain degree of operating autonomy, with itsown chief executive officer and senior management.

 

WC,through its wholly owned subsidiary, CompManagement, Inc. (“CMI”), is aleading independent provider of comprehensive claims management, costcontainment and consulting services designed to control the cost to employersof workers’ compensation, medical malpractice, automobile, general liability,unemployment and short- and long-term disability insurance benefits. WC’sactivities are primarily centered in Ohio, California, Virginia, Maryland, Texas,Michigan, Florida, Washington, Minnesota and New York. The operations ofWC, CMI, and CMI’s wholly ownedsubsidiaries are reported in our Employer Cost Containment and Health Servicessegment.

 

Primrose, through its wholly owned subsidiary, Primrose SchoolFranchising Company, Inc., is the exclusive franchisor of PrimroseSchools, an industry leader in early childhood education and high-qualitychildcare services, with related activities in real estate consultingand site selection services. Primrose schools are currently located in 13states throughout the Southeast, Southwest and Midwest. The operations ofPrimrose and its wholly owned subsidiaries comprise our Educational Servicessegment.

 

In January 2004, we announced that our Board of Directors had formeda Special Committee to explore strategic alternatives to maximize stockholdervalue and provide an opportunity for liquidity to our public stockholders. During2004, the Special Committee considered offers from the Company’s Chairman and therepresentative of its controlling stockholder, Capital Partners, Inc. (“CapitalPartners”), for the public shares they did not control, as well as other offersfrom third parties for the entire Company. In June 2005, the Companyannounced that the Board of Directors, upon the recommendation of the SpecialCommittee, had determined to switch to a formal sale process to seek thehighest price reasonably attainable for the Company, believing that a formalsale process represented the best possibility to maximize stockholder value.

 

ThroughDecember 31, 2005, we had received several indications of interest for ourPrimrose business, our WC business, and the entire Company; however, no definitiveoffers for Primrose, WC or the entire Company had been received. On January 18,2006, three independent third parties submitted offer letters and financingcommitments to the Company to purchase our Primrose business. Shortly afterreceiving these offers, the Board of Directors considered whether to sell thePrimrose business regardless of whether WC and the balance of the Company weresold, or to continue to pursue the sale of the entire Company to a single buyer.Subsequent to year-end, the Board decided to sell Primrose, and to pursue thesale of the WC business and the balance of the Company in another separatetransaction.

 

OnFebruary 10, 2006, the Company signed a definitive agreement for the saleof Primrose to an affiliate of American Capital Strategies, Ltd. for anaggregate purchase price of $85 million, subject to adjustment. After adjustmentfor transaction costs and certain items specified in the agreement, the netpurchase price is anticipated to be approximately $82.8 million. The Companyexpects to net, after taxes, approximately $58.2 million for its 91.5% fully dilutedinterest in Primrose, or approximately $8.44 per diluted share. The Primrose sale,which is subject to customary closing conditions, is anticipated to close by March 31,2006.

 

We continue to seek to sell the WC business and the balance ofthe Company.  The Company is considering offers for its interest in WC andthe balance of the Company.  The Companycurrently expects to enter into a definitive agreement during the secondquarter of 2006 to sell WC and the balance of the Company.

 

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**EMPLOYER COST CONTAINMENT AND HEALTH SERVICESSEGMENT**

 

**Overview**

 

Asa result of several acquisitions and internal growth, revenues for the EmployerCost Containment and Health Services segment have grown from $53.6 million in2001 to $140.8 million for the year ended December 31, 2005. Segmentrevenues were $140.8 million, $121.3 million and $84.6 million, representingapproximately 90% of consolidated revenues from continuing operations, for eachof the years ended December 31, 2005, 2004 and 2003, respectively.

 

In March 2005, Octagon Risk Services (“Octagon”), a whollyowned subsidiary of CMI, acquired 100% of the outstanding stock ofManaged Care Holdings Corporation and its wholly owned subsidiary, CaroniaCorporation (“Caronia”). Caronia provides third-party professional medical liability claims administration andrisk management services to over 700 hospitals, 23,000 physicians and 4,000long-term care facilities. Its business is headquartered in Melville, New York,and it services clients through 40 locations nationwide. Professionalliability claims administration has become an increasingly important portion ofour CMI business, and with the acquisition of Caronia, management believes thatCMI is now one of the largest independent providers of professional medicalliability claims services in the United States.

 

InMay 2004, CMI acquired 100% of the outstanding stock of Integrated ClaimsStrategies (“ICS”), a provider of insurance claims processing andadministrative services in the Tampa, Florida area, and in January 2004,CMI acquired 100% of the outstanding stock of KRAMMCO, Inc., a managementcompany whose sole asset is a management contract with the North AmericanEmployer’s Council, Inc. In October 2003, CMI acquired 100% of theoutstanding stock of Octagon, a California-based full-service claimsadministration and consulting services provider for workers’ compensation,medical professional liability and general liability. In October 2002, CMIacquired 100% of the outstanding stock of Barron Risk Management Services, Inc.,a third party administrator (“TPA”) in Texas that offers various services forthe administration of self-insured property and casualty programs, and in April 2001,CMI acquired 100% of the outstanding stock of Trigon Administrators, Inc.,a TPA in Virginia, Maryland and North Carolina.

 

**Services**

 

CMI’s services primarily include costmanagement, medical management and administrative services related to workers’compensation and medical professional liability claims, consulting, trainingand education services designed to improve and manage the costs of workplacehealth and safety, management and administrative services related to auto andgeneral liability, short- and long-term disability insurance and Family MedicalLeave Act claims. CMI’s services are categorized into two generalcategories: (1) TPA services related to workers’ compensation,professional medical liability, automobile, general liability and short- and long-term disability claimsand (2) medical management of workers’ compensation claims, or “MCO”services.

 

*Third-Party Administration Services*

 

Through its TPA operations, CMI provides comprehensive claimsmanagement to employers that is designed to control the employers’ costs ofworkers’ compensation, medical malpractice, automobile, general liability, short-and long-term disability insurance and Family Medical Leave Act claims. TPAservices are provided primarily to the public sector (cities and counties),educational entities (universities), healthcare organizations (hospitals,physician groups, nursing homes) and industrial and commercial business and includegroup rating, claims administration, medical cost containment, risk management,disability management, managed care services, comprehensive web-enabled datamanagement and consulting services, and safety and loss prevention.

 

Workers’ compensation programs are legislated on a state-by-state basisand range from a monopolistic system in which a state agency underwrites allinsurance risk and manages administration of the program to largely privatizedsystems in which insurance can be underwritten by private insurance companies,individual self-insured employers, self-insured employer groups or state riskpools. CMI is one of the largest workers’ compensation TPAs in Ohio, whichoperates as a monopolistic system. All workers’ compensation risk andadministration is underwritten by the Ohio Bureau of Workers’ Compensation (the“OBWC”). Other states that operate under a monopolistic system where CMIoperates include Washington and West Virginia (along with Ohio, “State Fund”). StateFund services include the review and processing of an employer’s workers’compensation claims, the performance of risk analysis for an employer’sexperience rating, the design of individual programs to improve an employer’sexperience ratings, the review of premium audits on behalf of employers

 

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and analysis of employers for inclusion in group rating plans. In the Stateof Ohio, CMI services also include assisting employers before the OhioIndustrial Commission and the OBWC. Many Ohio employers have entered intocontracts with CMI because of their participation in group rating planssponsored by trade associations of which such employers are members.

 

CMI also acts as a TPA of workers’ compensation claims for self-insuredemployers. Each employer selects the types of services it desires and CMI isable to customize its service offerings to meet the specific needs of thecustomer. Customers generally enter into contracts with CMI for one-yearperiods; however, CMI enjoys a high customer retention rate. CMI currentlyprovides its TPA services to over 23,000 State Fund and self-insured employers,many of which also receive MCO services (see below). CMI has onecustomer that accounted for approximately 12% and 13% of the Employer Cost Containmentand Health services segment revenues, and 11% and 12% of consolidated revenuesfor 2005 and 2004, respectively.

 

*MCO Services*

 

Managed care services are designed to control the cost of healthcareservices and to measure the performance of providers through intervention andongoing review of services proposed and those actually provided. CMI operates astate-wide MCO under Ohio’s Health Partnership Program, pursuant to a contractwith the OBWC. Under this contract, CMI is responsible for providing, amongother things, a state-wide health care provider network; treatment guidelinesand utilization review procedures; peer review and quality assurance programs;provider sanction and termination procedures; medical and vocational casemanagement programs; utilization management programs; medical bill adjudicationand payment procedures; dispute resolution procedures; provider, employer andemployee relations and education programs; and health care fraud detection andreporting programs.

 

CMI receives an administrative fee based on volume of activity, asdefined by the OBWC. The administrative fee is paid monthly and is subject tosetoffs if CMI does not meet certain criteria with respect to first report ofinjuries, bill submissions or data accuracy, or if CMI makes a misfiling ofdeath claims. CMI can also earn a quarterly incentive payment provided that CMImeets certain performance criteria specified in the contract with the OBWC. Revenuesfrom the contract with the OBWC were $28.9 million, $29.0 million and $27.2million, representing 21%, 24% and 32% of total segment revenues in 2005, 2004and 2003, respectively. The current contract with the OBWC is scheduled toexpire in December 2006. CMI considers its relationship with the OBWC tobe good, and while this contract has historically been renewed, no assurancescan be given that the contract will be renewed.

 

CMI also provides MCO services to self-insured and insurance companycustomers throughout its national network, either separately or integrated withTPA services provided to the same customer. MCO services include treatmentguidelines, case management, bill review, utilization review and payment andquality assessment. The majority of TPA customers also purchase MCO services,although a significant number of customers purchase MCO services only. CMI ownsor has arrangements with various state-wide health care provider networksconsisting of physicians, hospitals and ancillary providers. In those stateswhere CMI operates its own network (South Carolina, Maryland, Virginia andTexas), CMI has a provider services department, which recruits new providersfor its own network and offers educational materials and training seminars toits customers. CMI currently provides MCO services to over 55,000 customers.

 

**Customers and Marketing**

 

CMI markets its TPA and MCO services through internal sales and servicerepresentatives, direct marketing staff, external national sales representativesand senior management who manage most large account sales efforts. In addition,CMI has relationships with over 700 independent insurance agencies and brokers.CMI maintains five regional centers with 65 service locations throughout 25states. Marketing efforts are directed at the risk management staff ofprospective customer, as well as their advisors, usually insurance brokers andindividual agents.

 

**Competition**

 

The TPA and MCO markets consist of approximately a dozen nationalcompanies, including CMI, that target Fortune 1000 companies and largegovernment agencies, a number of independent companies, typically operating ona regional basis that target middle market corporate employers, municipalitiesand other non-profit entities, and a proliferation of local providers thatserve smaller local businesses. Management considers the large, nationalcompanies to be the primary

 

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competitors of CMI; however, the regional independent companies offerone or more services similar to those offered by CMI. Some of CMI’s competitorsare significantly larger and have greater financial and marketing resourcesthan CMI.

 

The principal competitive factors are the range of services offered andresponsiveness to customer needs. CMI competes principally on the basis of itsspecialization in the non-health claims management area, breadth of services,attention to customer service and independence from insurance carriers andbrokers.

 

**Government Regulation**

 

Regulation of CMI’s TPA business varies on a state-by-state basis andranges from no specific government regulation or oversight to specificlicensing requirements. CMI’s Ohio MCO is certified and regulated by the OBWCunder Ohio’s Health Partnership Program. The MCO, however, is not subject toOhio’s laws governing health insuring corporations, since it is not responsiblefor payment of health care claims or benefits, nor is it otherwise responsiblefor risk-bearing activities commonly associated with organizations licensedunder Ohio’s insurance laws. Management believes that its MCO operation ispresently in compliance in all material respects with all applicable laws,regulations and certification requirements. See Item 3. “LegalProceedings” of this Form 10-K for a discussion of litigation with respectto whether certain practices by CMI and its hearing representatives in Ohioconstituted the unauthorized practice of law.

 

**Employees**

 

CMI has approximately 1,400 employees. CMI’s employees are notrepresented by a union, and CMI considers its relationship with its employeesto be good.

 

**EDUCATIONAL SERVICES SEGMENT**

 

**Overview**

 

Primrose is a leading provider of early childhood education andhigh-quality childcare services for children six weeks to five years old andafter-school programs for children five through 12 years old. Primrose isa franchised system of private, educational-based childcare that targets theupscale demographic segment of the childcare industry. It is one of the largestfranchisors of childcare programs in the United States. At December 31,2005, Primrose had 149 franchise schools operating in the Southeast, Southwestand Midwest and had awarded 51 additional franchise units that were in variousstages of development and construction. Primrose also has a company-owned schoolthat serves an important role in training, testing new curricula, and business initiatives.

 

Revenuesfrom the Educational Services segment are composed of royalties, franchisefees, assignment and real estate services fees, transfer fees, forfeiture feesand tuition fees. Royalties, which account for approximately 80% of totalEducational Services revenues, are received from franchisees based on apercentage of a school’s revenue. Revenues from the Educational Servicessegment have experienced double-digit annual growth due to the quality of thebrand, opening of additional franchise schools and higher royalties from increasesin “same school” revenues. Segment revenues were $14.5 million, $11.6 millionand $9.8 million, representing approximately 10% of consolidated revenues fromcontinuing operations, for each of the years ended December 31, 2005, 2004and 2003.

 

**Educational Services**

 

Primrose aims at delivering a consistent, high-quality educationalproduct throughout all its schools. The overall franchise system and productare tightly controlled and uniform. Primrose provides a proven copyrighted earlychildhood curriculum and programming to its franchisees. These include detaileddaily educational lesson plans, management guidelines and other collateralmaterials. Primrose integrates nationally recognized packaged curriculums withits own copyrighted Balanced Learningsm programs. Primrose’sproprietary curriculum has received accreditation by the Southern Associationof Colleges and Schools and the North Central Association Commission onAccreditation of School Improvement.

 

Primrose provides extensive training to new franchisees prior to theopening of their schools and provides its franchisees with detailed on-linemanuals that cover all aspects of operating a Primrose school. Primrose has anongoing operations support infrastructure that includes comprehensive business,operational and marketing plans for franchisees.

 

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Operations consultants provide consulting services and visit schools ona regular basis to ensure that Primrose’s quality standards are maintained. Acomplete internal and external equipment package is provided by Primrose forfranchisees’ use in their schools. This package includes furniture, educationalprograms and materials, playground equipment, school supplies and customizedchildcare management software.

 

**Real Estate and Marketing Services**

 

Primrose provides real estate services and marketing services to itsfranchisees. Real estate services include site selection, assistance with thepermitting process and development consulting. Real estate services are chargedon a fixed fee basis, based upon the level of services provided to thefranchisee.

 

Marketing efforts are directed in two areas: (i) creating consumerdemand for Primrose’s early childhood education and high-quality childcareservices at the end-user level; and (ii) creating demand for PrimroseSchool franchises among potential franchisees. Primrose markets its franchiseschools primarily to working parents who desire more than “daycare” orbabysitting through targeted marketing with numerous media, including publicrelations, direct mail, radio, newspapers, Internet and various magazines.

 

Its franchise opportunities are targeted towards successful individualswith management experience and entrepreneurial desires. Primrose receivesfavorable publicity generated by its quality curriculum and service. Marketingefforts include advertising in newspapers, trade publications, and magazines, conductingpresentations in targeted cities, and customer referrals.

 

Allfranchisees pay advertising and marketing fees to Primrose equal to 1% ofmonthly gross revenues (although the franchise agreement allows the Company tocharge up to 2%). These funds are restricted and can only be used by Primroseto help fund its various advertising and marketing programs for the schools.

 

Primrose has alliances with national lending sources to providecompetitive financing for franchisees. These strategic partnerships provide adegree of familiarity and efficiency to the financing process for Primrosefranchisees. Primrose does not guarantee any franchisee loans or leases.

 

**Trademarks and Other Proprietary Rights**

 

Primrose owns and maintains trademarks and copyrights relating to its curriculum,programs, characters, logos and building plans.

 

**Competition and Markets**

 

Primrose competes in the center-based for-profit sector of thechildcare industry. The industry is highly fragmented with more than 113,000licensed childcare centers, of which only a small percentage consists ofnational for-profit childcare “chains” such as Primrose. In addition to thenational for-profit childcare centers, Primrose competes with familychildcare operated out of the caregiver’s home, residential and work-sitechildcare centers, full- and part-time nursery schools, pre-kindergartenand kindergarten programs offered in private and public schools and church-affiliated and othernot-for-profit providers. In addition, substitutes for organized childcare,such as relatives and nannies can represent lower cost alternatives to theCompany’s services. Management believes the fragmented nature of theindustry, together with an increasing demand for educational childcare,provides growth opportunities for well-managed childcare centers withprofessional, owner-operated childcare providers.

 

Management believes that the principal elements definingcompetitiveness are curriculum, product quality and consistency, well-trainedstaff, strong customer service and good business center management. AlthoughPrimrose competes favorably with respect to these factors, some of Primrose’s competitorsare larger and have greater financial resources, with a larger number offacilities and a broader national or regional presence.

 

**Government Regulation**

 

Primrose and its franchisees are subject to various federal, state andlocal laws as well as to a variety of regulatory provisions relating to zoningof school sites, sanitation, curriculum, health and safety. As a franchisor,Primrose is subject to state and federal laws regulating various aspects offranchise operations and sales. These laws impose registration and

 

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disclosure requirements on franchisors in the offer and sale offranchises. In certain cases, they also apply substantive standards to therelationship between franchisor and franchisee, relating primarily to default,termination and non-renewal of franchises and the potential impact of newPrimrose schools on enrollment levels at existing Primrose sites. Managementbelieves that Primrose is presently in compliance in all material respects withall applicable federal, state and local laws and regulatory provisions.

 

Various federal and state labor laws also govern Primrose’s and itsfranchisees’ relationships with their employees. These include such matters asminimum wage requirements, overtime and other working conditions. Significantadditional government-imposed increases in paid leaves of absence or mandatedhealth benefits could be detrimental to the economic viability of franchisee-operatedschools.

 

**Employees**

 

Primrose has approximately 70 employees. The employees are notrepresented by a labor union, and Primrose considers its relationship with itsemployees to be good.

 

**Available Information**

 

Security Capital files annual, quarterly and current reports, proxystatements and other information with the Securities and Exchange Commission (the“SEC”). You may read and copy any document filed at the SEC’s publicreference room at 100 F Street, N.E., Washington, D.C. 20549. Please callthe SEC at 1-800-SEC-0330 for information on the public reference room. The SECmaintains a website (www.sec.gov) that contains annual, quarterly and currentreports, proxy statements and other information that we file electronicallywith the SEC. You may also obtain, free of charge, copies of our annualreports on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, and any amendments to those reports filed or furnishedpursuant to the Securities Exchange Act of 1934 by contacting InvestorRelations, at our principal corporate office, Eight Greenwich Office Park,Greenwich, CT 06831, telephone (203) 625-0770, or by visiting our websiteat www. securitycapitalcorporation.com.

 

**Executive Officers of the Registrant**

 

Executive officers serve at the discretion of the Company’s Board ofDirectors. The executive officers of the Company and their positions as of March 24,2006 are as follows:

 
| Brian D.  Fitzgerald     |   | Chairman of  the Board, President and Chief Executive Officer |   | 61 |
|--------------------------|--------|--------------------------------------------------------------------|--------|----|
| A. George  Gebauer       |   | Vice Chairman of  the Board and Secretary                          |   | 72 |
| William R.  Schlueter    |   | Senior Vice  President and Chief Financial Officer                 |   | 39 |
| Richard W. O’Connor |   | Controller                                                         |   | 41 |

 

Mr. Brian D. Fitzgerald has served as theChairman of the Board since January 1990 and President and CEO since July 2000;President and a director of FGS, Inc. since March 1989; and apartner, general partner, stockholder, officer and/or director of variousCapital Partners entities for more than five years.

 

Mr. A. George Gebauer has served as the Vice Chairman of the Board since July 2000and Secretary since February 1994; Vice President, Secretary and adirector of FGS, Inc. since March 1989; and a partner, generalpartner, stockholder, officer and/or director of various Capital Partnersentities for more than five years. Mr. Gebauer was also the President ofthe Company from January 1990 to July 2000.

 

Mr. William R. Schlueter has served as a SeniorVice President since April 2003 and Assistant Secretary since July 2000.In March 2004, he was re-named Chief Financial Officer. He was VicePresident and Chief Financial Officer from 1999 through April 2003 andTreasurer from July 2001 to April 2003. He has also been ChiefFinancial Officer of Capital Partners since 1998 and a Senior Vice Presidentand Managing Director of Capital Partners since 2002.

 

Mr. RichardW. O’Connor has served as the Controller since July 2004 and was named anexecutive officer of the Company in October 2005. Prior to joining theCompany, Mr. O’Connor was the Director of Financial Reporting andBudgeting at R.H. Donnelley Corporation, an independent yellow pages directorypublisher, from August 1998 to March 2004.

 

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**ITEM 1A. RISK FACTORS**

 

Certain statements contained in this Annual Report on Form 10-Kregarding the Company’s future operating results, performance, business plans andprospects and any other statements not constituting historical fact are “forward-lookingstatements” subject to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. Words such as “believe,” “expect,” “anticipate,”“should,” “will,” “would,” “plan,” “estimate,” “potential,” “goal,” “outlook,” “may,”“predicts,” “could,” or the negative of those words and other comparableexpressions, are used to identify such forward-looking statements. Suchstatements are based on management’s current expectations and are subject to anumber of factors and uncertainties that could cause actual results and eventsto differ materially from those described in the forward-looking statements.

 

Investors should consider carefully the following risk factors, as wellas the other information in this Annual Report and the Company’s other filingswith the SEC, including the Company’s consolidated financial statements and therelated notes, before deciding whether to invest or maintain an investment inshares of the Company’s common stock. If any of the following risks actuallyoccurs, the Company’s business, financial condition, results of operations andcash flows could suffer, and the trading price of the Company’s common stock coulddecline. The risks described below are not the only ones that we face. Additionalrisks that we currently do not know about or that we currently believe to beimmaterial also may impact us and our stock.

 

All forward-looking statements reflect only our current beliefs andassumptions, and are based solely on information currently available to us. Althoughwe believe that the expectations reflected in the forward-looking statementsare reasonable, we cannot guarantee future results or events. Theseforward-looking statements are made as of the date of this Annual Report and,except as required under the federal securities laws and the rules andregulations of the SEC, we assume no obligation to update or revise them or toprovide reasons why actual results or events may differ.

 

**RISK FACTORS SPECIFIC TO OUR**

**EMPLOYER COST CONTAINMENT AND HEALTH SERVICESSEGMENT**

 

**Changes in government regulations in the State of Ohio and other statesin which we operate could significantly affect and change the way we dobusiness in those states.**

 

Workers’ compensation programs are legislated on a state-by-state basisand range from a monopolistic system in which a state agency underwrites allinsurance risk and manages administration of the program to largely privatizedsystems in which insurance can be underwritten by private insurance companies,individual self-insured employers, self-insured employer groups or state riskpools. Three of the states in which we conduct business, Ohio, Washington andWest Virginia, operate as a monopolistic system.

 

We provide managed care services for workers’ compensation claims inthe State of Ohio under a contract with the OBWC for approximately 23,000employers.  While revenues for ourservices are paid through the OBWC, the OBWC requires all employers to choosefrom a number of OBWC qualified service providers, of which the Company is one.Revenues from this contract were $28.9 million, $29.0 million and $27.2million, representing 21%, 24% and 32% of total segment revenues, in 2005, 2004and 2003, respectively. The current contract with the OBWC is scheduled toexpire in December 2006. We consider our relationship with the OBWC to begood, and while this contract has historically been renewed, no assurances canbe given that the contract will be renewed. The loss of the OBWC contract couldhave a material adverse effect on our financial condition, results ofoperations and cash flows.

 

Changes in the legislative or political environment in the State ofOhio, or the other states that operate as a monopolistic system, could resultin the privatization of the workers’ compensation system. A change from amonopolistic system to a privatized system would significantly affect the waywe conduct business in those states, and no assurances can be given that wewill be able to adapt to the new environment in a timely and efficient mannerand maintain our market share or level of profitability in those states. Approximately40% of our Employer Cost Containment and Health Services segment revenuesis derived from the State of Ohio, and a change from a monopolisticsystem of administering workers’ compensation claims to a privatized system inthat State could have a material adverse effect on our financial condition,results of operations and cash flows.

 

7

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**If the Company fails to manage its growth effectively, it may beunable to execute its business plan, maintain high levels of service oradequately address competitive challenges.**

 

Ashighlighted in Item 1. “Business” above, the historical revenue growth of ourEmployer Cost Containment and Health Services segment has been fueled, in part,by several strategic acquisitions and internal growth initiatives. The Company’sstrategy is to continue to pursue internal growth initiatives and strategies,as well as to seek growth through strategic acquisitions of, or relationshipswith, other companies in related lines of business.

 

Asa result, the Company is subject to certain growth-related risks, including therisk that it will be unable to retain personnel or acquire other resourcesnecessary to service such growth adequately. Expenses arising from the Company’sefforts to increase its market penetration may have a negative impact onoperating results. Moreover, there can be no assurance that any suitableopportunities for strategic acquisitions or relationships will arise or, ifthey do arise, that the transactions contemplated thereby could be completed. Ifsuch a transaction does occur, there can be no assurance that the Company willbe able to integrate effectively any acquired business into the Company.

 

Becausea large portion of the Company’s historical revenue growth has been fueled bystrategic acquisitions, investors may have developed an expectation thatthis historical growth will continue in the future. The Company’s inability togrow revenues at this historical rate, for whatever reason, could causeinvestors to reconsider their investment in the Company and result in a declinein the Company’s stock price.

 

**A change in market dynamics could negatively impact the Company.**

 

Withinthe past few years, several states have experienced a decline in the frequencyof workers’ compensation claims, which has resulted in workers’ compensationinsurance premium rate reductions in those states. The Company believes thatdeclines in workers’ compensation premium rates in some states are dueprincipally to intensified efforts by payors to manage and control claim costs,to improved risk management by employers and to legislative reforms. Ifdeclines in workers’ compensation costs occur in many other states and persistover the long-term, they may have an adverse impact on the Company’sfinancial condition, results of operations and cash flows.

 

TheCompany provides an outsource service to payors of workers’ compensation benefits.These payors include insurance companies, TPAs, municipalities, State Funds,and self-insured, self-administered employers. If these payors reduce theamount of work they outsource, the Company’s financial condition, results ofoperations and cash flows could be adversely affected.

 

**The Company faces competition for staffing, which may increase itslabor costs and reduce profitability.**

 

TheCompany competes with other health-care providers in recruiting qualifiedmanagement and staff personnel for the day-to-day operations of its business, aswell as health-care professionals such as nurses, claims adjusters and casemanagement professionals. In some markets, the scarcity of health-careprofessionals has become a significant operating issue for the Company. Thisshortage may require the Company to increase wages to recruit and retainqualified health-care professionals. Our inability to recruit and retainqualified health-care professionals, or to control labor costs, could have amaterial adverse effect on our profitability.

 

**The Company’s failure to compete successfully in our industry may limitour ability to retain customers or attract new customers, which could adverselyaffect our financial condition, results of operations and cash flows.**

 

The TPA and MCO markets consist of approximately a dozen nationalcompanies, including CMI, that target Fortune 1000 companies and largegovernment agencies, a number of independent companies, typically operating ona regional basis that target middle market corporate employers, municipalitiesand other non-profit entities, and a proliferation of local providers thatserve smaller local businesses.  Someof our competitors have broader geographical coverage, more establishedreputations in our markets, greater market share, larger contracting scale,lower costs and/or greater financial and other resources.

 

Webelieve that, as managed care techniques continue to gain acceptance in theworkers’ compensation marketplace, our competitors will increasingly consist ofnationally focused workers’ compensation managed care service companies,insurance companies, HMOs and other significant providers of managed careproducts. Legislative reforms in some states permit employers to designatehealth plans such as HMOs and PPOs to cover workers’ compensation claimants.Because many health plans have the ability to manage medical costs for workers’compensation claimants, 

 

8

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suchlegislation may intensify competition in the markets served by the Company.Also, decisions by major insurance carriers, underwriters, and brokers toexpand their activities as third-party administrators and adjusters coulddirectly compete with our business.

 

**An adverse decision in the complaint filed by the Cleveland BarAssociation against CMI alleging that certain practices by CMI constituted theunauthorized practice of law could have a material adverse effect on ourfinancial condition, results of operations and cash flows.**

 

OnFebruary 8, 2006, the Cleveland Bar Association filed a brief with respectto its pending complaint filed in 2002 against CMI, which alleges that CMIengaged in the unauthorized practice of law in connection with certainactivities of CMI. In the latest filing, the Cleveland Bar Association requestspenalties of $28 million for past practices of CMI that the Cleveland BarAssociation contends constituted the unauthorized practice of law. We believethat this penalty is without merit and intend to continue to vigorously defendourselves in this matter. The current recommendation of the Board on theUnauthorized Practice of Law to the Ohio Supreme Court is not to assesspenalties against CMI. However, no assurances can be given that this complaintwill be resolved in a manner that is favorable to CMI, and a decision in favorof the Cleveland Bar Association could have a material adverse effect on our financialcondition, results of operations and cash flows. See Item 3. “Legal Proceedings”below for further details.

 

**RISK FACTORS SPECIFIC TO OUR**

**EDUCATIONAL SERVICES SEGMENT**

 

**Deterioration in economic conditions, including, but not limited to, anincrease in the unemployment rate or a recession, could have an adverse effecton our financial condition, results of operations and cash flows.**

 

TheCompany’s Educational Services revenues depend, in part, on the number of dualincome families and working single parents who require childcare services. Anincrease in unemployment may adversely impact the Company because of thetendency of out-of-work parents to diminish or discontinue utilization ofchildcare services. In addition, the Company’s franchisees may not be ableto increase tuition at a rate consistent with increases in operating costs.

 

Weoperate as a franchised system of private, educational-based childcare thattargets the upscale demographic segment of the childcare industry. Our successin growing revenues and net income is dependent upon, among other things, ourability to increase the number of franchisees in our system.

 

Inorder to be considered for a Primrose franchise, potential franchisees arerequired to have a minimum level of liquid net worth to be able to fund aportion of the total costs to develop and construct a Primrose school. Inperiods of economic recession, individuals may experience significantdeclines in their net worth and not meet the minimum requirements, or have therequired minimum level of net worth, but be unable or unwilling to liquidateequity or other holdings in order to raise the cash to fund their share of aschool’s development and construction costs.

 

Accordingly,adverse changes in unemployment or sustained periods of economic recession couldhave an adverse effect on our financial condition, results of operations and cashflows.

 

**Our inability to successfully compete in the childcare industry couldimpact our ability to attract new franchisees and retain current franchisees,impede the growth of our business and significantly impact our financialcondition, results of operations and cash flows.**

 

Thechildcare industry is highly fragmented, with more than 113,000 licensedchildcare centers, of which only a small percentage consists of nationalfor-profit childcare “chains” such as Primrose. In addition to thenational for-profit childcare centers, Primrose competes with family childcare operated out of thecaregiver’s home, residential and work-site childcare centers, full- andpart-time nursery schools, pre-kindergarten and kindergarten programsoffered in private and public schoolsand church-affiliated and other not-for-profit providers. In addition,substitutes for organized childcare,

 

9

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suchas relatives and nannies, can represent lower cost alternatives to the Company’sservices.

 

Managementbelieves the Company’s ability to compete successfully depends on a number offactors, including quality of care, curriculum, product quality andconsistency, well-trained staff, strong customer service and good businesscenter management. We target the upscale demographic segment of the childcareindustry, so we are often at a price disadvantage with respect to familychildcare providers who operate with a much lower cost structure and generallydo not comply or are not required to comply with the same health, safety,insurance and operational regulations as the Company and its franchisees. Ourschools are also at a price disadvantage to many of the center-basedparticipants in the childcare industry who do not offer the same level of care,quality of curriculum, customer service or management as we do. Some of ourcompetitors are larger and have greater financial resources, with a largernumber of facilities and a broader national or regional presence. There can beno assurance that we will be able to compete successfully against current andfuture competitors, or that competitive pressures will not have a materialadverse effect on our financial condition, results of operations and cashflows.

 

**Participantsin the childcare industry, including Primrose and our franchisees, may besubject to certain claims, allegations or litigation involving the care,development and supervision of young children. Such claims, allegations orlitigation could significantly damage the reputation of the childcare providerand have adverse effects on the childcare industry, even if such claims,allegations or litigation are proven false.**

 

A claim, allegation orlitigation involving the neglect or mistreatment of young children would likelyresult in negative adverse publicity to the childcare provider and thechildcare industry. Our business could be adversely affected by negativepublicity involving the neglect or mistreatment of young children as parentsdeciding among childcare options may reconsider their desire to place their childrenin a childcare facility and those parents whose children are already in one ofour schools, may decide to remove their children from that school. We imposestrict operational, ethical and compliance standards on our franchisees andhave a system in place to closely monitor that our franchisees operate theirschools in accordance with our strict standards. However, no assurances can begiven that Primrose or one of its franchisees will not be directly named in aclaim, allegation or litigation involving the neglect or mistreatment of youngchildren.

 

**We and our franchisees are subject to various federal, state and locallaws as well as to a variety of regulatory provisions relating to zoning ofschool sites, sanitation, curriculum, health and safety. The failure to complywith these laws and regulations could result in significant costs to theCompany and disruptions to the business.**

 

Primroseschools are subject to numerous national, state and local regulations andlicensing requirements. Although these regulations vary greatly fromjurisdiction to jurisdiction, government agencies generally review, among otherthings, the adequacy of buildings and equipment, licensed capacity, the ratioof staff to children, staff training, record keeping, the dietary program, thedaily curriculum, hiring practices and compliance with health and safetystandards. Failure of a school to comply with applicable regulations andrequirements could subject it to governmental sanctions, which might includefines, corrective orders, probation or, in more serious cases, suspension orrevocation of the school’s license to operate or an award of damages to privatelitigants, and could require significant expenditures to bring the school intocompliance. We impose strict operational, ethical and compliance standards onour franchisees and have a system in place to closely monitor that ourfranchisees operate their schools in accordance with our strict standards. However,no assurances can be given that all franchisees will continually operate incompliance with our standards and with all federal, state and local laws andmaintain compliance with all regulatory provisions. In addition, no assurancescan be given that government agencies will not impose sanctions on the Companyor a Primrose school, revoke a Primrose school’s license to operate, or takeother actions against the Company or the franchisee. Such actions couldadversely affect our financial condition, results of operations and cash flows.

 

**RISK FACTORS SPECIFIC TO OUR**

**FORMAL SALE PROCESS**

 

**Our businesses could be materially adversely impacted by uncertaintyrelated to our formal sale process.**

 

Uncertaintyabout whether and when our formal sale process will be completed andexpectations as to how our businesses will be operated after they are soldcould materially adversely affect our businesses, including the risk of

 

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employeeattrition and increased attempts by competitors to persuade our customers tochange service providers. This could have a negative impact on our financialcondition, results of operations and cash flows.

 

In addition, we face certain other risks and uncertainties if we arenot successful in selling the Company, including but not limited to, thefollowing:

 

•                              Wehave incurred significant costs throughout the formal sales process for, amongother things, investment banking, legal and accounting services;

 

•                              Ourshare price could decline, and in light of the fact that our stock is notactively traded on a daily basis, the decline in the price of the stock couldbe significant and stockholders could incur significant losses; and

 

•                              Thereis the possibility that litigation could be bought against the Company and itsmanagement. Although management believes that any such lawsuit would be withoutmerit, significant financial and management resources could be expendeddefending ourselves.

 

**The pursuit of the formal sale process has consumed a substantialportion of the time and attention of our management, and certain aspects of theprocess may impact how our businesses are conducted, which may have anadverse effect on our businesses.**

 

Sincewe first announced the formal sale process in June 2005, the process hasconsumed a substantial portion of management’s time and attention and left themwith less time to devote to our operations, consideration of potentialacquisitions and other strategic relationships, and other aspects of ourbusinesses. This diversion of management’s attention has continued in 2006 andcould have a material adverse effect on our businesses, and, as a result, onour financial condition, results of operations and cash flows.

 

**Item 1B.UNRESOLVED STAFF COMMENTS**

 

Notapplicable

 

**ITEM 2.PROPERTIES**

 

CMI leases a 70,000 square foot office building in Dublin, Ohio, whichis used as its principal office facilities. The original lease for the buildingwas for a term of 15 years and was scheduled to expire in 2012. In 2002, CMIexercised a renewal option and extended the lease for an additional five years,through 2017. The lease requires CMI to pay all operating expenses for thebuilding. The lease also provides for two remaining renewal options of fiveyears each.

 

CMI leases 35,000 square feet of office space in Oakland, Californiafor its Octagon headquarters. The initial lease term is for five and one-halfyears and is scheduled to expire in June 2010. The lease provides for arenewal option for an additional five years.

 

CMI leases 28,000 square feet of office space in Cincinnati, Ohio,22,000 square feet of office space in Richmond, Virginia, and 17,000 squarefeet of office space in Cleveland, Ohio. These facilities serve as regionaloffices. The Cincinnati, Richmond and Cleveland leases expire in December 2007,November 2008 and April 2008, respectively. Both the Cleveland andCincinnati leases contain two renewal options of five years each.

 

CMI has 40 other leases for office space of between 1,000 and 15,000square feet that serve as regional offices and service centers. These leaseshave initial terms between two and six years and expire between 2006 and 2011.

 

Primrose leases a 13,000 square foot facility in Acworth, Georgia asits corporate headquarters. The initial lease is for a term of five years andexpires in June 2008. The lease contains two renewal options of five yearseach, and provides Primrose an option to purchase the building during a limitedtime period as specified in the lease. Primrose also leases an 8,000 squarefoot building, also located in Acworth, Georgia, for its company-owned andoperated educational childcare facility. The initial lease term is 10 years andexpires in January 2013. The lease contains two renewal options of 10years each and also provides Primrose an option to purchase the building duringa limited time period as specified in the lease.

 

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The Company leases 4,800 square feet of office space in Greenwich,Connecticut for its corporate headquarters. The lease is for an initial term ofseven years four months, expiring in February 2011, and contains a renewaloption for an additional five years. The Company shares the office space withCapital Partners. While the lease of the office space is in the name of theCompany, Capital Partners pays the monthly rent and other costs of the lease,including utilities and taxes.  TheCompany’s reimbursement for its portion of the rent is included in the advisoryservices fee the Company pays to Capital Partners.  See Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements andSupplementary Data.”

 

The Company believes its leased properties are adequate for its currentneeds.

 

**ITEM 3.LEGAL PROCEEDINGS**

 

In November 2005, Mr. Robert Bossart, former Chief Executive Officer of WC and CMI, and Mr. PaulMiller, former Chief Financial Officer and General Counsel of WC and CMI(collectively, the “Former Executives”), filed a complaint against WC and certainCMI wholly owned subsidiaries (collectively, the “CMI Companies”). Thecomplaint alleges that the Former Executives were wrongfully terminated by theCMI Companies. Each of the Former Executives filed a single claim for breach ofhis employment contract seeking monetary damages. As previously disclosed, the FormerExecutives were terminated for cause after an internal independentinvestigation, conducted under the oversight of the Company’s Audit Committee,found, among other things, that the Former Executives owned, operated andcontrolled various entities that had certain unauthorized and undisclosedtransactional, operational and financial relationships with the CMI Companies,resulting in conflicts of interest.

 

OnMarch 9, 2006, we entered into a Settlement Agreement and Release  with the Former Executives (the “Agreement”). Pursuantto the Agreement, the Former Executives agreed to three-year covenants not tocompete and non-solicitation agreements, the Company and the Former Executivesagreed to be bound by a “drag/tag” arrangement with respect to the shares of WCheld by the Former Executives in the event of a change of control of theCompany or WC, the Former Executives agreed to dismiss their wrongfultermination suit with prejudice, and the parties entered into mutual releasesand non-disparagement agreements. Under the Agreement, we agreed to pay theFormer Executives an aggregate of $1.8 million, with $0.8 million of thatamount payable upon a change of control of the Company or WC.

 

CMIis party to a complaint brought by the Cleveland Bar Association that alleged thatcertain practices by CMI and its hearing representatives in Ohio constitutedthe unauthorized practice of law. CMI believes that its practices do not differfrom those of any other Ohio workers’ compensation TPA and do not constitutethe unauthorized practice of law.

 

InMay 2004, the Board of Commissioners on the Unauthorized Practice of Law(the “UPL Board”) found that the activities of CMI and its hearingrepresentatives constituted the unauthorized practice of law; CMI appealedthese findings to the Ohio Supreme Court (the “Supreme Court”). In December 2004,the Supreme Court ruled that the activities engaged in by CMI and its hearingrepresentatives did not constitute the unauthorized practice of law. However,in its decision, the Supreme Court remanded the matter back to the UPL Board toconsider whether those activities that were the subject of the original suitwere in violation of certain Industrial Commission resolutions.

 

Afterhearing oral arguments, the UPL Board issued a recommendation released on December 14,2005 that CMI did engage in specific activities that constituted theunauthorized practice of law. CMI, along with 80 trade associations, hasobjected to those recommendations and asked the Supreme Court to consider thematter. The recommendations of the UPL Board included a recommendation that theSupreme Court not assess any civil monetary penalties. The Cleveland BarAssociation has filed an objection to the recommendation of the UPL Boardrelative to the finding of no penalties and requested, in a filing dated February 8,2006, that a $28 million assessment be levied against CMI.

 

Thematter is pending a hearing with the Supreme Court. CMI believes its practiceswere in compliance with the Industrial Commission resolutions and subsequentguidance memorandums, and intends to vigorously defend itself in this matter. However,at this time, management is unable to evaluate the outcome or determine****whetherpenalties ultimately will be assessed.

 

In connection with a written offer made by Brian Fitzgerald, our Chairman of the Board,President and Chief

 

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ExecutiveOfficer, and, through Capital Partners, the controlling person of our majoritystockholder, CP Acquisition, L.P. No. 1 (“CP1”),  to acquire by merger all of the outstanding Class ACommon Stock and Common Stock of Security Capital, other than shares held by Mr. Fitzgerald,Capital Partners, CP1 and certain other persons (the “Offer”), three complaints were filed in the Court ofChancery of the State of Delaware in and for New Castle County (the “Court”),naming the Company, each then-member of our Board of Directors and CP1 asdefendants. Each of the complaints alleged that the defendants breachedtheir fiduciary duties to the putative class and that the Offer wasunfair, inadequate and not the result of arm’s-length negotiations. Each complaint sought an injunction against theproposed merger or, if the merger was consummated, the rescission of themerger, as well as money damages, attorneys’ fees, expenses and other relief. Thesecomplaints were subsequently consolidated into one class action. On November 1,2005, the plaintiffs voluntarily dismissed the consolidated class actionwithout prejudice.

 

Weare party to several legal actions arising in the ordinary course of business. Itis management’s opinion that we have adequate legal defenses to these actions,and that the resolution of such matters will not have a material adverse effecton our financial condition, results of operations or cash flows.

 

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Not Applicable.

 

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**PART II**

 

**ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

The Class A Common Stock of Security Capital is traded on theAmerican Stock Exchange (the “AMEX”) under the symbol “SCC”. The followingtable states the high and low sales prices for the Class A Common Stock onthe AMEX for the 2005 and 2004 quarterly periods indicated:

 
| **2005 PRICE RANGE** | ** ** | **2004 PRICE RANGE** | ** ** |
|--------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **HIGH**                       | ** ** | **LOW** | ** ** | ** ** | ** ** | **HIGH** | ** ** | **LOW** | ** ** |
| Quarter Ended                  |       |                           |       |   |   | Quarter Ended |   |   |   |   |   |
| March 31, 2005            |       | $                              | 10.25      |   | $ | 8.27 |   | March 31, 2004 |   | $ | 7.96 |   | $ | 6.35 |   |
| June 30, 2005             |       | $                              | 15.00      |   | $ | 9.35 |   | June 30, 2004 |   | $ | 7.49 |   | $ | 6.70 |   |
| September 30, 2005        |       | $                              | 16.70      |   | $ | 12.80 |   | September 30, 2004 |   | $ | 10.30 |   | $ | 6.90 |   |
| December 31, 2005         |       | $                              | 15.00      |   | $ | 14.00 |   | December 31, 2004 |   | $ | 10.90 |   | $ | 9.56 |   |

 

As of March 24, 2006, there were 709 stockholders of record of theClass A Common Stock and 7,148,587 shares outstanding, and 11 stockholdersof record of the Common Stock and 380 shares outstanding. On such date, theclosing price of the Class A Common Stock on the AMEX was $17.60.

 

The Company has not paid any dividends to common stockholders during atleast the last five years. Certain financing arrangements limit the ability ofour subsidiaries to pay dividends to Security Capital, thus limiting ourability to pay dividends to our stockholders.

 

The following table sets forth information, as of December 31,2005, with regard to the Company’s 2000 Long-Term Incentive Plan which wasapproved by stockholders in July 2000. There are no other equitycompensation plans in effect with regard to the Company’s stock at this time.

 
| **Plan Category**                                       | ** ** | **Number of Class A****Common Shares to be Issued Upon  Exercise of  Outstanding Options** | ** ** | **Weighted-average****Exercise Price  of Outstanding Options** | ** ** | **Number of Class A****Common Shares  Remaining Available  for Future Issuance  Under Equity  Compensation Plans** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
|                                                    |       |                                                                                            |       |                                                           |       |                                                                                                                    |       |
| Equity compensation plans approved by  stockholders     |       | 587,510                                                                                         |       | $                                                              | 9.06       |                                                                                                                    | 58,836     |   |
|                                                    |       |                                                                                            |       |                                                           |       |                                                                                                                    |       |
| Equity compensation plans not approved by  stockholders |       | —                                                                                          |       | —                                                         |       | —                                                                                                                  |       |
|                                                    |       |                                                                                            |       |                                                           |       |                                                                                                                    |       |
| Total                                                   |       | 587,510                                                                                         |       | $                                                              | 9.06       |                                                                                                                    | 58,836     |   |

 

Since January 1, 2006, an aggregate of378,000 shares of Class A Common Stock have been issued as a result ofstock option exercises, at an average exercise price of $8.78 per share.

 

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**ITEM 6.SELECTED FINANCIAL DATA**

 

The following table sets forth certain selected consolidated financialdata for the Company. The selected consolidated financial data should be readin conjunction with the consolidated financial statements and the notes theretoincluded in Item 8. “Financial Statements and Supplementary Data” and Item7. “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of this Form 10-K.

 

**Statementof Income Data:**

 
| ** **                                                                              | ** ** | **YEARS ENDED DECEMBER 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(in thousands, except per share data)**                      | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                                    |       |                              |       |   |   |   |   |   |   |   |   |
| Revenues (1)                                                                            |       | $                                 | 155,311    |   | $ | 132,940 |   | $ | 94,432 |   | $ | 72,703 |   | $ | 61,286 |   |
| Selling, general and administrative  expenses (2)                                       |       | 132,245                           |       | 114,315 |   | 79,639 |   | 57,479 |   | 48,775 |   |
| Depreciation and amortization                                                           |       | 4,984                             |       | 3,780 |   | 2,451 |   | 2,277 |   | 4,980 |   |
| Operating income                                                                        |       | 18,082                            |       | 14,845 |   | 12,342 |   | 12,947 |   | 7,531 |   |
| Interest expense (3)                                                                    |       | (2,607                            | )          | (4,351 | ) | (1,565 | ) | (3,633 | ) | (4,162 | ) |
| Other income (expense), net (4)                                                         |       | 59                                |       | 652 |   | 185 |   | 881 |   | (770 | ) |
| Income from continuing operations before  income taxes and minority interest            |       | 15,534                            |       | 11,146 |   | 10,962 |   | 10,195 |   | 2,599 |   |
| Income tax expense (5)                                                                  |       | (4,770                            | )          | (5,245 | ) | (4,617 | ) | (4,114 | ) | (1,762 | ) |
| Minority interest in income of consolidated  subsidiaries                               |       | (1,329                            | )          | (1,438 | ) | (1,087 | ) | (1,023 | ) | (254 | ) |
| Income from continuing operations                                                       |       | 9,435                             |       | 4,463 |   | 5,258 |   | 5,058 |   | 583 |   |
| Less: preferred stock accretion (6)                                                     |       | —                            |       | (1,275 | ) | (457 | ) | (401 | ) | (352 | ) |
| Income from continuing operations available  to common stockholders                     |       | $                                 | 9,435      |   | $ | 3,188 |   | $ | 4,801 |   | $ | 4,657 |   | $ | 231 |   |
|                                                                                    |       |                              |       |   |   |   |   |   |   |   |   |
| Basic earnings per share from continuing  operations available to common stockholders   |       | $                                 | 1.40       |   | $ | 0.49 |   | $ | 0.74 |   | $ | 0.72 |   | $ | 0.04 |   |
| Diluted earnings per share from continuing  operations available to common stockholders |       | $                                 | 1.34       |   | $ | 0.43 |   | $ | 0.68 |   | $ | 0.66 |   | $ | 0.02 |   |
| Dividends per share of common stock                                                     |       | —                            |       | — |   | — |   | — |   | — |   |

 

**BalanceSheet Data:**

 
| ** **                                 | ** ** | **DECEMBER 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                 | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets                               |       | $                     | 141,774    |   | $ | 116,635 |   | $ | 123,850 |   | $ | 100,943 |   | $ | 107,472 |   |
| Long-term obligations                      |       | 27,216                |       | 21,256 |   | 27,441 |   | 19,042 |   | 37,063 |   |
| Redeemable convertible preferred stock (6) |       | —                |       | — |   | 3,725 |   | 3,268 |   | 2,867 |   |
| Total stockholders’ equity            |       | 47,555                |       | 35,367 |   | 33,350 |   | 30,518 |   | 27,190 |   |
|                                            |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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The table above includes the revenues and expensesof continuing operations and does not include the revenues and expenses ofdiscontinued operations, or the cumulative effect of a change in accountingprinciple. The Company reported income (loss) from discontinued operations of $(1,230), $(1,969),$2,073 and $2,157 for each of the years ended December 31, 2004, 2003,2002 and 2001, respectively, and a cumulative effect of a change in accountingprinciple of $(3,402) in the year ended December 31, 2002.

 

(1)                                  Growth in revenues and expenses has been impactedby acquisitions made by the Company. See Item 1. “Business” for furtherdetails.

 

(2)                                  SG&A expense in 2005 include costs of$2,100 for an internal independent investigation into certain related-partytransactions and conflicts of interest involving certain members of CMImanagement (the “Investigation”), $720 for the cash settlement of employeestock options and $190 under the Agreement with the Former Executives. SG&Aexpense in 2004 includes costs of $900 for the Investigation and approximately$850 of additional accounting fees related to the Investigation and therestatement of the Company’s financial statements for lease accounting.

 

(3)                                  Interest expense in 2004 includes $2,423 relatedto a $30,000 Senior Subordinated Promissory Note (the “Note”) issued in January 2004.The Note was repaid in full in September 2004. During 2002, Primroserefinanced its debt and recorded additional interest expense of $860 related tothe write-off of original issue discount and deferred financing costsassociated with the original debt.

 

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(4)                                  Other income (expense) in 2005 includesexpense of $428 for the Agreement with the Former Executives. Other income(expense) in 2002 includes a gain of $1,334 from the repurchase of warrants byPrimrose.

 

(5)                                  Income tax expense in 2005 includes a benefitof $1,684 from the reversal of previously established tax reserves thatmanagement determined were not longer necessary.

 

(6)                                  In November 2004, we redeemed all 500shares of our outstanding redeemable convertible preferred stock (the “PreferredStock”) for $10 per share, or $5,000. Preferred Stock accretion of $1,275 wasrecognized in 2004 to accrete the carrying value of the Preferred Stock to itsredemption value.

 

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**ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF                OPERATIONS**

 

The following discussion should be read in conjunction with the consolidatedfinancial statements of the Company and the related notes thereto appearing inItem 8. “Financial Statements and Supplementary Data” of this Annual Reporton Form 10-K, and the risk factors appearing in Item 1A. “Risk Factors.”  Amounts are in thousands except share and pershare amounts.

 

**CompanyOverview**

 

Security Capital operates as a holding company that activelyparticipates in the management of its subsidiaries, but also gives eachsubsidiary a certain degree of operating autonomy, with its own chief executiveofficer and senior management. The Company itself is managed by CapitalPartners pursuant to an Advisory Services Agreement. Capital Partners controlsapproximately 80% of the Company’s shares, held principally by CPI. Mr. BrianFitzgerald controls Capital Partners and serves as our Chairman of the Board ofDirectors, President and Chief Executive Officer.

 

At December 31, 2005, we had two reportable operating segments,Employer Cost Containment and Health Services, conducted through WC, CMI and CMI’swholly owned subsidiaries, and Educational Services, conducted through Primrose.In recent years, we have sought to strengthen these two valuable businesses,while at the same time shedding unneeded or unprofitable businesses. In keepingwith our management philosophy, the senior management of both WC and Primrose haveequity participations in our businesses (approximately 15.6% and 1.5%,respectively), as well as stock options in those subsidiaries, giving us an83.7% and 91.5% fully diluted ownership interest in WC and Primrose,respectively.

 

While one of the goals of the Company has always been to maximizestockholder value, beginning in January 2004 and proceeding through thefiling of this Annual Report, management and the Board of Directors have also soughtto provide an opportunity for liquidity to our public stockholders. Werecognized that, with the costs of being a public company increasing, and lessthan 20% of our shares in public hands, it made sense for us to consideralternatives to remaining a publicly traded company. In that vein, in January 2004,the Board of Directors formed a Special Committee to explore strategicalternatives that would fulfill our goals of maximizing value to all ourstockholders, providing liquidity to our public stockholders, and exploringalternatives to being a publicly traded company.

 

In July 2004, Mr. Fitzgerald and the representative of the Company’scontrolling stockholder, Capital Partners, submitted an offer to the SpecialCommittee for the public shares they did not control (the “Capital PartnersOffer”). The Special Committee subsequently received other offers for theentire Company, including an offer in September 2004 from a group thatincluded certain current and former members of the management of CMI, the mainoperating subsidiary of WC (the “CMI Management Offer”). Both the CapitalPartners Offer and the CMI Management Offer were subsequently increased.

 

The Special Committee’s ability to move forward with the process ofexploring strategic alternatives and providing a liquidity event for publicstockholders was hampered by a number of unforeseen events. Most notably, theCompany’s management, beginning in July 2004, had to perform varioussupplemental procedures (the “Supplemental Procedures”), and the AuditCommittee of the Company’s Board of Directors, beginning in November 2004,oversaw an internal independent investigation (the “Investigation”), intocertain related-party transactions and conflicts of interest involving certainmembers of CMI’s management team. The Investigation was completed in March 2005,and the results indicated that, while there were certain unauthorized andundisclosed transactional, operational, and financial relationships between variousentities owned, operated and controlled by certain members of CMI’s managementand CMI and its subsidiaries, there were no instances of fraud or financialimpropriety that would indicate the Company’s historical financial statementswere misstated. The total cost of the Investigation, including the SupplementalProcedures, was approximately $3,000, of which $900 was recorded in 2004 andthe remaining costs were recorded in 2005.

 

Additionally, in response to an SEC letter issued to the AmericanInstitute of Certified Public Accountants in February 2005, managementconducted an internal review of our accounting practices with respect to leasesand leasehold improvements, concluding that various adjustments were required,and that previously issued financial statements should be restated (the “Restatement”).For more information regarding the Investigation and the Restatement, see ourAnnual Report on Form 10-K for the year ended December 31, 2004 (the “2004Form 10-K”).

 

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The Investigation caused a delay in the filing of our quarterly reporton Form 10-Q for the quarter ended September 30, 2004 until March 11,2005. The Investigation and the Restatement also caused the completion of theCompany’s year-end audit to be significantly delayed due to the additionalaudit procedures that were performed. Our 2004 Form 10-K was not fileduntil June 28, 2005. Additionally, the late filing of our 2004 Form 10-Kresulted in the late filing of our Form 10-Q for the periods ended March 31,2005 (the “First Quarter 10-Q”) and June 30, 2005 (the “Second Quarter10-Q” and, collectively with the First Quarter 10-Q, the “2005 Form 10-Qs”),which were not filed until September 1, 2005 and September 16, 2005,respectively.

 

Throughout the Investigation, the Restatement and the added demandsplaced on management from the lengthy year-end audit procedures, we continuedto strengthen the core WC and Primrose businesses and resolve various mattersthat needed to be addressed in order to maximize the value of the Company andachieve an appropriate liquidity event for public stockholders. As a result ofthe findings of the Investigation, the employment of two senior members of theCMI management team was terminated and new management was put in place. Theoperating systems at WC were improved and controls were strengthened at thesubsidiary level.

 

In March 2005, CMI, through one of its operating subsidiaries,acquired Caronia, a leading provider of third-party professional medicalliability claims administration and risk management services to hospitals andhealthcare systems, physician and paraprofessional groups, nursing homes,rehabilitation centers and clinics. As a result of this acquisition, managementbelieves that CMI is now one of the largest independent providers ofprofessional medical liability claims services in the United States.

 

Recognizing that we were a stronger and much more valuable company, andthat the market for control of companies such as ours had recoveredconsiderably since the formation of the Special Committee, our Board ofDirectors, upon the recommendation of the Special Committee, determined to implementa formal sale process to seek the highest price reasonably attainable for theCompany. On June 6, 2005, the Board retained UBS Securities LLC to assistit in that process. Management is committed to the process as the best and mostefficient way to provide liquidity for our stockholders. For their part, Mr. Fitzgeraldand Capital Partners also fully support the formal sale process, have stated tothe Board that they would not participate as a bidder in the process and havecommitted to sell the shares they control if appropriate value is achieved inthe transaction.

 

On February 10, 2006, the Company signed a definitive agreementfor the sale of Primrose to an affiliate of American Capital Strategies, Ltd.for an aggregate purchase price of $85 million. After adjustment fortransaction costs and certain items specified in the agreement, the netpurchase price is anticipated to be approximately $82.8 million. The Companyexpects to net, after taxes, approximately $58.2 million for its 91.5% fully dilutedshare of Primrose, or approximately $8.44 per diluted share. The sale issubject to customary closing conditions and is anticipated to close by March 31,2006.

 

We continue to seek to sell the WC business and the balance ofthe Company. The Company is consideringoffers for its interest in WC and the balance of the Company. The Companycurrently expects to enter into a definitive agreement during the secondquarter of 2006 to sell WC and the balance of the Company.

 

**Critical Accounting Policies**

 

Thereare certain accounting policies that we believe are critical to our businessand the understanding of our financial statements, either because of theirmagnitude to the financial statements or because they require management tomake certain estimates and assumptions. Management makes its estimates andassumptions based upon the best information available at the time and a numberof underlying variables and range of possible outcomes. The accuracy of theseestimates and assumptions is dependent upon the occurrence of future events andcircumstances beyond our control, and accordingly, actual results could differfrom our original estimates and assumptions. These critical accounting policiesare described below. For additional disclosures with respect to our significantaccounting policies, see Note 2 of the Notes to Consolidated FinancialStatements in Item 8 of this Annual Report on Form 10-K.

 

*Revenue Recognition*

 

Revenues for the Employer Cost Containment andHealth Services segment are derived from third-party

 

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administratorservices, self-insured plan administrator services, consulting services, grouprating services, and managed care administration services. Revenues arerecorded based on the terms and duration of the related contracts. Revenuesfrom managed care administration services with the OBWC are recognized on amonthly basis based on the contracted administrative fee. Certain contractsalso provide for an incentive or bonus award based on the attainment of certaincriteria stipulated in the contracts. Revenues from incentive or bonus awardsare recognized when they are earned and collectibility is reasonably assured. Cashreceived in advance of the services being provided is initially deferred andrecognized as revenue on a pro rata basis over the related contract period,which typically ranges between three and 12 months.

 

Revenuesfrom the Educational Services segment are composed of royalties, franchisefees, assignment and real estate services fees, transfer fees, forfeiture feesand tuition fees. Royalties are received from franchisees based on a percentageof a school’s monthly revenue. Royalty revenue is recorded in the month earnedand typically collected in the subsequent month. Franchise fees are receivedfrom a franchisee upon the signing of a franchise agreement. These fees areinitially deferred and recognized as revenue when the school receives itscertificate of occupancy. Assignment and real estate services include siteidentification and evaluation, preparation for the construction of thefranchisee’s Primrose school and consulting services provided to the franchiseeduring the construction of the school related to architectural and engineeringdesign. Additionally, assignment and real estate services may includecoordination with third-party professional service providers to (i) prepareenvironmental and soil studies; (ii) prepare the applications for allrequired building and zoning permits and assist with any follow-up proceduresnecessary to obtain all required permits; (iii) obtain a title commitmentfor the land site; and (iv) ensure that the franchisee’s lender has allrelevant documentation necessary for the franchisee to purchase the land forits Primrose school. Third party fees are not included in our revenues. Amajority of the assignment and real estate services fees is received from afranchisee upon the signing of a franchise agreement, and the remaining fee isreceived upon the closing of the purchase of the property by the franchisee(the “Closing”). All fees for assignment and real estate services receivedprior to the Closing are initially deferred. A portion of the assignment andreal estate services fees is recognized at the time of the Closing, and theremaining portion is recognized when the school receives its certificate ofoccupancy.

 

Transferfees are received and earned upon the sale of an existing franchise to anotherfranchisee. Forfeiture fees include fees applicable to the termination offranchise agreements or the expiration of option agreements. Tuition fees areearned at the company-owned school and are generally billed weekly for servicesto be provided in the following week. Primrose will occasionally provideexisting franchisees an option to purchase a franchise in a designatedgeographical area for a stated period of time (typically six to 12 months) forwhich Primrose receives a fee. This fee is initially deferred when received. Whenthe option is exercised, the option fee is credited against the amount of thefranchise fee and recognized as revenue when the school receives itscertificate of occupancy. If the option expires, the fee is recognized as aforfeiture fee.

 

*Allowance for Doubtful Accounts and**Uncollectible Recoverable Costs*

 

Our receivables are composed primarily of amounts due for contractservices provided by WC and royalty payments due to Primrose from franchisees. Primrosealso incurs third-party professional services costs on behalf of franchisees forassignment and real estate services. These costs are recorded as recoverablecosts and are collected from the franchisee upon the Closing. We establish anallowance for doubtful accounts and for potentially uncollectiblerecoverable costs based on a review of the current status of thereceivable, customer or franchisee credit evaluations, collection history andother pertinent information. Receivables are generally not collateralized.

 

On a consolidated basis, the allowance for doubtful accounts and forpotentially uncollectible recoverable costs was 4.8%, 6.9% and 5.7% of grossreceivables at December 31, 2005, 2004 and 2003, respectively. A onepercentage point increase in the allowance for doubtful accounts and for potentially uncollectible recoverablecosts would have increased operating expenses by $244, $211 and $174 for theyears ended December 31, 2005, 2004 and 2003, respectively.

 

*Goodwill and Intangible Assets*

 

Acquisitions are accounted for under the “purchase method,”whereby acquired tangible and intangible assets and assumed liabilities arerecorded at fair value. The determination of fair value of tangible andintangible assets and their respective useful lives requires management to makecertain estimates, judgments and assumptions. We determine fair value based ona variety of different methods, including, but not limited to, reference toquoted market prices, discounted cash flow

 

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projections, reference to relevant market data, replacement costanalysis and independent third-party valuations. Determining the estimateduseful life of intangible assets is dependent upon an evaluation of numerousfactors, such as the competitive environment, our market share and our abilityto maintain that market share in the future, any legal, regulatory orcontractual provisions that limit, or could limit, the assets’ life and theexpected macroeconomic environment and its impact on the industries in which weoperate. Intangible assets are amortized over their estimated useful life. Accordingly,differences in the estimated useful life of intangible assets and the actual usefullife can have a significant effect on our financial statements. Our intangibleassets are being amortized over a weighted average useful life of 12.4 years. Ifthe weighted average useful life was one year less (11.4 years), amortizationexpense would have been higher by approximately $180.

 

The excess of the fair value of assets acquired and liabilities assumedover the acquisition cost is allocated to goodwill. Goodwill is not amortized;however, it is subject to annual impairment testing. To test goodwill forimpairment, the carrying amount of the net assets of each “reporting unit” iscompared to the fair value of the reporting unit. If the fair value of thereporting unit is greater than the carrying amount, no additional testing isrequired. However, if the fair value of the reporting unit is less than itscarrying amount, then the fair value of the reporting unit is allocated to theassets and liabilities of the reporting unit, including an amount for any “implied”goodwill. If implied goodwill exceeds the net carrying amount of goodwill, noimpairment loss is recorded. Otherwise, an impairment loss is recognized forthe difference.

 

Fair value is defined as the amount at which an asset can be purchasedin a current transaction between willing parties, other than in a forcedliquidation sale. As a result of the offers received as part of theongoing formal sale process for Primrose and the balance of the Company,management determined that at December 31, 2005, the fair value of thereporting units exceeded their carrying value and that further impairmenttesting was not required.

 

At December 31, 2004 and 2003, we determined the fair value of eachreporting unit using a discounted cash flow approach. This approach requiresmanagement to make assumptions and estimates of future cash flows of thereporting unit, the appropriate discount rate and a terminal value of thereporting unit. The discount rate used for each reporting unit was determinedby assessing the appropriate risk level of the cash flows of the respectivereporting unit and adjusting the risk-free rate by a factor dependent upon thisrisk assessment. The terminal period cash flow of the respective reportingunits was based upon assigning a multiple of earnings before income taxes,depreciation and amortization (“EBITDA”) consistent with companies of similarsize and industry in which each of the units operates. The results of ourapproach indicated that the fair value of the Company’s reporting unitsexceeded their carrying value. Accordingly, no impairment charges wererecognized in 2004 and 2003.

 

*Impairment of Long-lived Assets, Other ThanGoodwill*

 

We review long-lived assets, including intangible assets, forimpairment in accordance with the provisions of Statement of FinancialAccounting Standards No. 144, *Accountingfor the Impairment or Disposal of Long-**Lived Assets* (“SFAS 144”). SFAS 144requires companies to test long-lived assets when events or circumstances leadmanagement to believe that the carrying value of an asset may not berecoverable. Recoverability is assessed based on the carrying value of an assetand its fair value, which is generally determined by the sum of the estimated undiscountedcash flows expected to result from the use and eventual disposal of the assetin question. If the fair value of the asset is less than its carrying value, animpairment loss is recognized based on the excess of the carrying amount of theasset over its fair value. Based on our review and analysis conducted duringthe applicable periods, we have not recognized any impairment losses onlong-lived assets, including identified intangible assets, during each of thethree years ended December 31, 2005, 2004 and 2003.

 

*Stock Options*

 

EffectiveJuly 1, 2005, we adopted the fair value method of accounting forstock-based compensation under Statement of Financial Accounting Standards No. 123(revised 2004), *Share-Based Payment*(“SFAS 123R”). Prior to July 1,2005, we applied the intrinsic value method in measuring stock-basedcompensation under Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(“APB 25”), and disclosed in thefootnotes to our financial statements the pro forma effect on net income andearnings per share assuming we had applied the fair value method of accountingfor stock-based awards.

 

Weadopted the provisions of SFAS 123R using the modified prospective application.Under the modified prospective application, the provisions of SFAS 123R areapplied to new awards and awards modified, repurchased or cancelled after theeffective date. Additionally, compensation cost for the unvested portion ofawards outstanding as of

 

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theeffective date is recognized as the requisite service is rendered. Share-basedcompensation expense for the unvested portion of awards outstanding as of theeffective date was $180 in 2005, and is expected to be $208 in 2006, $60 in2007 and 2008, $53 in 2009 and $26 in 2010.

 

UnderSFAS 123R, share-based awards result in a cost measured at fair value on theawards’ grant dates. Determining the fair value of an award requires managementto make estimates regarding the number of awards expected to vest, the lengthof time the awards will be held, the appropriate risk-free interest rate, thedividend yield and the expected volatility of the underlying security. The fairvalue of the estimated number of awards expected to vest is recognized throughearnings over the requisite service period, which is generally the vestingperiod. At December 31, 2005, share-based awards are limited to stockoptions granted to employees and non-employee directors.

 

Theexpected life is the length of time the option holder is expected to hold the options.It is a significant assumption as it determines the period for which therisk-free interest rate, volatility and dividend yield must be applied. Therisk-free interest rate is based on the expected U.S. Treasury rate over theexpected life. Volatility reflects the movement in our stock price over themost recent historical period equivalent to the expected life. The dividend yieldrepresents the dividend the Company expects to pay over the expected life. In2005, the Company granted options to purchase 64,510 shares of the Company’scommon stock. The fair value of the options aggregated $264 ($4.09 per share) usinga Black-Scholes option pricing model and the following assumptions:

 
| Risk-free  interest rate |   | 4.0%    |
|--------------------------|--------|---------|
| Dividend  yield          |   | 0%      |
| Volatility               |   | 31.1%   |
| Expected  life           |   | 7 years |

 

Theoptions expire 10 years from the date of grant. Increasing the estimate of the expectedlife from seven years to 10 years would have increased the fair value of theoption award from $4.09 per share to $4.98 per share, and resulted in additionalshare-based compensation expense of $57 being recognized over the requisiteservice period.

 

*IncomeTax Expense and Accruals*

 

Income taxes are accounted for in accordance with Statement ofFinancial Accounting Standards No. 109, *Accountingfor Income Taxes*, whereby deferred taxes are recognized based on thetemporary differences between the financial reporting basis and the tax basisof the assets and liabilities, using presently enacted rates. Certain judgmentis required in determining our annual effective tax rate and in evaluating ourtax positions. While we believe that our tax return positions are fully supportable,we expect that certain positions could be challenged and that we may notbe able to successfully defend our positions. Accordingly, we establish certainreserves, including interest, for these items. We adjust these reserves inlight of changing facts and circumstances. Our effective tax rate for 2005 was 30.7%compared to 47.1% in 2004. In 2005, our tax provision included the reversal of$1,684 of previously recorded tax reserves that management believed were nolonger necessary in light of current facts and circumstances.

 

Certain items are included in our tax return at different times thanthey are reflected in our financial statements. As a result, our effective taxrate reflected in our financial statements is different that that reported inour tax return. Some of the differences are permanent, such as expenses thatare not tax deductible, and some of the differences are temporary, and willreverse over time, such as depreciation expense. These temporary differencescreate deferred tax assets and liabilities. Deferred tax assets generallyrepresent items that can be used as a tax deduction in our tax return in futureyears for which we have already recorded the benefit in our statement of income.We establish valuation allowances when we believe expected future taxableincome will not be sufficient to realize the deferred tax asset.

 

**RESULTS OF OPERATIONS**

 

*Overview*

 

For the year ended December 31, 2005, revenues were $155,311compared to $132,940 in 2004. We experienced double digit revenue growth over2004 in both our Employer Cost Containment and Health Services segmentand our Educational Servicessegment. The growth in the EmployerCost Containment and Health Services segment was fueled by

 

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the March 2005 acquisition of Caronia, which accounted forslightly more than half of the revenue growth and customer growth. The growthin our Education Services segment was driven by the opening of 24 newfranchise schools and increasing royalties from the existing franchise schoolsdue to increasing enrollment and tuition.

 

In2005, income available to common stockholders and earnings per share alsoexperienced significant increases over 2004 due to the revenue growth referredto above, plus the actions taken in 2004 to dispose of our discontinuedoperations, repay outstanding debt and redeem our outstanding Preferred Stock. Incomeavailable to common stockholders and diluted earnings per share in 2005 were $9,435and $1.34, respectively, compared to income available to common stockholders anddiluted earnings per share in 2004 of $1,958 and $0.26, respectively. For theyear ended December 31, 2004, income available to common stockholders andearnings per share were reduced by a loss from discontinued operations of$1,230 and Preferred Stock accretion of $1,275. Due to the sale ofsubstantially all the assets of Pumpkin, the resolution of all outstandingclaims against the Company with respect to the Possible Dreams bankruptcy, andthe redemption of all outstanding Preferred Stock during 2004, we no longerreported results from discontinued operations or recognized Preferred Stockaccretion in 2005. Finally, during 2004, we incurred $2,423 of interest expenseon a $30,000 fixed rate note (the “Note”). The Note was repaid in September 2004,resulting in lower interest costs in 2005.

 

The formal process to sell the Company announced in June 2005 is ongoing.As previously discussed, we have reached an agreement to sell Primrose for anaggregate purchase price of $85,000, and are currently considering offers forour interest in WC and the balance of the Company. We currently expectto enter into a definitive agreement during the second quarter of 2006 to sellWC and the balance of the Company.

 

Through December 31, 2005, costs of approximately $500 have beenincurred in connection with the formal sale process. The majority of the costsrelated to the sale will be incurred upon the closing of the sale of Primroseand the completion of the sale of the Company. These costs would include, butare no limited to, investment banking fees, legal and accounting fees, stay paybonuses and fees to Capital Partners for its role in the formal sale process. Someof the costs of the process, such as legal and accounting fees, are notcontingent and will be paid even if the transactions do not close.

 

A more detailed discussion of our results of operations is provided inthe sections below.

 

*Revenues*

 

Segmentrevenues were as follows:

 
| ** **                                    | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Employer Cost Containment and Health Services |       | $                                        | 140,786    |   | $ | 121,335 |   | $ | 84,598 |   |
| Educational Services                          |       | 14,525                                   |       | 11,605 |   | 9,834 |   |
| Total revenues                                |       | $                                        | 155,311    |   | $ | 132,940 |   | $ | 94,432 |   |

 

Consolidatedrevenues for the year ended December 31, 2005 increased $22,371, or 17% to$155,311 compared to revenues of $132,940 for the year ended December 31,2004. Consolidated revenues for the year ended December 31, 2004 increased$38,508, or 41% to $132,940 compared to revenues of $94,432 for the year ended December 31,2003.

 

Revenuesfrom the Employer Cost Containment and Health Services segment for the yearended December 31, 2005 increased $19,451, or 16% to $140,786 compared to$121,335 for 2004. The increase was driven by the acquisition of Caronia in March 2005,which accounted for $10,941 of revenue in 2005, the full-year contribution ofthe strong customer growth in the second half of 2004 and additional customergrowth during 2005.

 

Revenues from the Employer Cost Containment andHealth Services segment for the year ended December 31, 2004 increased$36,737, or 43% to $121,335 compared to $84,598 for 2003. The increase wasprimarily driven by the acquisition of Octagon in October 2003. Theoperations of Octagon were included in our 2003 results only for the threemonths following the acquisition, whereas in 2004 the operations of Octagonwere included for the entire year. The

 

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inclusionof Octagon for 12 months in 2004 compared to only three months in 2003 resultedin additional revenues of $33,918.

 

Revenues from the Educational Services segmentfor the year ended December 31, 2005 increased $2,920, or 25% to $14,525compared to $11,605 for 2004. Royalty revenues for 2005 increased $1,713, or 18%compared to 2004 due to a 10% increase in same school revenue, a full yearcontribution from schools opened in 2004 and the opening of 24 additionalschools during 2005. The opening of 24 schools in 2005 compared to seven in2004 also resulted in an increase of $1,042, or almost 300% in franchise feesand assignment and real estate services fees. At December 31, 2005, therewere 149 schools opened compared to 125 schools at December 31, 2004.

 

Revenues from the Educational Services segmentfor the year ended December 31, 2004 increased $1,771, or 18% to $11,605compared to $9,834 for 2003. Royalty revenues for 2004 increased $1,357, or 17%compared to 2003 due to higher same school revenue, a full year contributionfrom schools opened in 2003 and the opening of seven additional schools during2004. At December 31, 2004, there were 125 schools opened compared to 118schools at December 31, 2003. Assignment and real estate services feesincreased $220 as there were 16 property sale closings with franchisees during2004 compared to five in 2003, and company-owned school revenues increased $293due to increasing enrollment as the school becomes established. These increaseswere partially offset by lower franchise fees of $309 as seven new schools wereopened during 2004 compared to 13 openings in 2003.

 

*Selling, General and Administrative Expenses*

 

Selling,general and administrative expense (“SG&A”) by segment was as follows:

 
| ** **                                       | ** ** | **For the year ended December 31,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Employer Cost Containment and Health Services    |       | $                                        | 120,961    |   | $ | 104,006 |   | $ | 71,709 |   |
| Educational Services                             |       | 7,247                                    |       | 5,980 |   | 5,267 |   |
| Total segment SG&A                           |       | 128,208                                  |       | 109,986 |   | 76,976 |   |
| Corporate                                        |       | 2,487                                    |       | 2,779 |   | 1,263 |   |
| Management advisory fee paid to Capital Partners |       | 1,550                                    |       | 1,550 |   | 1,400 |   |
| Total SG&A                                   |       | $                                        | 132,245    |   | $ | 114,315 |   | $ | 79,639 |   |

 

ConsolidatedSG&A for the year ended December 31, 2005 increased $17,930, or 16% to$132,245 compared to SG&A of $114,315 for 2004. Consolidated SG&A forthe year ended December 31, 2004 increased $34,676, or 44% compared toSG&A of $79,639 for 2003.

 

SG&Aexpenses in the Employer Cost Containment and Health Services segment increased$16,955, or 16% to $120,961 for the year ended December 31, 2005 comparedto $104,006 for 2004. Compensation and benefits expense increased $11,600 dueto the acquisition of Caronia, which accounted for $5,580 of the increase, anincrease in personnel necessary to support the customer growth in 2004 and 2005and a one-time special compensation charge in 2005 of $910 resulting from the cashsettlement of vested options held by certain WC employees. Legal and accountingfees were higher in 2005 due to the cost of the Investigation ($2,100 incurredin 2005 compared to $900 in 2004), consulting fees of $350 were incurred relatingto an internal control documentation and improvement project and costs of approximately$1,000 were incurred for the integration of Caronia’s information systems withour systems.

 

SG&Aexpenses in the Employer Cost Containment and Health Services segment increased$32,297, or 45% to $104,006 for the year ended December 31, 2004 comparedto $71,709 for 2003. SG&A increased $30,405 as Octagon was included for 12months in 2004 compared to only the last three months in 2003 following itsacquisition. Also, for the year ended December 31, 2004, SG&A expenseincluded $900 for the Supplemental Procedures and the Investigation and $892 ofhigher audit fees resulting from the Supplemental Procedures and the Investigation.

 

SG&Aexpenses in the Educational Services segment increased $1,267, or 21% to $7,247for the year ended December 31, 2005 compared to $5,980 for 2004. Thisincrease was primarily attributable to higher compensation and benefits expenseof approximately $900 due to increased personnel necessary to service theincreased number of franchised schools and a special one-time cash payment of$240 to certain employees (see “Liquidity and Capital Resources”).

 

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SG&Aexpenses in the Educational Services segment increased $713, or 14% to $5,980for the year ended December 31, 2004 compared to $5,267 for 2003. Thisincrease was primarily attributable to higher personnel costs due to increasedheadcount necessary to service the number of franchise schools and higher expensesin our company-owned school as a result of increasing enrollment as the schoolmatured.

 

SG&Aexpenses at our corporate headquarters decreased $292, or 10%, to $2,487 forthe year ended December 31, 2005 compared to $2,779 for 2004. Contributingto this decrease was a significant decline in accounting and auditing expenses ofapproximately $800 due to the extended procedures performed for the 2004 auditresulting from the Investigation and the Restatement and other factorsassociated with the planning and execution of year-end audit procedures. Forthe 2005 period, we selected new independent public accountants, which also resultedin a decrease in fees for our 2005 quarterly reviews compared to the 2004quarterly reviews. The fees and costs of the Special Committee also decreasedapproximately $300 in 2005 as their activities were significantly diminishedwhen the Board determined to pursue a formal sale process for the Company. Partiallyoffsetting these decreases were higher legal fees of approximately $430 due tothe Investigation, the late filing of our 2004 Form 10-K and our 2005 Form 10-Qs,communications with the AMEX and SEC, the Caronia acquisition, and the formalsale process. We do not have an in-house legal staff and, accordingly, rely onoutside legal counsel for all our legal services. In 2005, we also recorded approximately$320 of expenses relating to professional services incurred in connection with theformal sale process and share-based compensation expense relating to theadoption of SFAS 123R.

 

SG&Aexpenses at our corporate headquarters increased $1,516, or 120% to $2,779 forthe year ended December 31, 2004 compared to $1,263 for 2003. Thisincrease was mainly due to an increase in audit fees, legal fees, and the costsof the Special Committee. Audit fees for corporate increased $850 due to anincrease in the hourly billing rates of our accountants, additional workincurred for the Investigation and the Restatement, and other factorsassociated with the planning and execution of year-end audit procedures. Legalfees were $383 higher than in 2003 mainly due to services pertaining to thereview of strategic alternatives, the redemption of the Preferred Stock, thesale of Pumpkin, the settlement of the Possible Dreams bankruptcy and publicfiling requirements resulting from the offers to purchase the Company, theSupplemental Procedures and the Investigation and the late filing of ourquarterly and annual reports. The costs of the Special Committee in 2004 were$580 and included costs of an investment banking firm, independent legalcounsel and fees paid to the Special Committee members.

 

Our controlling stockholder, Capital Partners, provides certainmanagement and advisory services related to investments, generaladministration, corporate development, strategic planning, stockholderrelations, financial matters and general business policy for which we paid anannual fee of $1,550 for the years ended December 31, 2005 and 2004 and$1,400 for the year ended December 31, 2003.

 

The Advisory Services Agreement with Capital Partners also provides forthe payment of investment banking fees to Capital Partners for acquisitionopportunities presented to the Company at usual and customary rates fortransactions of similar size and complexity. Capital Partners is under noobligation to present to the Company any or all acquisition candidates of whichit becomes aware. Furthermore, the Company is under no obligation to utilizeCapital Partners for investment banking services. The payment of an investmentbanking fee to Capital Partners requires the approval of the Audit Committee, theCompensation Committee and the full Board of Directors. We paid CapitalPartners an investment banking fee of $240 in 2005 in connection with theCaronia acquisition and an investment banking fee of $150 in 2003 in connectionwith the Octagon acquisition. The investment banking fees were capitalized as part ofthe acquisition costs of these acquisitions.

 

OnDecember 23, 2005, we entered into the Second Amended and RestatedAdvisory Services Agreement (the “Amended Advisory Services Agreement”) withCapital Partners, effective January 1, 2006. Under the Amended AdvisoryServices Agreement, Capital Partners will provide services similar to thoseprovided under prior Advisory Services Agreements, and we will pay CapitalPartners an annual fee of $1,550. The fee is payable quarterly at the beginningof the quarter. Under the terms of the Amended Advisory Services Agreement, if the Company is sold prior to June 30,2006, Capital Partners will continue to provide services under theagreement for a period of six months following the effective date of a sale. Inaddition, under the Amended Advisory Services Agreement, Capital Partners willprovide advisory services to the Company in connection with managing the formalsale process, including in the areas of planning such sale process, selectingand evaluating potential buyers, negotiating directly or indirectly withpotential buyers and consummating a sale of the Company, or if applicable, thesale of Primrose and the sale of the balance of the Company in two separatetransactions.  In exchange for suchservices, the Company will pay to Capital Partners a sale bonus of $2,000 (the“Incentive Sale Bonus”).  The IncentiveSale Bonus will be increased or decreased depending on the ultimate aggregatesale proceeds obtained (the “Adjustment Amount”).  In the event a sale of Primrose occurs in aseparate transaction, no amount will be due. Rather, the Incentive Sale Bonus, including the Adjustment Amount, willbe earned and payable upon the sale of the balance of the Company. 

 

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*Depreciationand Amortization Expense*

 

Depreciationand amortization expense (“D&A”) by segment was as follows:

 
| ** **                                    | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Employer Cost Containment and Health Services |       | $                                        | 4,400      |   | $ | 3,214 |   | $ | 1,893 |   |
| Educational Services                          |       | 545                                      |       | 537 |   | 558 |   |
| Total segment D&A                         |       | 4,945                                    |       | 3,751 |   | 2,451 |   |
| Corporate                                     |       | 39                                       |       | 29 |   | — |   |
| Total D&A                                 |       | $                                        | 4,984      |   | $ | 3,780 |   | $ | 2,451 |   |

 

ConsolidatedD&A increased by $1,204, or 32% to $4,984 for the year ended December 31,2005 compared to $3,780 for 2004. Consolidated D&A increased by $1,329, or54% to $3,780 for the year ended December 31, 2004 compared to $2,451 for2003.

 

D&A for the Employer Cost Containment and Health Services segmentincreased $1,186, or 37% to $4,400 for the year ended December 31, 2005 ascompared to $3,214 for 2004. This increase was primarily due to depreciationand amortization of $781 on fixed assets and intangible assets acquired as part ofthe Caronia acquisition and additional amortization of $138 due to a decreasein the estimated useful life of an intangible asset (customer list) in 2005.

 

D&A for the Employer Cost Containment and Health Services segmentincreased $1,321, or 70% to $3,214 for the year ended December 31, 2004 ascompared to $1,893 for 2003. This increase was primarily due to a full year ofdepreciation and amortization of fixed and intangible assets acquired as part ofthe Octagon acquisition.

 

*InterestExpense*

 

Interestexpense by segment was as follows:

 
| ** **                                    | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Employer Cost Containment and Health Services |       | $                                        | 2,585      |   | $ | 1,789 |   | $ | 1,265 |   |
| Educational Services                          |       | 22                                       |       | 139 |   | 300 |   |
| Total segment interest expense                |       | 2,607                                    |       | 1,928 |   | 1,565 |   |
| Corporate                                     |       | —                                   |       | 2,423 |   | — |   |
| Total interest expense                        |       | $                                        | 2,607      |   | $ | 4,351 |   | $ | 1,565 |   |

 

Consolidatedinterest expense decreased $1,744 or 40% to $2,607 for the year ended December 31,2005 from $4,351 for 2004. This decrease was due to a decrease in our averageoutstanding borrowings of approximately $9,300 in 2005 compared to 2004 and a decreasein our effective interest rate to 7.8% in 2005 compared to 10.2% in 2004. The decreasein the average outstanding borrowings and effective interest rate in 2005 was duemainly to the repayment of the Note, which bore interest at a fixed rate of 10%,in September 2004.

 

Consolidatedinterest expense increased $2,786, or 178% to $4,351 for the year ended December 31,2004 from $1,565 for 2003. The increase in 2004 compared to 2003 was due to theissuance of the Note in January 2004 and the full year effect of theadditional debt from the acquisition of Octagon in October 2003. Due tothe issuance of the Note, the effective interest rate in 2004 increased to10.2% from 6.3% in 2003.

 

Interestexpense at the Employer Cost Containment and Health Services segment increased$796, or 44% to $2,585 for the year ended December 31, 2005 from $1,789for 2004 primarily due to additional debt resulting from the acquisition ofCaronia and slightly higher interest rates. For the year ended December 31,2004, interest expense increased $524, or 41% to $1,789 compared to $1,265 for2003 due to an increase in outstanding debt resulting from the Octagonacquisition.

 

Corporateinterest expense in 2004 represented interest on the Note.

 

25

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*Other Income, net*

 

Other income, net consisted of the following:

 
| ** **                     | ** ** | **For the year ended December 31,** | ** ** |
|--------------------------------|------------|------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest income                |       | $                                        | 213        |   | $ | 220 |   | $ | 84 |   |
| Unrealized gain on derivatives |       | 261                                      |       | 401 |   | 245 |   |
| Other (expense) income         |       | (415                                     | )          | 31 |   | (144 | ) |
| Total other income, net        |       | $                                        | 59         |   | $ | 652 |   | $ | 185 |   |

 

Other expense in 2005 included certain costs to resolvevarious matters with the Former Executives of WC. In March 2006, weentered into the Agreement with the Former Executives. See Item 3. “Legal Proceedings.”  The total cost of the Agreement was $935 andwas reflected in the 2005 financial statements as follows: $428 was recorded asother expense; $190 was recorded as SG&A; and $317 was capitalized asintangible asset and will be amortized over the three-year life of thecovenants not to compete. The cost of the Agreement does not includingpotential contingent payments aggregating $846 that the Former Executives areeligible to receive upon a change of control of the Company or WC. Otherexpense in 2003 included the loss from the sale of marketable securities acquiredin the Octagon acquisition of $251 partially offset by a gain of $107 from thesale of assets.

 

*Income Taxes*

 

Income tax expense was $4,770, $5,245, and$4,617 for the years ended December 31, 2005, 2004 and 2003, respectively,representing an overall effective tax rate on continuing operations of 30.7%, 47.1%,and 42.1%, respectively. The decrease in our effective tax rate in 2005 resultedfrom the reversal of $1,684 of certain tax reserves that management believed wereno longer necessary. Excluding the effect of this reversal, our effective taxrate for 2005 was 41.5%.

 

*Discontinued Operations*

 

Discontinuedoperations included the results of Pumpkin and Possible Dreams. In October 2004,we consummated the sale of substantially all of the assets of Pumpkin, and in November 2004,we entered into an agreement with the bankruptcy trustee for Possible Dreams toresolve all outstanding claims against the Company. The loss from discontinuedoperations in 2004 included a net loss on the sale of Pumpkin of $3,928 and a netgain from the settlement of the Possible Dreams bankruptcy of $1,516.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

AtDecember 31, 2005, we had available unrestricted cash and cash equivalentsof $12,340. This was only a slight decrease from the available unrestrictedcash and cash equivalents of $12,488 at December 31, 2004. At December 31,2005, WC had an available $8,000 revolving line of credit (the “WC Revolver”)and Primrose had an available $1,000 revolving line of credit (the “PrimroseRevolver”). Available borrowings under the WC Revolver were reduced by theaggregate amount of outstanding letters of credit ($1,250 at December 31,2005). There were no outstanding borrowings under the WC Revolver or the PrimroseRevolver, and accordingly, at December 31, 2005, WC had the ability toborrow an additional $6,750 and Primrose had the ability to borrow anadditional $1,000. Management believes that cash flows from operations alongwith the available borrowing capacity under the WC Revolver and the PrimroseRevolver will be sufficient to fund our operations and service our debt for thenext 12 to 24 months.

 

During2005, we spent $23,704 to acquire Caronia, pay for capital expenditures and acquireshares of WC from the minority stockholders of WC. To fund these expenditures,cash of $11,816 was generated from operating activities and cash of $11,740 wasraised through financing activities. Further discussion of the components ofour cash flow for each of the last three years follows.

 

Wehave revised our 2004 and 2003 consolidated statements of cash flows asa result of recent guidance provided

 

26

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by the SEC regarding the reporting of cash flows from discontinuedoperations. We had previously disclosed cash flows from operating, investingand financing activities of discontinued operations on a combined basis. Tocomply with Statement of Financial Accounting Standards No. 95*, Statement of Cash Flows*, we have revised our consolidated statementsof cash flows for 2004 and 2003 to report separately the cash flows fromoperating, investing and financing activities of discontinued operations.

 

Netcash flow from operations for 2005 was $11,816 compared to $17,339 in 2004. Thedecrease was principally the result of payments of accounts payable and accruedliabilities, primarily due to an increase in estimated Federal income taxpayments and significant payments made during the first quarter of 2005 foraccounting and auditing services. Also, cash flow in 2004 benefited from thetiming of cash receipts from advance billings on certain customer contracts andcash receipts from prospective franchisees (see increase in unearned revenuediscussion below).

 

Netcash flow from operations in 2004 of $17,339 represented an increase of $4,074over 2003 net cash flow from operations of $13,265. This increase was primarilydue to an increase in unearned revenue of $4,168. Unearned revenue at WCincreased $2,897 in 2004 as a result of growth at Octagon and growth in themanaged care operations. WC enters into certain service contracts with terms ofas much as one year and receives advance payments for services to be provided. Similarly,unearned revenue at Primrose increased $1,271 as the number of prospectivefranchisees increased in 2004 compared to 2003. Upon the signing of a franchiseagreement, franchisees pay a franchise fee and an assignment and real estateservices fee for services to be provided by Primrose to the franchisee up untilthe school receives its certificate of occupancy.

 

Cashused in investing activities was $23,704 in 2005 compared to net cash used ininvesting activities of $3,021 in 2004. In 2005, cash used in investingactivities included $15,432 to acquire Caronia and pay transaction costs, $4,931for capital expenditures and $3,341 to acquire 979.88 shares of WC from the minoritystockholders of WC (see below). Cash used in investing activities in 2004included $3,841 for capital expenditures and $1,801 for the acquisition ofKRAMMCO and ICS. These uses were partially offset by net cash received from thesale of substantially all the assets of Pumpkin. The increase in capitalexpenditures in 2005 compared to 2004 is due to expenditures for informationtechnology and software upgrades in our Employer Cost Containment and HealthServices segment. We estimate that expenditures for information technology andsoftware upgrades in our Employer Cost Containment and Health Services segmentin 2006 will be approximately $4,000 - $4,500. We currently have no commitmentsfor capital expenditures.

 

Cashused in investing activities in 2003 was primarily for capital expenditures of$1,589 and the acquisition of Octagon for $14,893, net of proceeds from the saleof investments acquired. Capital expenditures in 2004 increased compared to2003 primarily due to facilities expansion at Octagon in 2004.

 

In2005, we raised $11,740 of net cash from the issuance of long-term debt andother sources. In connection with the Caronia acquisition, WC entered into aSecond Amended and Restated Loan Agreement (the “Credit Agreement”) that providedWC with a $40,500 (net cash of $40,359 after financing costs of $141) five-year,fully-amortizing term loan (the “WC Term Loan”) and the WC Revolver. Theproceeds of the WC Term Loan were used to fund the Caronia acquisition andrepay the $24,929 balance then outstanding under the WC Holdings Senior TermLoan (the “Prior WC Term Loan”). The WC Term Loan bears interest at LIBOR plus 2.5%or Prime, at the Company’s option, and borrowings under the WC Revolver bearinterest at LIBOR plus 2.0% or Prime minus 0.5%, at the Company’s option. TheWC Term Loan requires monthly principal payments of $675. During 2005, total principalrepayments under the WC Term Loan were $6,075.

 

InSeptember 2005, Primrose entered into a five-year $1,000 loan (the “PrimroseTerm Loan”). The proceeds from the Primrose Term Loan were used to partiallyfund a special dividend to Primrose stockholders of $3,453. As a 98.5%stockholder of Primrose, we received $3,400 of the dividend, and the minoritystockholders received $53. A special one-time cash payment of $240 was made to certainemployees to compensate them for the dilution in the value of their options topurchase Primrose common stock resulting from the payment of the dividend. ThePrimrose Term Loan was repaid in full during the fourth quarter of 2005.

 

In2004, net cash of $13,475 was used in financing activities to repay debt of $39,960,which included the repayment of the $30,000 Note, redeem all issued andoutstanding shares of Preferred Stock for $5,000 and settle the outstandingclaims against the Company in the Possible Dreams bankruptcy for $442. Cash of $29,289 was received from the issuance of the Note (net offinancing costs) and cash of $2,638 was provided by financing activities ofdiscontinued operations. In 2003, net cash of $11,854 was provided by financingactivities primarily due to the issuance of debt to fund the Octagonacquisition partially offset by repayments of existing debt.

 

27

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On September 16, 2005, the Company acquired 979.88 shares of WC stock directly from the minoritystockholders of WC for total cash consideration of $3,341. The funds to acquirethese shares were obtained from the Dividend. Also on September 16,2005, certain option holders of WC exercised options to purchase shares of WCfor aggregate cash consideration of $283. As a result of the exercise of theseoptions, an additional 408.41 shares of WC were issued to minority stockholders.Prior to September 16, 2005, the minoritystockholders of WC had an aggregate ownership interest of 20%. After the neteffect of the Company’s acquisition of 979.88 shares from the minoritystockholders and the issuance of 408.41 additional shares to the minoritystockholders, the aggregate ownership interest of the minority was reduced to15.6%.

 

TheCredit Agreement bears interest at variable rates. To mitigate its exposure tochanges in variable rates, WC uses interest rate swaps to effectively convert aportion (based on the “notional value” of the swap) of variable rate debt tofixed rate debt. During 2005, WC had two outstanding interest rate swaps. Oneswap had a notional value of $10,000 under which WC paid a fixed rate of 3.44%and received a variable rate based on one-month LIBOR. The other swap had anotional value of $8,500 under which WC paid a fixed rate of 5.85% and receiveda variable rate based one-month LIBOR. On December 22, 2005, the interestrate swap with a notional value of $8,500 expired and the Company elected notto replace the expired swap with a new interest rate swap.

 

TheCredit Agreement also requires that an additional principal payment (the “AcceleratedPayment”) be made based on the annual earnings, as defined, of WC.  The Accelerated Payment based on the 2005earnings of WC is $1,574 and is due on April 30, 2006.

 

TheWC Term Loan, the WC Revolver and the Primrose Revolver each containsrestrictive covenants that prohibit or limit certain actions, includingspecified levels of capital expenditures, investments and incurrence ofadditional debt, and require the maintenance of a minimum fixed charge ratio. Borrowingsare secured by a pledge of substantially all assets at the subsidiary level, aswell as a pledge of the Company’s ownership in the subsidiary. The CreditAgreement also contains provisions that require WC to provide monthly financialstatements and audited annual financial statements to the lender. Managementbelieves that the Company is currently in compliance with all of theserequirements.

 

OnFebruary 10, 2006, we signed a definitive agreement to sell Primrose to anaffiliate of American Capital Strategies, Ltd. for an aggregate purchase priceof $85,000, subject to adjustment. After adjustment for transaction costs and certainitems specified in the agreement, the net purchase price is anticipated to beapproximately $82,800. After taxes, we expect to receive approximately $58,200million for our 91.5% fully diluted ownership interest in Primrose. If the saleof the balance of the Company is not successful, the Company’s Board ofDirectors may consider various alternative uses of the proceeds from the saleof Primrose, including, but not limited to, a special dividend to stockholders.

 

OnMarch 6, 2006, we entered into the Agreement with the Former Executives. Underthe terms of the Agreement, the Former Executives received a cash payment of$562 shortly after signing the Agreement and will receive additional cashpayments on the first and second anniversary dates of the signing of theAgreement aggregating $373. In addition, the Former Executives are eligible to receiveadditional cash payments aggregating$846 upon a change in control of theCompany or WC.

 

*Contractual Obligations*

 

The table below shows payments due undercontractual obligations at December 31, 2005 for the periods indicated: 

 
| ** **                           | ** ** | **Payments due by period** | ** ** |
|--------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **Total**                  | ** ** | **2006** | ** ** | **2007-2008** | ** ** | **2009-2010** | ** ** | **Thereafter** | ** ** |
| Long-term debt                       |       | $                          | 34,425     |   | $ | 9,674 |   | $ | 16,200 |   | $ | 8,551 |   | — |   |
| Operating leases                     |       | 32,839                     |       | 6,993 |   | 11,826 |   | 6,138 |   | 7,882 |   |
| Advisory fee due to Capital Partners |       | 1,550                      |       | 1,550 |   | — |   | — |   | — |   |
| The Agreement                        |       | 935                        |       | 562 |   | 373 |   | — |   | — |   |
| Total                                |       | $                          | 69,749     |   | $ | 18,779 |   | $ | 28,399 |   | $ | 14,689 |   | $ | 7,882 |   |
|                                      |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theobligation for the advisory fee due to Capital Partners under the AmendedAdvisory Services Agreement is

 

28

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reflectedin the above table for 2006 only. The Amended Advisory Services Agreement is an annual agreement that automaticallyrenews on December 31 under the existing terms unless either party givesat least 60 days’ prior written notice to the other. The Company is under noobligation to continue being a party to such an agreement beyond 2006. Accordingly,obligations for periods after 2006 are not reflected in the above table.

 

The payments due under the Agreement do not include the $846 ofadditional payments that would become payable under the Agreement upon a changeof control of the Company or WC.

 

**ITEM 7A. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

*RiskManagement*

 

Marketrisks relating to our operations result primarily from changes in interestrates. Our interest rate risk management objective is to lower our overallborrowing costs and to mitigate the impact of changing interest rates on ournet income and cash flows. We achieve our objective primarily through the useof interest rate swap agreements, which effectively convert variable rate debtto fixed rate debt. At December 31, 2005, WC had an interest rate swapagreement with a notional value of $10,000 under which it pays a fixed rate of3.44% and receives a variable rate based on one-month LIBOR. After the effectof the swap, variable rate debt comprised 71% of total debt at December 31,2005 compared to 26% at December 31, 2004. The increase in the percent ofvariable rate debt was due to our borrowings under the Credit Agreement, andexpiration of an interest rate swap agreement with a notional value of $8,500on December 22, 2005. The $10,000 swap expires in February 2009.

 

Theoutstanding interest rate swap exposes us to credit risk in the event that thecounterparty to the agreement does not or cannot meet its obligation. Thenotional amount is used to measure interest to be paid or received and does notrepresent the amount of exposure to credit loss. The loss would be limited tothe amount that would have been received, if any, over the remaining life ofthe swap agreement. The counterparty to the swap is a major financialinstitution, which we expect to fully perform under the terms thereof. Wedo not utilize interest rate swaps or other derivative financial instrumentsfor trading or speculative purposes.

 

*MarketRisk Sensitive Instruments*

 

Includingthe effect of the interest rate swaps, the weighted average borrowing rate forour debt was 7.8% for 2005 compared to 10.2% for 2004. The decrease in theweighted average borrowing rate in 2005 was due to the absence of the Noteduring 2005. Assuming a one percentage point increase in our weighted averageborrowing rate, interest expense would have been higher by $112 and $162 forthe years ended December 31, 2005 and 2004, respectively.

 

29

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**ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**Index To Consolidated Financial Statements**

 
| Reports of Independent Registered Public Accounting Firms                                                        |   |
|------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets at December 31,  2005 and 2004                                                  |   |
| Consolidated Statements of  Income for the years ended December 31, 2005, 2004 and 2003                     |   |
| Consolidated Statements of  Stockholders’ Equity for the years ended December 31, 2005, 2004 and  2003 |   |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2005, 2004 and 2003                 |   |
| Notes to Consolidated  Financial Statements                                                                      |   |
| Schedule I  — Condensed Financial Information of Registrant                                            |   |

 

30

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

Board of Directors and Stockholders

Security Capital Corporation

Greenwich, Connecticut

 

We have audited the consolidated balance sheet of Security CapitalCorporation and subsidiaries as of December 31, 2005, and the relatedconsolidated statements of income, stockholders’ equity, and cash flows for theyear then ended. Our audit also included the financial statement schedule ofSecurity Capital Corporation, listed in the Index at Item 15(a).These financial statements and the financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of SecurityCapital Corporation and subsidiaries as of December 31, 2005 and theresults of their operations and their cash flows for the year then ended inconformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements, taken as a whole, presents fairly in all materialrespects the information set forth therein.

 
|                | /s/ McGladrey & Pullen |   |
|---------------------|---------------------------------|--------|
|                |
| New York, NY        |
| March 31, 2006 |

 

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Board of Directors and Stockholders

Security Capital Corporation

 

We have audited the accompanying consolidated balancesheet of Security Capital Corporation and subsidiaries (the “Company”) as of December 31,2004, and the related consolidated statements of income, stockholders’ equity,and cash flows for each of the two years in the period ended December 31,2004. Our audits also included the related financial statement schedule (forthe 2004 and 2003 information) listed in the Index at Item 15(a).These financial statements and schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements and schedule based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. We were not engaged to perform an audit of theCompany’s internal control over financial reporting. Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Security Capital Corporation and subsidiaries at December 31,2004, and the consolidated results of their operations and their cash flows foreach of the two years in the period ended December 31, 2004, in conformitywith U.S. generally accepted accounting principles. Also, in our opinion, therelated financial statement schedule (for the 2004 and 2003 information),when considered in relation to the basic financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

 

 
|                   | /s/  Ernst & Young LLP |   |
|------------------------|---------------------------------|--------|
|                   |                            |
| Stamford,  Connecticut |                            |
| June 10,  2005    |                            |

 

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**SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                      | ** ** | **DECEMBER 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(in thousands, except share and per share amounts)**                                                                                                                       | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                                                                                      |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                                 |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                       |       | $                     | 12,340     |   | $ | 12,488 |   |
| Restricted cash                                                                                                                                                                                                 |       | 175                   |       | 373 |   |
| Accounts receivable, net                                                                                                                                                                                        |       | 22,524                |       | 18,340 |   |
| Recoverable costs, net                                                                                                                                                                                          |       | 817                   |       | 1,548 |   |
| Deferred income taxes                                                                                                                                                                                           |       | 2,592                 |       | 2,681 |   |
| Other current assets                                                                                                                                                                                            |       | 1,865                 |       | 1,345 |   |
| Total current assets                                                                                                                                                                                            |       | 40,313                |       | 36,775 |   |
| Property and equipment, net                                                                                                                                                                                     |       | 8,591                 |       | 6,036 |   |
| Goodwill, net                                                                                                                                                                                                   |       | 72,557                |       | 59,041 |   |
| Intangible assets, net                                                                                                                                                                                          |       | 18,537                |       | 12,563 |   |
| Deferred income taxes                                                                                                                                                                                           |       | 668                   |       | 1,358 |   |
| Other assets                                                                                                                                                                                                    |       | 1,108                 |       | 862 |   |
| Total assets                                                                                                                                                                                                    |       | $                     | 141,774    |   | $ | 116,635 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                   |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                                            |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                                                |       | $                     | 2,425      |   | $ | 5,363 |   |
| Other accrued expenses                                                                                                                                                                                          |       | 12,762                |       | 9,899 |   |
| Income taxes payable                                                                                                                                                                                            |       | 6,784                 |       | 8,191 |   |
| Unearned revenue                                                                                                                                                                                                |       | 28,539                |       | 24,566 |   |
| Current portion of long-term debt                                                                                                                                                                               |       | 9,674                 |       | 5,970 |   |
| Total current liabilities                                                                                                                                                                                       |       | 60,184                |       | 53,989 |   |
| Long-term debt                                                                                                                                                                                                  |       | 24,751                |       | 18,959 |   |
| Other long-term obligations                                                                                                                                                                                     |       | 2,465                 |       | 2,297 |   |
| Deferred taxes                                                                                                                                                                                                  |       | 2,862                 |       | — |   |
| Minority interests                                                                                                                                                                                              |       | 3,957                 |       | 6,023 |   |
| Commitments and contingencies, see Note 16                                                                                                                                                                      |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                                                      |       |                  |       |   |   |
| Common stock, $0.01 par value, 7,500 shares authorized; 380 shares  issued and outstanding                                                                                                                      |       | —                |       | — |   |
| Class A common stock, $0.01 par value,  10,000,000 shares authorized; 6,778,309 and 6,458,309 shares issued;  6,770,587 and 6,450,587 shares outstanding at December 31, 2005 and  2004, respectively |       | 68                    |       | 65 |   |
| Additional paid-in capital                                                                                                                                                                                      |       | 67,010                |       | 64,395 |   |
| Accumulated deficit                                                                                                                                                                                             |       | (19,632               | )          | (29,067 | ) |
| Accumulated other comprehensive income                                                                                                                                                                          |       | 194                   |       | 59 |   |
| Less: treasury stock, at cost, 7,722 shares                                                                                                                                                                     |       | (85                   | )          | (85 | ) |
| Total stockholders’ equity                                                                                                                                                                                 |       | 47,555                |       | 35,367 |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                 |       | $                     | 141,774    |   | $ | 116,635 |   |
|                                                                                                                                                                                                                 |            |                       |            |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                                                                                                                        | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(in thousands, except per share amounts)**                                                             | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                              |       |                              |       |   |   |   |   |
| Revenues:                                                                                                                         |       |                              |       |   |   |   |   |
| Employer cost containment and health  services                                                                                    |       | $                                 | 140,786    |   | $ | 121,335 |   | $ | 84,598 |   |
| Educational services                                                                                                              |       | 14,525                            |       | 11,605 |   | 9,834 |   |
| Total revenues                                                                                                                    |       | 155,311                           |       | 132,940 |   | 94,432 |   |
| Selling, general and administrative  expenses                                                                                     |       | 132,245                           |       | 114,315 |   | 79,639 |   |
| Depreciation and amortization                                                                                                     |       | 4,984                             |       | 3,780 |   | 2,451 |   |
| Operating income                                                                                                                  |       | 18,082                            |       | 14,845 |   | 12,342 |   |
| Interest expense                                                                                                                  |       | (2,607                            | )          | (4,351 | ) | (1,565 | ) |
| Other income, net                                                                                                                 |       | 59                                |       | 652 |   | 185 |   |
| Income from continuing operations before  income taxes and minority interests                                                     |       | 15,534                            |       | 11,146 |   | 10,962 |   |
| Income tax expense                                                                                                                |       | (4,770                            | )          | (5,245 | ) | (4,617 | ) |
| Minority interest in income of consolidated  subsidiaries                                                                         |       | (1,329                            | )          | (1,438 | ) | (1,087 | ) |
| Income from continuing operations                                                                                                 |       | 9,435                             |       | 4,463 |   | 5,258 |   |
| Loss from discontinued operations (net of  income tax expense of $162 and $2,351 in 2004 and 2003, respectively)                  |       | —                            |       | (1,230 | ) | (1,969 | ) |
| Net income                                                                                                                        |       | 9,435                             |       | 3,233 |   | 3,289 |   |
| Less preferred stock accretion                                                                                                    |       | —                            |       | (1,275 | ) | (457 | ) |
| Income available to common stockholders                                                                                           |       | $                                 | 9,435      |   | $ | 1,958 |   | $ | 2,832 |   |
|                                                                                                                              |       |                              |       |   |   |   |   |
| Net income                                                                                                                        |       | $                                 | 9,435      |   | $ | 3,233 |   | $ | 3,289 |   |
| Unrealized gain on interest rate swaps, net  of taxes and minority interest totaling $129 and $65 in 2005 and 2004,  respectively |       | 135                               |       | 59 |   | — |   |
| Comprehensive income                                                                                                              |       | $                                 | 9,570      |   | $ | 3,292 |   | $ | 3,289 |   |
|                                                                                                                              |       |                              |       |   |   |   |   |
| *Basic  earnings per common share:*                                                                                               |       |                              |       |   |   |   |   |
| Earnings from continuing operations                                                                                               |       | $                                 | 1.40       |   | $ | 0.49 |   | $ | 0.74 |   |
| Loss from discontinued operations                                                                                                 |       | —                            |       | (0.19 | ) | (0.31 | ) |
| Basic earnings per common share available  to common stockholders                                                                 |       | $                                 | 1.40       |   | $ | 0.30 |   | $ | 0.43 |   |
|                                                                                                                              |       |                              |       |   |   |   |   |
| *Diluted  earnings per common share:*                                                                                             |       |                              |       |   |   |   |   |
| Earnings from continuing operations                                                                                               |       | $                                 | 1.34       |   | $ | 0.43 |   | $ | 0.68 |   |
| Loss from discontinued operations                                                                                                 |       | —                            |       | (0.17 | ) | (0.31 | ) |
| Diluted earnings per common share available  to common stockholders                                                               |       | $                                 | 1.34       |   | $ | 0.26 |   | $ | 0.37 |   |
|                                                                                                                              |       |                              |       |   |   |   |   |
| Basic weighted average shares used in  computation                                                                                |       | 6,725                             |       | 6,451 |   | 6,451 |   |
|                                                                                                                              |       |                              |       |   |   |   |   |
| Diluted weighted average shares used in computation                                                                               |       | 6,824                             |       | 6,598 |   | 6,536 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’EQUITY**

 
| **(in thousands, except share amounts)** | ** ** | **Number of  Shares  Outstanding*** | ** ** | **Common  Stock*** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Treasury  Stock** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------|------------|--------------------|------------|----------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|---------------------|------------|-----------|------------|
|                                                         |       |                                     |       |               |       |                             |       |                     |       |                                          |       |                |       |      |       |
| Balance, December 31, 2002                              |       | 6,450,967                                |       | $                  | 65         |                             | $          | 66,127                   |       | $                                             | (35,589    | )                   | $          | —    |       | $ | (85 | ) | $ | 30,518 |   |
|                                                         |       |                                     |       |               |       |                             |       |                     |       |                                          |       |                |       |      |       |
| Net income                                                   |       | —                                   |       | —             |       | —                           |       | 3,289                    |       | —                                        |       | —              |       | 3,289     |       |
| Preferred Stock accretion                                    |       | —                                   |       | —             |       | (457                             | )          | —                   |       | —                                        |       | —              |       | (457      | )          |
| Balance, December 31, 2003                              |       | 6,450,967                                |       | 65                 |       | 65,670                           |       | (32,300                  | )          | —                                        |       | (85                 | )          | 33,350    |       |
|                                                         |       |                                     |       |               |       |                             |       |                     |       |                                          |       |                |       |      |       |
| Net income                                                   |       | —                                   |       | —             |       | —                           |       | 3,233                    |       | —                                        |       | —              |       | 3,233     |       |
| Preferred Stock accretion                                    |       | —                                   |       | —             |       | (1,275                           | )          | —                   |       | —                                        |       | —              |       | (1,275    | )          |
|                                                         |       |                                     |       |               |       |                             |       |                     |       |                                          |       |                |       |      |       |
| Change in fair value of derivatives                          |       | —                                   |       | —             |       | —                           |       | —                   |       | 59                                            |       | —              |       | 59        |       |
| Balance, December 31, 2004                              |       | 6,450,967                                |       | 65                 |       | 64,395                           |       | (29,067                  | )          | 59                                            |       | (85                 | )          | 35,367    |       |
|                                                         |       |                                     |       |               |       |                             |       |                     |       |                                          |       |                |       |      |       |
| Net income                                                   |       | —                                   |       | —             |       | —                           |       | 9,435                    |       | —                                        |       | —              |       | 9,435     |       |
| Unearned compensation                                        |       | —                                   |       | —             |       | 180                              |       | —                   |       | —                                        |       | —              |       | 180       |       |
| Stock option exercises                                       |       | 320,000                                  |       | 3                  |       | 2,240                            |       | —                   |       | —                                        |       | —              |       | 2,243     |       |
| Tax benefit from exercise of employee stock  options         |       | —                                   |       | —             |       | 195                              |       | —                   |       | —                                        |       | —              |       | 195       |       |
|                                                         |       |                                     |       |               |       |                             |       |                     |       |                                          |       |                |       |      |       |
| Change in fair value of derivatives                          |       | —                                   |       | —             |       | —                           |       | —                   |       | 135                                           |       | —              |       | 135       |       |
| Balance, December 31, 2005                              |       | 6,770,967                                |       | $                  | 68         |                             | $          | 67,010                   |       | $                                             | (19,632    | )                   | $          | 194       |       | $ | (85 | ) | $ | 47,555 |   |

 

----

*Includes both Common Stock and Class A Common Stock

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

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**SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                                            | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**                                                                                               | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                            | ** ** | ** **                                  | ** ** | **Revised** | ** ** | **Revised** | ** ** |
| Cash flows from operating activities:                                                                                 |       |                                        |       |   |   |   |   |
| Net income                                                                                                            |       | $                                           | 9,435      |   | $ | 3,233 |   | $ | 3,289 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                                    |       |                                        |       |   |   |   |   |
| Deferred income taxes                                                                                                 |       | 280                                         |       | 779 |   | 473 |   |
| Stock-based compensation                                                                                              |       | 180                                         |       | — |   | — |   |
| Amortization                                                                                                          |       | 2,548                                       |       | 1,774 |   | 811 |   |
| Depreciation                                                                                                          |       | 2,437                                       |       | 2,006 |   | 1,640 |   |
| Amortization of deferred financing costs                                                                              |       | 189                                         |       | 951 |   | 256 |   |
| Minority interest in income of consolidated  subsidiaries                                                             |       | 1,329                                       |       | 1,438 |   | 1,087 |   |
| Allowances for doubtful accounts receivable  and uncollectible recoverable costs                                      |       | 361                                         |       | 800 |   | 713 |   |
| Unrealized gain on derivative                                                                                         |       | (261                                        | )          | (401 | ) | (245 | ) |
| Benefit from reversal of tax reserves                                                                                 |       | (1,684                                      | )          | — |   | — |   |
| Net loss on disposal of discontinued  operations                                                                      |       | —                                      |       | 2,412 |   | — |   |
| Write-off of deferred tax asset of  discontinued operation                                                            |       | —                                      |       | — |   | 2,402 |   |
| Other                                                                                                                 |       | —                                      |       | — |   | 144 |   |
| Changes in operating assets and  liabilities:                                                                         |       |                                        |       |   |   |   |   |
| Increase in accounts receivable                                                                                       |       | (3,241                                      | )          | (3,191 | ) | (3,301 | ) |
| Decrease (increase) in recoverable costs                                                                              |       | 656                                         |       | (774 | ) | (396 | ) |
| (Increase) decrease in other assets                                                                                   |       | (1,007                                      | )          | 293 |   | (537 | ) |
| (Decrease) increase in unearned revenue                                                                               |       | (329                                        | )          | 4,168 |   | 853 |   |
| Increase in accounts payable, accrued  expenses and other liabilities                                                 |       | 923                                         |       | 5,326 |   | 5,238 |   |
| Cash flows from operating activities of  discontinued operations                                                      |       | —                                      |       | (1,475 | ) | 838 |   |
| Net cash provided by operating activities                                                                             |       | 11,816                                      |       | 17,339 |   | 13,265 |   |
| Cash flows from investing activities:                                                                                 |       |                                        |       |   |   |   |   |
| Capital expenditures                                                                                                  |       | (4,931                                      | )          | (3,841 | ) | (1,589 | ) |
| Acquisitions (net of acquired cash of  $1,388 in 2005 and $4,374 in 2003)                                             |       | (15,432                                     | )          | (1,801 | ) | (26,295 | ) |
| Purchase of minority interest                                                                                         |       | (3,341                                      | )          | — |   | — |   |
| Net proceeds from sale of discontinued  operation (Pumpkin)                                                           |       | —                                      |       | 2,764 |   | — |   |
| Proceeds on sale of investments—Octagon                                                                          |       | —                                      |       | — |   | 11,402 |   |
| Net cash flow from investing activities of  discontinued operations                                                   |       | —                                      |       | (143 | ) | (240 | ) |
| Proceeds on sale of Texas land                                                                                        |       | —                                      |       | — |   | 107 |   |
| Net cash used in investing activities                                                                                 |       | (23,704                                     | )          | (3,021 | ) | (16,615 | ) |
|                                                                                                                  |       |                                        |       |   |   |   |   |
| Cash flows from financing activities:                                                                                 |       |                                        |       |   |   |   |   |
| Proceeds from long-term borrowings (net of  deferred financing costs of $141 and $711 in 2005 and 2004, respectively) |       | 41,359                                      |       | 29,289 |   | 18,975 |   |
| Repayments of long-term borrowings and  capital leases                                                                |       | (32,004                                     | )          | (39,960 | ) | (6,156 | ) |
| Dividends paid to minority interest                                                                                   |       | (53                                         | )          | — |   | — |   |
| Redemption of Preferred Stock                                                                                         |       | —                                      |       | (5,000 | ) | — |   |
| Proceeds from exercise of stock options                                                                               |       | 2,243                                       |       | — |   | — |   |
| Tax benefit of stock option exercises                                                                                 |       | 195                                         |       | — |   | — |   |
| Cash payment to settle Possible Dreams  bankruptcy                                                                    |       | —                                      |       | (442 | ) | — |   |
| Cash flows from financing activities of  discontinued operations                                                      |       | —                                      |       | 2,638 |   | (78 | ) |
| Proceeds from lines of credit                                                                                         |       | 20,585                                      |       | 16,507 |   | 28,051 |   |
| Repayment of lines of credit                                                                                          |       | (20,585                                     | )          | (16,507 | ) | (28,938 | ) |
| Net cash provided by (used in) financing  activities                                                                  |       | 11,740                                      |       | (13,475 | ) | 11,854 |   |
| (Decrease) increase in cash and cash  equivalents                                                                     |       | (148                                        | )          | 843 |   | 8,504 |   |
| Cash and cash equivalents, beginning of  year                                                                         |       | 12,488                                      |       | 11,645 |   | 3,141 |   |
| Cash and cash equivalents, end of year                                                                                |       | $                                           | 12,340     |   | $ | 12,488 |   | $ | 11,645 |   |
| Interest paid                                                                                                         |       | $                                           | 2,303      |   | $ | 3,504 |   | $ | 1,926 |   |
| Income taxes paid                                                                                                     |       | $                                           | 6,734      |   | $ | 4,343 |   | $ | 709 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005**

**(in thousands, except share and per shareamounts, unless otherwise noted)**

 

**1.****                                      Organizationand Description of Business**

 

SecurityCapital Corporation (“Security Capital”, “Company”, “we”, “us” and “our”)operates as a holding company that actively participates in the management ofits subsidiaries. At December 31, 2005, we operated two subsidiaries, WCHoldings, Inc. (“WC”) and Primrose Holdings, Inc. (“Primrose”). WC isa majority-owned subsidiary that provides cost containment services relative todirect and indirect costs of corporations and their employees primarilyrelating to industrial health and safety, industrial medical care and workers’compensation insurance. As a result of certain transactions that occurredduring 2005, our ownership interest in WC increased from 80% to 84.4% (see Note11). WC’s activities are primarily centered in Ohio, California, Virginia,Maryland, Texas, Michigan, Florida, Washington, Minnesota and New York. Primroseis a 98.5%-owned subsidiary involved in the franchising of educational-based childcareservices, with related activities in real estate consulting and site selectionservices. At December 31, 2005, Primrose schools were located in theSoutheast, Southwest and Midwest. On February 10, 2006, the Company signeda definitive agreement for the sale of Primrose (see Note 17).

 

Wehad two reportable operating segments at December 31, 2005. The EmployerCost Containment and Health Services segment consists of WC, and theEducational Services segment consists of Primrose. See Note 4 for furtherdetails regarding our reportable operating segments.

 

Inrecent years, the Company has sought to strengthen these two valuablebusinesses, while at the same time shedding unneeded and unprofitablebusinesses. Discontinued operations in 2004 and 2003 consisted of the Company’sSeasonal Products segment. This segment consisted of our 100% ownershipinterest in Pumpkin Masters Holdings, Inc. (“Pumpkin”) and our 75%ownership interest in P.D. Holdings, Inc. (“Possible Dreams”). In October 2004,we consummated the sale of substantially all of the assets of Pumpkin, and in November 2004,we entered into an agreement with the bankruptcy Trustee for Possible Dreams toresolve all outstanding claims against the Company.

 

InJune 2005, we announced that the Company’s Board of Directors, upon therecommendation of a Special Committee of the Board formed in January 2004to explore strategic alternatives to maximize stockholder value and provide anopportunity for liquidity to our public stockholders, determined to pursue aformal sale process to seek the highest price reasonably attainable for theCompany. As a part of that process, the Company has solicited offers bothfor the entire Company and for our Primrose and WC businesses separately. At December 31,2005, that process was ongoing. For developments subsequent to that date, seeNote 17.

 

**2.****                                      SignificantAccounting Policies**

 

*Consolidation*

 

The accompanying consolidated financial statements include the accountsof Security Capital and its majority-owned subsidiaries and have been preparedin accordance with U.S. generally accepted accounting principles (“GAAP”). Allintercompany balances have been eliminated in consolidation. Theconsolidated statements include 100% of the assets and liabilities of theCompany’s subsidiaries, and the ownership interests of the minority investors inthe subsidiaries are recorded as minority interests.

 

*Revisions and Reclassifications*

 

The Company has revised its 2004 and 2003 consolidated statements of cashflows as a result of recent guidance provided by the Securities and ExchangeCommission staff regarding the reporting of cash flows from discontinuedoperations. We had previously disclosed cash flows from operating, investingand financing activities of discontinued operations on a combined basis. Tocomply with Statement of Financial Accounting Standards No. 95, *Statement of Cash Flows*, we have revised our consolidatedstatements of cash flows for 2004 and 2003 to report separately the cash flowsfrom operating, investing and financing activities of discontinued operations. 

 

Certain prior year amounts have been reclassified to conform tothe 2005 presentation.

 

37

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*Use of Estimates*

 

The preparation of consolidated financial statements in conformity withGAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reported period. Actual resultscould differ from those estimates. Significant estimates include an allowancefor doubtful accounts and uncollectible recoverable costs, the amount ofemployee related health care costs incurred but not reported, reserves for potentialloss contingencies, our ability to utilize future tax benefits, the estimatesand assumptions inherent in our goodwill impairment testing procedures, theallocation of the purchase price to the fair value of assets acquired andliabilities assumed, the determination of the economic lives of intangibleassets, and the estimates inherent in the determination of the fair value of share-basedawards.

 

*Revenue Recognition*

 

Revenues for the Employer Cost Containment andHealth Services segment are derived from third-party administrator services,self-insured plan administrator services, consulting services, group ratingservices, and managed care administration services. Revenues are recorded basedon the terms and duration of the related contracts. Revenues from managed careadministration services with the Ohio Bureau of Workers’ Compensation (the “OBWC”)are recognized on a monthly basis based on the contracted administrative fee. Certaincontracts also provide for an incentive or bonus award based on the attainmentof certain criteria stipulated in the contracts. Revenues from incentive orbonus awards are recognized when they are earned and collectibility isreasonably assured. Cash received in advance of the services being provided isinitially deferred and recognized as revenue on a pro rata basis over therelated contract period, which typically ranges between three and 12 months.

 

Revenuesfrom the Educational Services segment are composed of royalties, franchise fees,assignment and real estate services fees, transfer fees, forfeiture fees andtuition fees. Royalties are received from franchisees based on a percentage ofa school’s monthly revenue. Royalty revenue is recorded in the month earned andtypically collected in the subsequent month. Franchise fees are received from afranchisee upon the signing of a franchise agreement. These fees are initiallydeferred and recognized as revenue when the school receives its certificate ofoccupancy. Assignment and real estate services include site identification andevaluation, preparation for the construction of the franchisee’s Primroseschool and consulting services provided to the franchisee during theconstruction of the school related to architectural and engineering design. Additionally,assignment and real estate services may include coordination withthird-party professional service providers to (i) prepare environmentaland soil studies; (ii) prepare the applications for all required buildingand zoning permits and assist with any follow-up procedures necessary to obtainall required permits; (iii) obtain a title commitment for the land site;and (iv) ensure that the franchisee’s lender has all relevantdocumentation necessary for the franchisee to purchase the land for itsPrimrose school. Third–party fees are not included in our revenues. A majorityof the assignment and real estate services fees is received from a franchiseeupon the signing of a franchise agreement, and the remaining fee is receivedupon the closing of the purchase of the property by the franchisee (the “Closing”).All fees for assignment and real estate services received prior to the Closingare initially deferred. A portion of the assignment and real estate servicesfees is recognized at the time of the Closing, and the remaining portion isrecognized when the school receives its certificate of occupancy.

 

Transferfees are received and earned upon the sale of an existing franchise to anotherfranchisee. Forfeiture fees include fees applicable to the termination offranchise agreements or the expiration of option agreements. Tuition fees areearned at the company-owned school and are generally billed weekly for servicesto be provided in the following week. Primrose will occasionally provide existingfranchisees an option to purchase a franchise in a designated geographical areafor a stated period of time (typically six to 12 months) for which Primrosereceives a fee. This fee is initially deferred when received. When the optionis exercised, the option fee is credited against the amount of the franchisefee and recognized as revenue when the school receives its certificate ofoccupancy. If the option expires, the fee is recognized as a forfeiture fee.

 

*Cash and Cash Equivalents*

 

The Company considers all highly liquid investments with an originalmaturity of three months or less to be cash equivalents. All cash equivalentsare carried at cost, which approximates fair value. At times, cash and cashequivalents may

 

38

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exceed federally insured limits.

 

*Restricted Cash*

 

Restricted cash includes amounts collected from franchisees foradvertising and marketing costs. The agreements with franchisees allow Primroseto collect up to 2% of the franchisees’ monthly gross revenue for advertisingand development costs. The amounts received are held in a restricted accountand Primrose is obligated to spend the funds in accordance with terms of thefranchisee agreements. A corresponding liability has been recorded in accruedexpenses and other liabilities.

 

*Allowance for Doubtful Accounts and**Uncollectible Recoverable Costs*

 

Our receivables are composed primarily of amounts due for contractservices provided by WC and royalty payments due to Primrose from franchisees. Primrosealso incurs third-party professional services costs on behalf of franchiseesfor assignment and real estate services. These costs are recorded asrecoverable costs and are collected from the franchisee upon the Closing. Weconsider an account to be delinquent when the customer fails to make paymentwithin the timeframe specified in the applicable sales contract or invoice. We establishan allowance for doubtful accounts and for potentially uncollectiblerecoverable costs based on a review of the current status of thereceivable, customer or franchisee credit evaluations, collection history andother pertinent information. Receivables are generally not collateralized.

 

A summary of the changes in the allowance for doubtful accounts for theyears ended December 31, 2005, 2004 and 2003 is as follows:

 
| ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance at beginning of year |       | $        | 1,115      |     | $          | 807      |       | $ | 458 |   |
| Provisions                   |       | 286      |       | 602      |       | 610      |       |
| Deductions                   |       | (417     | )          | (294     | )          | (261     | )          |
| Balance at end of year       |       | $        | 984        |     | $          | 1,115    |       | $ | 807 |   |

 

A summary of the changes in the allowance for uncollectible recoverablecosts for the years ended December 31, 2005, 2004 and 2003 is as follows:

 
| ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance at beginning of year |       | $        | 336        |     | $          | 192      |       | $ | 200 |   |
| Provisions                   |       | 75       |       | 198      |       | 103      |       |
| Deductions                   |       | (237     | )          | (54      | )          | (111     | )          |
| Balance at end of year       |       | $        | 174        |     | $          | 336      |       | $ | 192 |   |

 

*Property and Equipment*

 

Property and equipment are stated at cost. Depreciationis provided over the estimated useful life of the assets using thestraight-line method. Estimated useful lives are three to five years forcomputer equipment and software and three to seven years for furniture andfixtures. Leasehold improvements are depreciated over the shorter of theestimated life of the improvement or the lease term. Property and equipment,net of accumulated depreciation, at December 31, 2005 and 2004 were asfollows:

 
| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Computer equipment and software |       | $        | 10,578     |     | $          | 7,866 |   |
| Furniture and fixtures          |       | 5,003    |       | 3,481    |       |
| Leasehold improvements          |       | 1,700    |       | 1,391    |       |
| Gross cost                      |       | 17,281   |       | 12,738   |       |
| Less accumulated depreciation   |       | (8,690   | )          | (6,702   | )          |
| Net cost                        |       | $        | 8,591      |     | $          | 6,036 |   |

 

*Goodwill and Intangible Assets*

 

Acquisitions are accounted for under the “purchase method,” wherebyacquired tangible and intangible assets and assumed liabilities are recorded atfair value. The determination of fair value of tangible and intangible assetsand their respective useful lives requires management to make certainestimates, judgments and assumptions. We determine fair value

 

39

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based on a variety of different methods, including, but not limited to,reference to quoted market prices, discounted cash flow projections, referenceto relevant market data, replacement cost analysis and independent third-partyvaluations. Determining the estimated useful life of intangible assets isdependent upon an evaluation of numerous factors, such as the competitiveenvironment, our market share and our ability to maintain that market share inthe future, any legal, regulatory or contractual provisions that limit, orcould limit, the assets’ life and the expected macroeconomic environment andits impact on the industries in which we operate. Intangible assets areamortized over their estimated useful life.

 

The excess of the fair value of assets acquired and liabilities assumedover the acquisition cost is allocated to goodwill. Goodwill is not amortized;however, it is subject to annual impairment testing. To test goodwill forimpairment, the carrying amount of the net assets of each “reporting unit” iscompared to the fair value of the reporting unit. If the fair value of thereporting unit is greater than the carrying amount, no additional testing isrequired. However, if the fair value of the reporting unit is less than itscarrying amount, then the fair value of the reporting unit is allocated to theassets and liabilities of the reporting unit, including an amount for any “implied”goodwill. If implied goodwill exceeds the net carrying amount of goodwill, noimpairment loss is recorded. Otherwise, an impairment loss is recognized forthe difference.

 

Fair value is defined as the amount at which an asset can be purchasedin a current transaction between willing parties, other than in a forcedliquidation sale. As a result of the offers received as part of theongoing formal sale process for Primrose and the balance of the Company, managementdetermined that at December 31, 2005, the fair value of the reportingunits exceeded their carrying value and that further impairment testing was notrequired.

 

At December 31, 2004 and 2003, we determined the fair value ofeach reporting unit using a discounted cash flow approach. This approach requiredmanagement to make assumptions and estimates of future cash flows of thereporting unit, the appropriate discount rate and a terminal value of thereporting unit. The discount rate used for each reporting unit was determinedby assessing the appropriate risk level of the cash flows of the respectivereporting unit and adjusting the risk-free rate by a factor dependent upon thisrisk assessment. The terminal period cash flow of the respective reportingunits was based upon assigning a multiple of earnings before income taxes,depreciation and amortization (“EBITDA”) consistent with companies of similarsize and industry in which each of the units operates. The results of ourapproach indicated that the fair value of the Company’s reporting unitsexceeded their carrying value. Accordingly, no impairment charges wererecognized in 2004 and 2003.

 

*Impairment of Long-lived Assets, Other ThanGoodwill*

 

We review long-lived assets, including intangible assets, forimpairment in accordance with the provisions of Statement of FinancialAccounting Standards No. 144, *Accountingfor the Impairment or Disposal of Long-**Lived Assets* (“SFAS 144”). SFAS 144requires companies to test long-lived assets when events or circumstances leadmanagement to believe that the carrying value of an asset may not berecoverable. Recoverability is assessed based on the carrying value of an assetand its fair value, which is generally determined by the sum of the estimatedundiscounted cash flows expected to result from the use and eventual disposalof the asset in question. If the fair value is less than the asset’s carryingvalue, an impairment loss is recognized based on the excess of the carryingamount of the asset over its fair value. Based on our review and analysisconducted during the applicable periods, we have not recognized any impairmentlosses on long-lived assets, including intangible assets, during each of thethree years ended December 31, 2005, 2004 and 2003.

 

*Financial Instruments*

 

Financial instruments include cash and cash equivalents, restrictedcash, receivables, accounts payable, long-term debt and interest rate swaps. Thecarrying value of cash and cash equivalents, restricted cash, receivables and accountspayable approximates fair value due to the short-term nature of these items. Long-termdebt, including the current portion, bears interest at current market ratesand, accordingly, its carrying value approximates fair value. The fair value ofinterest rate swaps is obtained from a major financial institution based oncurrent market prices of similar instruments. This value represents theestimated amount the Company would receive or pay to terminate the agreement.

 

*Advertising Costs*

 

Advertising costs are expensed when incurred and aggregated $229, $172 and$211 for the years ended December 31, 2005, 2004 and 2003, respectively.

 

40

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*Stock Options*

 

EffectiveJuly 1, 2005 (the “Effective Date”), the Company adopted the provisions ofStatement of Financial Accounting Standards No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123R”), to account for share-basedawards. SFAS 123R is a revision to Statement of Financial Accounting Standards No. 123,*Accounting for Stock-Based Compensation*(“SFAS 123”). We adopted the provisions of SFAS 123R using the modifiedprospective application. Under the modified prospective application, theprovisions of SFAS 123R are applied to new awards and awards modified,repurchased or cancelled after the Effective Date. Additionally, compensationcost for the unvested portion of awards outstanding as of the Effective Date isrecognized as the requisite service is rendered after the Effective Date. Share-basedcompensation expense recognized in 2005 was $180 ($172 after taxes and minorityinterest), and is reflected as selling, general and administrative expense inthe 2005 consolidated statement of income.

 

Under SFAS 123R, share-based awards result in a cost measured at fairvalue on the awards’ grant dates. Share-based awards are currently limited tostock options granted to employees and non-employee directors. We determine thefair value of stock options using the Black-Scholes option pricing model. TheBlack Scholes option pricing model requires the input of highly subjectiveassumptions, including the expected life of the option and expected volatilityof the underlying security. The expected life of the option is the length oftime the option holder is expected to hold the options. When estimating theexpected life of an option, management will consider, among other things, thelevel of the employee receiving the option and the historical exercise behaviorof option holders. The expected life of an option is a significant assumptionas it determines the period for which the risk-free interest rate, volatilityand dividend yield must be applied. The risk-free interest rate is based on theexpected U.S. Treasury rate over the expected life. Volatility reflects themovement in our stock price over the most recent historical period equivalentto the expected life. The dividend yield represents the dividend the Companyexpects to pay over the expected life. 

 

The fair value of the estimated number of awards expected to vest isrecognized ratably through earnings over the requisite service period, which isgenerally the vesting period. Because less than 20% of our common stock is heldby the general public, daily trading volume of our shares tends to be minimaland thus the market for our common stock may not be as liquid as the market formore widely-held shares. Accordingly, in management’s opinion, theBlack-Scholes option pricing model may not necessarily provide a reliablesingle measure of the fair value of options granted.

 

Priorto July 1, 2005, we applied the intrinsic value method in measuringstock-based compensation under Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees*(“APB 25”). Under APB 25, when the exercise price of the Company’s stockoptions equaled the market value of the underlying stock on the date of thegrant, no compensation expense was recognized.

 

See Note 12 for additional information.

 

*IncomeTax Expense and Accruals*

 

Income taxes are accounted for in accordance with Statement ofFinancial Accounting Standards No. 109, *Accountingfor Income Taxes*, whereby deferred taxes are recognized based on thetemporary differences between the financial reporting basis and the tax basisof the assets and liabilities, using presently enacted rates. Certain judgmentis required in determining our annual effective tax rate and in evaluating ourtax positions. While we believe that our tax return positions are fullysupportable, we expect that certain positions could be challenged andthat we may not be able to successfully defend our positions. Accordingly,we establish certain reserves, including interest, for these items. We adjustthese reserves in light of changing facts and circumstances. See Note 13for additional information.

 

*Earnings Per Common Share*

 

Basicearnings per common share (“EPS”) are derived by dividing income available tocommon stockholders by the weighted average shares outstanding. Diluted EPSassumes the dilution from the potential exercise of employee stock options inCompany stock and in stock of subsidiary companies. The assumed exercise ofstock options of subsidiary companies has the effect of reducing our earnings (“dilutedearnings”) since our overall ownership interest in the subsidiary companies,and thus our share of the net income of the subsidiaries, would be reduced. DilutedEPS are derived by dividing the applicable diluted earnings by the weightedaverage shares outstanding plus the dilutive effect of common stockequivalents. See Note 14 for a detailed computation of EPS.

 

**3.****                                      Acquisitions**

 

OnMarch 31, 2005, the Company, through its indirect, majority-ownedsubsidiary, Octagon Risk Services, Inc. (“Octagon”), acquired 100% of theoutstanding capital stock of Managed Care Holdings Corporation (“MCHC”) and itswholly owned subsidiary, Caronia Corporation (“Caronia”), for $16,000, plus$962 of transaction costs. Caronia provides third-party professional medicalliability claims administration and risk management services to hospitals andhealthcare systems, physician and paraprofessional groups, nursing homes,rehabilitation centers and clinics. Caronia is based in Melville, New York and services clients through40 locations nationwide. Upon the consummation of the transaction, Caroniabecame part of our Employer Cost Containment and Health Services operatingsegment.

 

41

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Thecost to acquire Caronia was allocated to the tangible and intangible assetsacquired and liabilities assumed based on their respective fair values, and anyexcess was allocated to goodwill. The purchase price allocation was as follows:

 

| Total purchase price             |   | $      | 16,000 |   |
|----------------------------------|--------|--------|--------|--------|
| Transaction costs                |   | 962    |   |
| Total purchase price to allocate |   | $      | 16,962 |   |
|                             |   |   |   |
| *Allocation of Purchase Price*   |   |   |   |
| Cash                             |   | $      | 1,388  |   |
| Accounts receivable, net         |   | 1,315  |   |
| Fixed assets, net                |   | 66     |   |
| Customer list                    |   | 5,200  |   |
| Trade name                       |   | 3,000  |   |
| Goodwill                         |   | 13,516 |   |
| Deferred financing costs         |   | 141    |   |
| Unearned revenue                 |   | (4,302 | )      |
| Deferred tax liability           |   | (3,362 | )      |
| Total                            |   | $      | 16,962 |   |

 

Thefollowing unaudited selected financial data present the pro forma combinedresults of the Company and Caronia for the years ended December 31, 2005and 2004 as if the Caronia acquisition had taken place on January 1, 2004.The pro forma amounts give effect to the amortization of intangibles, increasedinterest expense and the related income tax and minority interest effects. Thispro forma information does not necessarily reflect the results of operations ifthe business had been managed by the Company during these periods and is notindicative of results that may be obtained in the future. The results of Caronia are reflected in ourconsolidated statements of income as of the acquisition date.

 
| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Revenues                                                           |       | $                                | 159,028    |   | $ | 148,471 |   |
| Net income from continuing operations                              |       | 9,485                            |       | 5,764 |   |
| Income from continuing operations available to common stockholders |       | 9,485                            |       | 4,489 |   |
|                                                               |       |                             |       |   |   |
| Basic earnings per common share                                    |       | $                                | 1.41       |   | $ | 0.70 |   |
| Diluted earnings per common share                                  |       | $                                | 1.35       |   | $ | 0.62 |   |

 

During 2004, WC acquired 100% of the stock ofIntegrated Claims Strategies (“ICS”) for $800, plus $17 of transaction costsand 100% of the stock ofKRAMMCO, Inc. for $975, plus $9 of transaction costs. ICS provides insurance claims processing andadministration services in the Tampa, Florida area. KRAMMCO, Inc.is a management company whose sole asset is a management contract with theNorth American Employer’s Council, Inc. (“NAEC”), an Ohio not-for-profitcorporation. NAEC is an Ohio association that provides association memberswith, among other value-added services, an Ohio group rating sponsor. The allocation of the purchase prices were asfollows:

 

| ** **                       | ** ** | **ICS** | ** ** | **KRAMMCO** | ** ** |
|----------------------------------|------------|---------|------------|-------------|------------|
|                             |       |    |       |        |       |
| Total purchase price             |       | $       | 800        |        | $          | 975 |   |
| Transaction costs                |       | 17      |       | 9           |       |
| Total purchase price to allocate |       | $       | 817        |        | $          | 984 |   |

 

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| ** **                     | ** ** | **ICS** | ** ** | **KRAMMCO** | ** ** |
|--------------------------------|------------|---------|------------|-------------|------------|
|                           |       |    |       |        |       |
| *Allocation of Purchase Price* |       |    |       |        |       |
| Accounts receivable            |       | $       | 95         |        | $          | — |   |
| Customer list                  |       | —  |       | 984         |       |
| Goodwill                       |       | 997     |       | 406         |       |
| Current liabilities            |       | (275    | )          | —      |       |
| Deferred tax liability         |       | —  |       | (406        | )          |
| Total                          |       | $       | 817        |        | $          | 984 |   |
|                                |            |         |            |             |            |  |  |  |  |

 

InOctober 2003, WC, through its subsidiary, CMI, acquired all of theoutstanding shares of Octagon for $30,000, plus $914 of transaction costs. Octagon,based in Oakland, California, provides workers’ compensation and professionalliability claims administration and consulting services primarily in thewestern United States, including California. The purchase priceallocation was as follows:

 
| Total purchase price             |   | $      | 30,000 |   |
|----------------------------------|--------|--------|--------|--------|
| Transaction costs                |   | 914    |   |
| Total purchase price to allocate |   | $      | 30,914 |   |
|                             |   |   |   |
| *Allocation of Purchase Price*   |   |   |   |
| Cash                             |   | $      | 4,374  |   |
| Investments                      |   | 11,653 |   |
| Customer lists                   |   | 3,245  |   |
| Deferred tax assets              |   | 8,068  |   |
| Other assets                     |   | 6,273  |   |
| Goodwill                         |   | 7,976  |   |
| Unearned revenue                 |   | (6,026 | )      |
| Accrued liabilities              |   | (4,649 | )      |
| Total                            |   | $      | 30,914 |   |

 

The following unaudited selected financial data presents the pro forma combinedresults of the Company and Octagon for the year ended December 31, 2003 asif the Octagon acquisition had taken place on January 1, 2003. The proforma amounts give effect to the amortization of intangibles, increasedinterest expense and the related income tax and minority interest effects. Thispro forma information does not necessarily reflect the results of operations asthey would have been if the business had been managed by the Company during thatperiod and is not indicative of results that may be obtained in the future.The results of Octagon werereflected in our consolidated statements of income as of the acquisition date. 

 
| Revenues                                                           |   | $      | 120,811 |   |
|--------------------------------------------------------------------|--------|--------|---------|--------|
| Net income from continuing operations                              |   | 2,594  |    |
| Income from continuing operations available to common stockholders |   | 2,137  |    |
|                                                               |   |   |    |
| Basic earnings per common share                                    |   | $      | 0.63    |   |
| Diluted earnings per common share from continuing operations       |   | $      | 0.58    |   |

 

**4.****                                      SegmentDisclosure**

 

Management evaluates the performance of itssegments based upon segment income, defined as earnings before interest, taxes,depreciation, amortization, minority interests, corporate expenses andmanagement fee, other income or expense and income/loss from discontinuedoperations. Segment income is used to evaluate performance because managementbelieves this is the best financial indicator of value and of our ability toincur and service debt and to generate operating cash flows. It is also onemethod by which we evaluate and value potential acquisition opportunities andby which we value our current subsidiaries. Segment income is not a substitutefor operating income or cash flows from operating activities determined inaccordance with GAAP.

 

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| ** **                                      | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                      | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                            |       |                              |       |   |   |   |   |
| Revenues from external customers:               |       |                              |       |   |   |   |   |
| Employer cost containment and health services   |       | $                                 | 140,786    |   | $ | 121,335 |   | $ | 84,598 |   |
| Educational services                            |       | 14,525                            |       | 11,605 |   | 9,834 |   |
| Total revenues                                  |       | $                                 | 155,311    |   | $ | 132,940 |   | $ | 94,432 |   |
|                                            |       |                              |       |   |   |   |   |
| Segment income:                                 |       |                              |       |   |   |   |   |
| Employer cost containment and health services   |       | $                                 | 19,824     |   | $ | 17,327 |   | $ | 12,891 |   |
| Educational services                            |       | 7,278                             |       | 5,625 |   | 4,566 |   |
| Total segment income                            |       | 27,102                            |       | 22,952 |   | 17,457 |   |
|                                            |       |                              |       |   |   |   |   |
| Reconciliation of segment income to net income: |       |                              |       |   |   |   |   |
| Depreciation and amortization                   |       | (4,984                            | )          | (3,780 | ) | (2,451 | ) |
| Interest expense                                |       | (2,607                            | )          | (4,351 | ) | (1,565 | ) |
| Income tax expense                              |       | (4,770                            | )          | (5,245 | ) | (4,617 | ) |
| Minority interests                              |       | (1,329                            | )          | (1,438 | ) | (1,087 | ) |
| Corporate expenses and management fee           |       | (4,036                            | )          | (4,327 | ) | (2,662 | ) |
| Other income                                    |       | 59                                |       | 652 |   | 185 |   |
| Loss from discontinued operations               |       | —                            |       | (1,230 | ) | (1,969 | ) |
| Net income                                      |       | $                                 | 9,435      |   | $ | 3,233 |   | $ | 3,289 |   |

 
| ** **                                    | ** ** | **December 31,** | ** ** |     |       |
|-----------------------------------------------|------------|-----------------------|------------|----------|------------|
| ** **                                    | ** ** | **2005**              | ** ** | **2004** | ** ** |   |   |
| Segment assets:                               |       |                  |       |     |       |   |   |
| Employer cost containment and health services |       | $                     | 109,393    |     | $          | 84,486 |   |   |   |
| Educational services                          |       | 27,933                |       | 28,458   |       |   |   |
| Total segment amounts                         |       | 137,326               |       | 112,944  |       |   |   |
| Corporate and other                           |       | 4,448                 |       | 3,691    |       |   |   |
| Total assets                                  |       | $                     | 141,774    |     | $          | 116,635 |   |   |   |

 

Our Employer Cost Containment and Health Services segmenthas two customers that individually account for more than 10% of consolidatedrevenues and accounts receivable. One customer accounted for approximately 19%,22%, and 29% of total consolidated revenues for 2005, 2004 and 2003,respectively, and 15% and 19% of consolidated accounts receivable at December 31,2005 and 2004, respectively. The current contract with this customer isscheduled to expire in December 2006. CMI considers its relationship withthis customer to be good, and while this contract has historically beenrenewed, no assurances can be given that this contract will be renewed. Theother customer accounted for approximately 11% and 12% of consolidated revenues,and 17% and 22% of consolidated accounts receivable, for 2005 and 2004,respectively. This contract was acquired in late 2003 and was not significantto 2003 consolidated revenues. The contract with this customer expires June 30,2007. The loss of either of these contracts could have a material adverseeffect on the financial condition, results of operations and cash flows of our Employer Cost Containment and Health Servicessegment and the Company.

 

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**5.****                                      Goodwilland Intangible Assets**

 

The changes in the carrying amount of goodwill at December 31,2004 and 2005 were as follows:

 
| ** **                        | ** ** | **Employer Cost  Containment  and Health  Services** | ** ** | **Educational  Services** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|---------------------------|------------|-----------|------------|
|                              |       |                                                 |       |                      |       |      |       |
| Balance at January 1, 2004   |       | $                                                    | 42,454     |                      | $          | 16,830    |       | $ | 59,284 |   |
| Additions                         |       | 1,767                                                |       | —                    |       | 1,767     |       |
| Deductions                        |       | (2,010                                               | )          | —                    |       | (2,010    | )          |
|                              |       |                                                 |       |                      |       |      |       |
| Balance at December 31, 2004 |       | 42,211                                               |       | 16,830                    |       | 59,041    |       |
| Additions                         |       | 13,516                                               |       | —                    |       | 13,516    |       |
|                              |       |                                                 |       |                      |       |      |       |
| Balance at December 31, 2005 |       | $                                                    | 55,727     |                      | $          | 16,830    |       | $ | 72,557 |   |

 

Additions to goodwill in 2004 included $406 from the acquisition ofKRAMMCO, Inc., $997 from the acquisition of ICS and a purchaseprice adjustment of $364 relating to the prior acquisition of Barron RiskManagement Services. Deductions represent net purchase price adjustmentsrelated to the 2003 acquisition of Octagon. Additions to goodwill in2005 resulted from the acquisition of Caronia.

 

The Company’s intangible assets consist primarily of franchiseagreements, customer lists, proprietary curriculum, trademarks and non-competeagreements with former executives of WC. Amortization expense is provided overthe estimated useful life of the asset using the straight-line method. Estimateduseful lives are 21 years for franchise agreements, five to seven years for customerlists, ten years for proprietary curriculum, 15 years for trademarks and threeyears for non-compete agreements. The weighted average amortization period ofintangible assets as of December 31, 2005 and 2004 was 12.4 years and 13.7years, respectively. The gross carrying value and accumulated amortization for intangibleassets at December 31, 2005 and 2004 were as follows:

 
| ** **              | ** ** | **2005**                   | ** ** | **2004**                      | ** ** |
|-------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|                    |       |                       |       |                          |       |   |   |   |   |
| Franchise agreements    |       | $                          | 8,750      |                          | $          | 2,804 |   | $ | 8,750 |   | $ | 2,386 |   |
| Customer lists          |       | 12,862                     |       | 3,520                         |       | 7,662 |   | 1,741 |   |
| Proprietary curriculum  |       | 393                        |       | 203                           |       | 389 |   | 160 |   |
| Trademarks              |       | 3,083                      |       | 341                           |       | 82 |   | 33 |   |
| Non-compete agreements  |       | 317                        |       | —                        |       | — |   | — |   |
| Total intangible assets |       | $                          | 25,405     |                          | $          | 6,868 |   | $ | 16,883 |   | $ | 4,320 |   |
| Net intangible assets   |       |                       |       | $                             | 18,537     |   |   |   | $ | 12,563 |   |

 

Amortization expense for the years ended December 31, 2005, 2004and 2003 was $2,548, $1,774 and $811, respectively. The estimated future amortizationexpense for the above intangible assets is as follows:

 
| 2006 |   | $ | 2,827 |   |
|------|--------|---|-------|--------|
| 2007 |   | $ | 2,826 |   |
| 2008 |   | $ | 2,549 |   |
| 2009 |   | $ | 1,552 |   |
| 2010 |   | $ | 1,400 |   |

 

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**6.****                                      DiscontinuedOperations**

 

Discontinuedoperations included the results of Pumpkin and Possible Dreams. Pumpkin was awholly owned subsidiary engaged in the business of designing and distributingHalloween-oriented pumpkin carving kits and related accessories throughout theUnited States and in Canada. During the fourth quarter of 2003, we committed toa plan to sell the operations of Pumpkin, and in October 2004, we soldsubstantially all of the assets of Pumpkin for $8,741, which included anadditional working capital payment of $1,741. A net loss of $3,928 wasrecognized on the sale and included in the loss from discontinued operations reportedin the consolidated statement of income for the year ended December 31,2004.

 

PossibleDreams was a 75%-owned subsidiary that formerly operated as a designer,importer and distributor of giftware and collectible figurines. In October 2003,Possible Dreams filed for bankruptcy protection under Chapter 11 of theBankruptcy Code. In November 2004, we settled all outstanding claimsagainst the Company with the bankruptcy Trustee for $442. An after-tax gain of$1,516 was recognized from the settlement and included in the loss fromdiscontinued operations reported in the consolidated statement of income forthe year ended December 31, 2004.

 

Revenues from discontinued operations were $10,500 and $21,600 for the yearsended December 31, 2004 and 2003, respectively.

 

**7.****                                      Long-termDebt**

 

AtDecember 31, 2005 and 2004, debt consisted of the following:

 
| ** **            | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| WC Term Loans         |       | $        | 34,425     |     | $          | 24,929 |   |
| Less: current portion |       | 9,674    |       | 5,970    |       |
| Long-term debt        |       | $        | 24,751     |     | $          | 18,959 |   |

 

OnMarch 31, 2005, WC entered into a Second Amended and Restated LoanAgreement (the “Credit Agreement”). The Credit Agreement provided WC with a$40,500 five-year, fully-amortizing term loan (the “WC Term Loan”) and an$8,000 revolving line of credit (the “WC Revolver”). The WC Term Loan bearsinterest at LIBOR plus 2.5% or Prime, at the Company’s option, and borrowingsunder the WC Revolver bear interest at LIBOR plus 2.0% or Prime minus 0.5%, atthe Company’s option. The WC Term Loan requires monthly principal payments of$675. The WC Term Loan also requires that an additional principal payment (the“Accelerated Payment”) be made based on the annual earnings, as defined, of WC.The Accelerated Payment based on the 2005 earnings of WC is $1,574 and is dueon April 30, 2006. The proceeds of the WC Term Loan were used to fund theCaronia acquisition and repay then outstanding debt under the WC HoldingsSenior Term Loan (the “Prior WC Term Loan”).

 

Borrowingsunder the Prior WC Term Loan bore interest at Prime minus 0.5% or one-monthLIBOR plus 1.75%, at the Company’s option. WC also maintained an $8,000 revolving line of credit (the “PriorWC Revolver”). Borrowings under thePrior WC Revolver bore interestat LIBOR plus 1.75%. The Prior WC Revolver was replaced by the WC Revolver.

 

OnSeptember 15, 2005, Primrose entered into the Fifth Amendment to LoanAgreement (the “Amendment”). The Amendment provided Primrose with a $1,000five-year loan (the “Primrose Term Loan”) and extended the maturity of the$1,000 revolving line of credit (the “Primrose Revolver”) until December 31,2006. The proceeds from the Primrose Term Loan were used to pay a portion of a dividendto the Primrose stockholders (see Note 11). The Primrose Term Loan was repaidin full prior to December 31, 2005. Borrowings under the Primrose Revolver bear interest at LIBOR plus 2.0%or Prime, at the Company’s option.

 

InJanuary 2004, the Company issued a $30,000 Senior Subordinated PromissoryNote (the “Note”), due September 30, 2008 The initial interest rate on the Note was 10% per annum, but wasscheduled to increase to 16% on September 30, 2004. Because of theavailability of less expensive financing alternatives, the Note was prepaidwithout penalty prior to September 30, 2004.

 

At December 31, 2005 and 2004, there were noamounts outstanding under the WC Revolver, the Prior WC

 

46

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Revolver, or the Primrose Revolver. WC hadoutstanding letters of credit aggregating $1,250 at December 31, 2005 and 2004.These letters of credit reduce the available borrowing amount under the WCRevolver on a dollar-for-dollar basis. Accordingly, WC could have borrowed upto a maximum of $6,750 under the WC Revolver or Prior WC Revolver at December 31,2005 and 2004. The weighted average borrowing rate of debt at December 31, 2005and 2004 was 6.5% and 5.9% respectively.

 

TheWC Term Loan, the Primrose Term Loan, the WC Revolver and the Primrose Revolvereach contains restrictive covenants that prohibit or limit certain actions,including specified levels of capital expenditures, investments and incurrenceof additional debt, and require the maintenance of a minimum fixed charge ratio.Borrowings are secured by a pledge of substantially all assets at thesubsidiary level, as well as a pledge of the shares of subsidiary stock ownedby the Company. The Credit Agreement also contains provisions that require WCto provide monthly financial statements and audited annual financial statementsto the lender. Management believes that the Company is currently in compliancewith all of these requirements.

 

Scheduled maturities at December 31, 2005 of long-term debt forthe next five years were as follows:

 
| 2006 |   | $ | 9,674 |   |
|------|--------|---|-------|--------|
| 2007 |   | $ | 8,100 |   |
| 2008 |   | $ | 8,100 |   |
| 2009 |   | $ | 8,100 |   |
| 2010 |   | $ | 451   |   |

 

**8.****                                      DerivativeFinancial Instruments**

 

Our use of derivative financial instruments is currently limited tointerest rate swap agreements utilized to mitigate exposure to changes ininterest rates on variable rate debt. We do not use derivatives for trading orspeculative purposes.

 

InDecember 2000, WC entered into an interest rate swap agreement with anotional value of $8,500, which effectively converted $8,500 of variable ratedebt to fixed rate debt. Under the terms of the swap, WC paid a fixed rate of5.85% and received a variable rate based on one-month LIBOR. The swap was notdesignated as a hedge for financial accounting purposes; therefore, changes inits fair value were recorded through earnings. This swap expired December 22,2005 and management decided not to replace the swap.

 

InFebruary 2004, WC entered into an interest rate swap agreement with anotional value of $10,000, which effectively converts $10,000 of variable ratedebt to fixed rate debt. Under the terms of this swap agreement, WC pays afixed rate of 3.44% and receives a variable rate based on one-month LIBOR. Thisswap has been designated as a cash flow hedge for financial accounting purposesand, to the extent the swap provides an effective hedge, changes in the fairvalue of the swap are recorded in other comprehensive income, a component ofstockholders’ equity. To the extent the swap does not provide an effectivehedge, changes in the fair value of the swap are recorded in other expense. Therewas no ineffectiveness recorded through earnings for the 12 months ended December 31,2005 or 2004. The interest rate swap expires in 2009.

 

Changes in the fair value of the interest rate swaps were as follows:

 
| ** **                                                      | ** ** | **For the Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Fair  market value at beginning of the year                     |       | $                                                            | (202       | ) | $ | (662 | ) | $ | (907 | ) |
| Gain recorded through earnings                                  |       | 261                                                          |       | 401 |   | 245 |   |
| Change in fair value recorded through stockholders’ equity |       | 135                                                          |       | 59 |   | — |   |
| Fair market value at end of the year                            |       | $                                                            | 194        |   | $ | (202 | ) | $ | (662 | ) |

 

The fair value of derivatives at December 31, 2005 is recorded asother assets, and the fair value of derivatives at December 31, 2004 isrecorded as other long-term obligations, in the consolidated balance sheets.

 

Theoutstanding interest rate swap exposes us to credit risk in the event that thecounterparty to the agreement does not or cannot meet its obligation. Thenotional amount is used to measure interest to be paid or received and does notrepresent the amount of exposure to credit loss. The loss would be limited tothe amount that would have been received, if any, over the remaining life ofthe swap agreement. The counterparty to the swap is a major financial

 

47

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institution,which we expect to fully perform under the terms thereof.

 

**9.****                                      RedeemableConvertible Preferred Stock**

 

During 2004 and 2003, we had issued 500,000shares of Redeemable Convertible Preferred Stock (the “Preferred Stock”), witha stated redemption value of $10 per share. The Preferred Stock was convertibleinto Class A Common Stock on a 1:1 basis. The Preferred Stock wasredeemable at the option of the stockholder upon the occurrence of certainevents or on April 6, 2006. On November 10, 2004, we redeemed allshares of Preferred Stock for $5,000, or $10 per share.

 

The difference between the carrying value of thePreferred Stock and the redemption value was accreted using the interest methodover the remaining estimated period to redemption. Preferred Stock accretion of$1,275 and $457 was recognized in 2004 and 2003, respectively. Additionalaccretion was recorded in 2004 to accrete the carrying value of the PreferredStock to its redemption value.

 

The Company had 2,500,000 shares of authorized preferred shares, $0.01par value, available for issuance at December 31, 2005.

 

**10.****                               Stockholders’Equity**

 

The authorized common stock of the Company consists of Common Stock andClass A Common Stock. The Class A Common Stock shares are identicalin rights to the Common Stock shares, except that, with certain exceptions,transfer of shares of the Class A Common stock is prohibited to a personwho is, or would thereby become, a holder of 4.75% or more of the fair marketvalue of the Common Stock and the Class A Common Stock. The Company hasnot paid any dividends to common stockholders during the last five years. Certainfinancing arrangements limit the ability of our subsidiaries to pay dividendsto Security Capital, thus limiting our ability to pay dividends to ourstockholders.

 

**11.****                               MinorityInterests**

 

The minority stockholders of WC (with an aggregate ownership interestof 15.6%) and Primrose (with an aggregate ownership interest of 1.5%) haveentered into agreements with the Company providing for restrictions on thetransfer of such shares, and other related share restrictions. See Note 17 forinformation with respect to the agreement to sell Primrose.

 

InSeptember 2005, Primrose paid a dividend of $3,453 to its stockholders. As the98.5% stockholder of Primrose, we received $3,400 of the dividend and the 1.5%minority stockholders in Primrose received $53. We used the proceeds from thedividend to purchase shares of WC held by minority stockholders in WC asdescribed below.

 

Prior to September 16, 2005, the minoritystockholders of WC had an aggregate ownership interest of 20%. On September 16,2005, we acquired 979.88 shares of WC stock directly from the minoritystockholders of WC for total cash consideration of $3,341. Also on September 16, 2005, certainoption holders of WC exercised options to purchase shares of WC. As a result ofthe exercise of these options, an additional 408.41 shares of WC were issued toWC minority stockholders for aggregate cash consideration of $283. The resultingnet decrease of 571.47 shares of WC held by the minority stockholders of WCreduced their ownership interest froman aggregate 20% to 15.6%. Also on September 16, 2005, WC settled for cashoptions to purchase 277 shares of WC for an aggregate of $720.

 

**12.****                               Long-TermIncentive Plans**

 

Wemaintain a stockholder-approved stock incentive plan (the “Incentive Plan”), wherebyup to 966,346 shares of our Class A Common Stock may be granted to certainemployees and non-employee directors. Eligible employees andnon-employee directors may receivestock options, stock appreciation rights, limited stock appreciation rights intandem with stock options, restricted stock, deferred stock and stock grantedas a bonus or in lieu of other awards (collectively, “Awards”). Awards are currentlylimited to stock options granted to employees and non-employee directors. TheBoard of Directors administers the Incentive Plan and has full authority to,among other things, select participants to whom Awards will be granted,determine the type and number of Awards to be granted, the exercise price ofthe Awards and all other relevant provisions, including, but not limited toforfeiture, vesting, restrictions on exercises, and transferability of theAwards. Stock options are typically granted at the fair market value of our Class A

 

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CommonStock on the date of the grant, vest ratably over a three- to five-year periodand expire 10 years from the date of grant. The Company will generally issuenew shares to satisfy a stock option exercise. At December 31, 2005,the Company had 58,836 shares of Class A Common Stock reserved for futureAwards.

 

A summary of stock option activity for the years ended December 31,2005, 2004 and 2003 is as follows:

 
| ** **                                 | ** ** | **Shares** | ** ** | **Weighted  average  exercise price** | ** ** | **Weighted  average grant  date fair  value** | ** ** |
|--------------------------------------------|------------|------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
|                                       |       |       |       |                                  |       |                                          |       |
| Awards outstanding, January 1, 2003   |       | 834,000    |       | $                                     | 7.88       |                                          | $          | 3.86 |   |
| Granted                                    |       | 15,000     |       | 8.00                                  |       | 3.20                                          |       |
| Awards outstanding, January 1, 2004   |       | 849,000    |       | 7.88                                  |       | 3.85                                          |       |
| Granted                                    |       | 24,000     |       | 10.00                                 |       | 4.03                                          |       |
| Cancelled                                  |       | (30,000    | )          | 9.43                                  |       | 3.98                                          |       |
| Awards outstanding, January 1, 2005   |       | 843,000    |       | 7.89                                  |       | 3.85                                          |       |
| Granted                                    |       | 64,510     |       | 9.83                                  |       | 4.09                                          |       |
| Exercised                                  |       | (320,000   | )          | 6.13                                  |       | 3.32                                          |       |
| Awards outstanding, December 31, 2005 |       | 587,510    |       | $                                     | 9.06       |                                          | $          | 4.16 |   |

 

Thefair values of options granted in 2005, 2004 and 2003 were estimated at thedate of grant using a Black-Scholes option pricing model with the followingweighted average assumptions:

 
| ** **              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free interest rate |       | 4.0      | %          | 3.8      | %          | 3.2      | %          |
| Dividend yield          |       | 0        | %          | 0        | %          | 0        | %          |
| Volatility              |       | 31.1     | %          | 30.0     | %          | 22.8     | %          |
| Expected life           |       | 7 years  |       | 7 years  |       | 10 years |       |

 

The following table summarizes information about stock optionsoutstanding and exercisable at December 31, 2005:

 
| ** **                  | ** ** | **Stock Options Outstanding** | ** ** | **Stock Options Exercisable**                                  | ** ** |
|-----------------------------|------------|-------------------------------|------------|----------------------------------------------------------------|------------|
| **Range  of grant  prices** | ** ** | **Shares**                    | ** ** | **Weighted  average  remaining  contractual  life (in years)** | ** ** | **Weighted  average  grant price  per share** | ** ** | **Shares** | ** ** | **Weighted  average grant  price per  share** | ** ** |
|                        |       |                          |       |                                                           |       |   |   |   |   |   |   |
| $6.13 - $6.13               |       | 205,000                       |       | 4.5                                                            |       | $ | 6.13 |   | 205,000 |   | $ | 6.13 |   |
| $9.65 - $10.31              |       | 136,510                       |       | 8.0                                                            |       | 9.91 |   | 64,000 |   | 9.99 |   |
| $10.85 - $12.69             |       | 246,000                       |       | 5.6                                                            |       | 11.03 |   | 201,600 |   | 11.07 |   |
| Total                       |       | 587,510                       |       | 5.8                                                            |       | $ | 9.06 |   | 470,600 |   | $ | 8.77 |   |

 

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At December 31, 2005, the intrinsic value (based on the stockprice of $14.50) of options outstanding and exercisable was $3,197 and $2,698,respectively. The intrinsic value of stock options exercised during 2005 was$722.

 

Information regarding unvested stock options at December 31, 2005and 2004 is as follow:

 
| ** **                                       | ** ** | **Shares** | ** ** | **Weighted  average  exercise price** | ** ** | **Weighted  average grant  date fair  value** | ** ** |
|--------------------------------------------------|------------|------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
|                                             |       |       |       |                                  |       |                                          |       |
| Unvested stock options at December 31, 2004 |       | 205,000    |       | $                                     | 8.47       |                                          | $          | 4.00 |   |
| Granted during the year                          |       | 64,510     |       | 9.83                                  |       | 4.09                                          |       |
| Vested during the year                           |       | (152,600   | )          | 7.70                                  |       | 3.78                                          |       |
| Unvested stock options at December 31, 2005 |       | 116,910    |       | $                                     | 10.23      |                                          | $          | 4.34 |   |

 

Unrecognized share-based compensation expense related to unvestedoptions at December 31, 2005 is $407 and will be recognized as follows: $208in 2006, $60 in 2007 and 2008, $53 in 2009 and $26 in 2010.

 

We also grant stock options to certain key employees of WC to purchaseshares of WC. The options are granted at the fair market value of a share of WCstock, as determined by the Company’s Board. The options vest over three toeight years; however, for certain options, vesting is accelerated if certain performanceobjectives are obtained. All options expire 10 years from the grant date.

 

We also grant stock options to certain key employees of Primrose topurchase shares of Primrose. The options are granted at the fair market valueof a share of Primrose stock, as determined by the Company’s Board. The optionsvest ratably over three to five years and expire 10 years from the grant date.For certain option grants to Primrose employees, the option holder was 100%vested with respect to 40% of the total number of stock options granted.

 

A summary of stock option activity for WC stock options and Primrosestock options for the years ended December 31, 2005, 2004 and 2003 is asfollows:

 
| ** **                                 | ** ** | **WC Stock Option Plan** | ** ** | **Primrose Stock Option Plan**         | ** ** |
|--------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **Shares**               | ** ** | **Weighted  average  exercise  price** | ** ** | **Shares** | ** ** | **Weighted  average  exercise  price** | ** ** |
|                                       |       |                     |       |                                   |       |   |   |   |   |
| Awards outstanding, January 1, 2003   |       | 1,380                    |       | $                                      | 761        |   | 1,676 |   | $ | 500 |   |
| Granted                                    |       | —                   |       | —                                 |       | 585 |   | 702 |   |
| Awards outstanding, January 1, 2004   |       | 1,380                    |       | 761                                    |       | 2,261 |   | 552 |   |
| Granted                                    |       | —                   |       | —                                 |       | — |   | — |   |
| Cancelled                                  |       | (360                     | )          | 694                                    |       | — |   | — |   |
| Awards outstanding, January 1, 2005   |       | 1,020                    |       | 785                                    |       | 2,261 |   | 552 |   |
| Settled for cash                           |       | (277                     | )          | 809                                    |       | — |   | — |   |
| Exercised                                  |       | (408                     | )          | 694                                    |       | — |   | — |   |
| Cancelled                                  |       | (206                     | )          | 694                                    |       | (289 | ) | 500 |   |
| Awards outstanding, December 31, 2005 |       | 129                      |       | $                                      | 1,171      |   | 1,972 |   | $ | 560 |   |

 

Stock options to acquire 129 shares of WC stock at December 31,2005 consisted of 63 options at an exercise price of $694 (of which 23 wereexercisable) and 66 options at an exercise price of $1,626 (of which 16 wereexercisable). There were 628 WC shares available for future option grants.

 

Stock options to acquire 1,972 shares of Primrose stock at December 31,2005 consisted of 1,387 options at an exercise price of $500 (of which all areexercisable) and 585 options at an exercise price of $702 (of which 468 wereexercisable). There were 628 Primrose shares available for future option grants.

 

Priorto adopting SFAS 123R, the Company applied the disclosure only provisions ofStatement of Financial

 

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AccountingStandards No. 123, *Accounting for Stock-BasedCompensation*, as amended by Statement of Financial AccountingStandards No. 148, *Accounting for Stock-BasedCompensation - Transitions and Disclosure, an amendment to FASB Statement No. 123*(“SFAS 148”). The following table is presented in accordancewith SFAS 148 and illustrates the effect on net income and earnings per shareif the Company had applied the fair value recognition provisions of SFAS 123Rfor all periods presented.

 
| ** **                                                                                                                                   | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income, as reported                                                                                                                      |       | $                                | 9,435      |   | $ | 3,233 |   | $ | 3,289 |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effects and  minority interest           |       | 172                              |       | — |   | — |   |
| Deduct: Stock-based employee compensation  expense determined under the fair value method, net of related tax effects  and minority interest |       | (479                             | )          | (590 | ) | (860 | ) |
| Pro forma net income                                                                                                                         |       | 9,128                            |       | 2,643 |   | 2,429 |   |
| Preferred stock accretion                                                                                                                    |       | —                           |       | (1,275 | ) | (457 | ) |
| Pro forma income available to common  stockholders                                                                                           |       | $                                | 9,128      |   | $ | 1,368 |   | $ | 1,972 |   |
|                                                                                                                                         |       |                             |       |   |   |   |   |
| Basic earnings per common share available  to common stockholders:                                                                           |       |                             |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                                | 1.40       |   | $ | 0.30 |   | $ | 0.43 |   |
| Pro forma                                                                                                                                    |       | $                                | 1.36       |   | $ | 0.21 |   | $ | 0.31 |   |
|                                                                                                                                         |       |                             |       |   |   |   |   |
| Diluted earnings per common share available  to common stockholders:                                                                         |       |                             |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                                | 1.34       |   | $ | 0.26 |   | $ | 0.37 |   |
| Pro forma                                                                                                                                    |       | $                                | 1.30       |   | $ | 0.17 |   | $ | 0.25 |   |

 

The Company’s subsidiaries each sponsor a defined-contribution 401(k)plan in which qualifying employees greater than 21 years of age who meetminimum service requirements may participate. Eligible employees may electto make pre-tax contributions of up to 15% of their eligible earnings. Thesubsidiary companies also make matching contributions. At WC, the contributionis equal to 50% of each participant’s contribution up to 6% of eligiblecompensation, and at Primrose, the contribution is equal to 50% of eachparticipant’s contribution up to 3% of eligible compensation. The aggregatematching contributions were $1,435, $1,162, and $750 for the years ended December 31,2005, 2004 and 2003, respectively.

 

In 2004, we established a deferred compensation plan for key employeesof Octagon (the “Octagon Plan”). An Administrative Committee has been appointedto administer the Octagon Plan and has the authority to, among other things,determine those employees who will participate in the Octagon Plan, approve theperformance goals that each participant will be measured against, determinewhether those goals were achieved and the amount to be awarded to eachparticipant. The amount each participant can be awarded is based on apercentage of their eligible compensation (as defined), but the total amountawarded to all participants cannot exceed 10% of Octagon earnings beforeinterest, taxes, depreciation and amortization. The amounts awarded to participantsvest 50% after five years and 100% after 10 years. The Octagon Plan is notrequired to be funded. For the years ended December 31, 2005 and 2004, werecognized expense of $300 and $322, respectively, related to the Octagon Plan.

 

**13.****          IncomeTaxes**

 

The provision (benefit) for income taxes from continuing operations wasas follows:

 
| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:           |       |                             |       |   |   |   |   |
| Federal            |       | $                                | 4,639      |   | $ | 2,972 |   | $ | 3,118 |   |
| State              |       | 1,466                            |       | 1,494 |   | 1,069 |   |
|               |       | 6,105                            |       | 4,466 |   | 4,187 |   |
| Deferred:          |       |                             |       |   |   |   |   |
| Federal            |       | (1,345                           | )          | 600 |   | 320 |   |
| State              |       | 10                               |       | 179 |   | 110 |   |
|               |       | (1,335                           | )          | 779 |   | 430 |   |
| Income tax expense |       | $                                | 4,770      |   | $ | 5,245 |   | $ | 4,617 |   |

 

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The Company’s net deferred tax asset was composed of the following:

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Deferred tax assets (liabilities):      |       |                  |       |   |   |
| Allowance for doubtful accounts         |       | $                     | 390        |   | $ | 586 |   |
| Net operating loss carry-forwards       |       | 5,349                 |       | 4,591 |   |
| Accelerated depreciation and other      |       | (4,627                | )          | (667 | ) |
| Gross deferred tax assets               |       | 1,112                 |       | 4,510 |   |
| Valuation allowance                     |       | (714                  | )          | (471 | ) |
| Net deferred tax asset                  |       | $                     | 398        |   | $ | 4,039 |   |
|                                    |       |                  |       |   |   |
| Reconciliation to financial statements: |       |                  |       |   |   |
| Current deferred tax asset              |       | $                     | 2,592      |   | $ | 2,681 |   |
| Non-current deferred tax asset          |       | 668                   |       | 1,358 |   |
| Non-current deferred tax liability      |       | (2,862                | )          | — |   |
| Net deferred tax asset                  |       | $                     | 398        |   | $ | 4,039 |   |

 

The valuation allowance is provided for certain state net operatinglosses (“NOL”).

 

A reconciliation of the tax provision at the Federal statutory rate to thereported tax provision is as follows:

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Federal income taxes based on statutory rate |       | $                                | 5,437      |   | $ | 3,790 |   | $ | 3,727 |   |
| State income taxes, net of federal benefit   |       | 930                              |       | 792 |   | 756 |   |
| Reversal of federal tax reserve              |       | (1,684                           | )          | — |   | — |   |
| Valuation allowance                          |       | —                           |       | 310 |   | — |   |
| Other                                        |       | 87                               |       | 353 |   | 134 |   |
| Income tax expense                           |       | $                                | 4,770      |   | $ | 5,245 |   | $ | 4,617 |   |

 

AtDecember 31, 2005, Octagon had NOL carryforwards for federal income taxpurposes of approximately $11,011. The use of the NOL carryforwards is subjectto certain limitations under Internal Revenue Code Section 382. The NOLcarryforwards expire between 2018 and 2022.

 

Theamount of goodwill deducted for tax purposes was $2,789, 2,789 and $1,818 forthe years ended December 31, 2005, 2004 and 2003, respectively. Approximately$25,000 remains to be deducted for tax purposes through 2017.

 

Whilewe believe that our tax return positions are fully supportable, we expect thatcertain positions could be challenged and that we may not be able tosuccessfully defend our positions. Accordingly, we establish certain reserves,including interest, for these items. We review the adequacy of these reservesperiodically and make adjustments when deemed necessary. During 2005, we reversed$1,684 of such reserves as we deemed them to be no longer necessary. Remainingtax reserves at December 31, 2005 aggregated $4,948.

 

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**14.****          EarningsPer Common Share**

 

The following table shows the calculation of basic and diluted EPS:

 
| ** **                                                                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                          |       |     |       |     |       |     |       |
| Basic weighted average shares outstanding —  denominator for basic EPS                                                   |       | 6,725    |       | 6,451    |       | 6,451    |       |
| Dilutive effect of stock options                                                                                              |       | 99       |       | 147      |       | 85       |       |
| Diluted weighted average shares outstanding  — denominator for diluted EPS                                               |       | 6,824    |       | 6,598    |       | 6,536    |       |
|                                                                                                                          |       |     |       |     |       |     |       |
| Income from continuing operations                                                                                             |       | $        | 9,435      |     | $          | 4,463    |       | $ | 5,258 |   |
| Preferred Stock accretion                                                                                                     |       | —   |       | (1,275   | )          | (457     | )          |
| Income from continuing operations available  to common stockholders – numerator for basic EPS from continuing operations |       | 9,435    |       | 3,188    |       | 4,801    |       |
| Loss from discontinued operations –  numerator for basic EPS from discontinued operations                                |       | —   |       | (1,230   | )          | (1,969   | )          |
| Income available to common stockholders –  numerator for basic EPS                                                       |       | 9,435    |       | 1,958    |       | 2,832    |       |
|                                                                                                                          |       |     |       |     |       |     |       |
| Effect of subsidiary stock options on  income (1)                                                                             |       | (259     | )          | (269     | )          | (395     | )          |
|                                                                                                                          |       |     |       |     |       |     |       |
| Basic earnings (loss) per share                                                                                               |       |     |       |     |       |     |       |
| Continuing operations                                                                                                         |       | $        | 1.40       |     | $          | 0.49     |       | $ | 0.74 |   |
| Discontinued operations                                                                                                       |       | —   |       | (0.19    | )          | (0.31    | )          |
| Total                                                                                                                         |       | $        | 1.40       |     | $          | 0.30     |       | $ | 0.43 |   |
|                                                                                                                          |       |     |       |     |       |     |       |
| Diluted earnings (loss) per share                                                                                             |       |     |       |     |       |     |       |
| Continuing operations                                                                                                         |       | $        | 1.34       |     | $          | 0.43     |       | $ | 0.68 |   |
| Discontinued operations                                                                                                       |       | —   |       | (0.17    | )          | (0.31    | )          |
| Total                                                                                                                         |       | $        | 1.34       |     | $          | 0.26     |       | $ | 0.37 |   |

 

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(1)   The assumed exercise of stock options ofsubsidiary companies has the effect of reducing our earnings (“diluted earnings”)since our overall ownership interest in the subsidiary companies, and thus ourshare of the net income of the subsidiaries, would be reduced. The calculation ofdiluted earnings per share is based on diluted earnings.

 

Stockoptions to acquire 24,000, 318,000, and 324,000 shares of Class A Common Stock in 2005, 2004and 2003, respectively, were excluded from the computation of diluted EPSbecause the effect of their assumed conversion was antidilutive. For theyears ended December 31, 2004 and 2003, 500,000 shares of Preferred Stock, which were convertible into 500,000shares of Class A Common Stock, were also excluded because the effect oftheir assumed conversion was antidilutive.

 

**15.****          Related-PartyTransactions**

 

The Company has an Advisory Service Agreement with Capital Partners, Inc.(“Capital Partners”), the representative of the Company’s controllingstockholder, whereby Capital Partners provides certain advisory servicesrelated to investments, general administration, corporate development,strategic planning, stockholder relations, financial matters and generalbusiness policy. The Advisory Services Agreement was approved by the AuditCommittee, the Compensation Committee and the full Board of Directors and iseffective for the calendar year. It can be terminated by either the Company or CapitalPartners upon at least 60 days’ prior written notice to the other. Fees arepayable quarterly at the beginning of the quarter and were $1,550, in each ofthe years ended December 31, 2005 and 2004, and $1,400 in the year ended December 31,2003. Fees paid to Capital Partners are generally subordinate to the rights ofthe lenders to the Company. The Company will also reimburse Capital Partnersfor certain expenses incurred and paid by Capital Partners on the Company’sbehalf.

 

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Amounts due to Capital Partners at December 31, 2005 and 2004 werenot material.

 

The Advisory Services Agreement with Capital Partners also provides forthe payment of investment banking fees to Capital Partners for acquisitionopportunities presented to the Company at usual and customary rates fortransactions of similar size and complexity. Capital Partners is under noobligation to present to the Company any or all acquisition candidates of whichit becomes aware. Furthermore, the Company is under no obligation to utilizeCapital Partners for investment banking services. The payment of an investmentbanking fee to Capital Partners requires the approval of the Audit Committee, theCompensation Committee and the full Board of Directors. We paid CapitalPartners an investment banking fee in 2005 of $240 in connection with theCaronia acquisition and an investment banking fee in 2003 of $150 in connectionwith the Octagon acquisition. The investment banking fees were capitalized as part ofthe acquisition costs of these acquisitions.

 

OnDecember 23, 2005, we entered into the Second Amended and RestatedAdvisory Service Agreement (the “Amended Advisory Services Agreement”) withCapital Partners. The Amended Advisory Services Agreement is effective January 1,2006 and the annual fee remains unchanged at $1,550. Under the terms ofthe Amended Advisory ServicesAgreement, if the Company is sold prior to June 30, 2006, Capital Partnerswill continue to provide services under the agreement for a period ofsix months following the effective date of a sale. In addition, under theAmended Advisory Services Agreement, CapitalPartners will provide advisory services to the Company in connection withmanaging the formal sale process, including in the areas of planning such saleprocess, selecting and evaluating potential buyers, negotiating directly orindirectly with potential buyers and consummating a sale of the Company, or ifapplicable, the sale of Primrose and the sale of the balance of the Company intwo separate transactions. In exchange for such services, the Company will payto Capital Partners a sale bonus of $2,000 (the “Incentive Sale Bonus”). TheIncentive Sale Bonus will be increased or decreased depending on the ultimateaggregate sale proceeds obtained (the “Adjustment Amount”). In the event a saleof Primrose occurs in a separate transaction, no amount will be due. Rather,the Incentive Sale Bonus, including the Adjustment Amount, will be earned andpayable upon the sale of the balance of the Company.

 

**16.****          Commitmentsand Contingencies**

 

In November 2005, Mr. Robert Bossart, former Chief Executive Officer of WC and CMI, and Mr. PaulMiller, former Chief Financial Officer and General Counsel of WC and CMI(collectively, the “Former Executives”), filed a complaint against WC, CMI and certainof its subsidiaries (collectively, the “CMI Companies”). The complaint allegedthat the Former Executives were wrongfully terminated by the CMI Companies. Eachof the Former Executives filed a single claim for breach of his employmentcontract, seeking monetary damages. This matter was settled subsequent to December 31,2005. See Note 17.

 

CMIis party to a complaint brought by the Cleveland Bar Association that allegedthat certain practices by CMI and its hearing representatives in Ohioconstituted the unauthorized practice of law. CMI believes that its practices donot differ from those of any other Ohio workers’ compensation third-partyadministrator and do not constitute the unauthorized practice of law.

 

InMay 2004, the Board of Commissioners on the Unauthorized Practice of Law(the “UPL Board”) found that the activities of CMI and its hearingrepresentatives constituted the unauthorized practice of law; CMI appealedthese findings to the Ohio Supreme Court (the “Supreme Court”). In December 2004,the Supreme Court ruled that the activities engaged in by CMI and its hearingrepresentatives did not constitute the unauthorized practice of law. However,in its decision, the Supreme Court remanded the matter back to the UPL Board toconsider whether those activities that were the subject of the original suitwere in violation of certain Industrial Commission resolutions.

 

Afterhearing oral arguments, the UPL Board issued a recommendation released on December 14,2005 that CMI did engage in specific activities that constituted theunauthorized practice of law. CMI, along with 80 trade associations, hasobjected to those recommendations and asked the Supreme Court to consider thematter. The recommendations of the UPL Board included a recommendation that theSupreme Court not assess any civil monetary penalties. The Cleveland BarAssociation has filed an objection to the recommendation of the UPL Boardrelative to the finding of no penalties and requested, in a filing dated February 8,2006, that a $28,000 assessment be levied against CMI.

 

Thematter is pending a hearing with the Supreme Court. CMI believes its practiceswere in compliance with the Industrial Commission resolutions and subsequentguidance memorandums, and intends to vigorously defend itself in this

 

54

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matter.However, at this time, management is unable to evaluate the outcome ordetermine****whether penalties ultimately will be assessed.

 

In connection with a written offer made by Brian Fitzgerald, our Chairman of the Board,President and Chief Executive Officer, and, through Capital Partners, thecontrolling person of our majority stockholder, CP Acquisitions, L.P. No. 1(“CPI”),  to acquire by merger all of theoutstanding Class A Common Stock and Common Stock of Security Capital,other than shares held by Mr. Fitzgerald, Capital Partners, CPI andcertain other persons (the “Offer”), threecomplaints were filed in the Court of Chancery of the State of Delaware in andfor New Castle County (the “Court”), naming the Company, each then-member ofour Board of Directors and CPI as defendants. Each of the complaints allegedthat the defendants breached their fiduciary duties to the putative class andthat the Offer was unfair, inadequate and not the result of arm’s-lengthnegotiations. Each complaint sought aninjunction against the proposed merger or, if the merger was consummated, therescission of the merger, as well as money damages, attorneys’ fees, expensesand other relief. These complaints were subsequently consolidated into one class action.On November 1, 2005, the plaintiffs voluntarily dismissed the consolidatedclass action without prejudice.

 

Weare party to several legal actions arising in the ordinary course of business. Itis management’s opinion that we have adequate legal defenses to these actions, andthat the resolution of such matters will not have a material adverse effect onour financial condition, results of operations or cash flows.

 

We lease office space and certain equipment under non-cancelableoperating lease agreements that expire at various dates through 2017. Certainleases include renewal provisions and require us to pay for certain operatingand maintenance costs. Future minimum operating lease payments at December 31,2005 for each of the following years are as follows:

 

| 2006 |   | $     | 6,993  |   |
|------|--------|-------|--------|--------|
| 2007 |   | 6,837 |   |
| 2008 |   | 4,990 |   |
| 2009 |   | 3,691 |   |
| 2010 |   | 2,447 |   |

 

Net rent expense for the years ended December 31, 2005, 2004 and2003 was as follows:

 
| ** **       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|
| Rent expense     |       | $        | 7,518      |     | $          | 6,799    |       | $ | 4,280 |   |
| Rent income      |       | (163     | )          | (205     | )          | —   |       |
| Net rent expense |       | $        | 7,355      |     | $          | 6,594    |       | $ | 4,280 |   |

 

**17.****          SubsequentEvents**

 

OnFebruary 10, 2006, the Company signed a definitive agreement for the saleof Primrose to an affiliate of American Capital Strategies, Ltd. for anaggregate purchase price of $85,000, subject to adjustment. After adjustmentfor transaction costs and certain items specified in the agreement, the netpurchase price is anticipated to be approximately $82,800. The Company expectsto net, after taxes, approximately $58,200 for its 91.5% fully diluted interestin Primrose. The sale is subject to customary closing conditions and isanticipated to close by March 31, 2006. The net book value of the Primrosebusiness was $22,777 at December 31, 2005.

 

OnMarch 9, 2006, the Company and its WC business entered into a SettlementAgreement and Release with two former executives of the WC business (the “Agreement”).Pursuant to the Agreement, the former executives agreed to three-year covenantsnot to complete and non-solicitation agreements, the Company and the formerexecutives agreed to be bound by a “drag/tag” arrangement with respect to theshares of WC held by the former executives in the event of a change of controlof the Company or WC, the former executives agreed to dismiss their wrongfultermination suit with prejudice, and the parties entered into mutual releasesand non-disparagement agreements. Under the Agreement, the Company agreed topay the former executives an aggregate of $1,781, with $846 of that amountpayable upon a change of control of the Company or WC. The Company accrued $935at December 31, 2005, representing the amount payable at the time of thesigning of the Agreement and the amounts to be paid on the first and second anniversarydate of the signing of the Agreement. The $846 payable upon a change in controlof the Company or WC was not accrued at December 31, 2005.

 

During2006, an additional 378,000 shares of Class A Common Stock of the Companywere issued as a result of stock option exercises. Cash of $3,318 was receivedfrom the stock option exercises.

 

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**18.****          Selected Quarterly Data(unaudited)**

 
| ** **                                                    | ** ** | **1st  Quarter** | ** ** | **2nd  Quarter** | ** ** | **3rd  Quarter** | ** ** | **4th  Quarter** | ** ** | **TOTAL** | ** ** |
|---------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| **2005:**                                                     |       |             |       |             |       |             |       |             |       |      |       |
| Total revenues                                                |       | $                | 34,887     |             | $          | 39,867           |       | $                | 39,826     |      | $          | 40,731 |   | $ | 155,311 |   |
| Operating income (1)                                          |       | 3,434            |       | 4,917            |       | 4,116            |       | 5,615            |       | 18,082    |       |
| Net income (2)                                                |       | 1,600            |       | 3,815            |       | 1,866            |       | 2,154            |       | 9,435     |       |
| Basic earnings per common share                               |       | $                | 0.24       |             | $          | 0.56             |       | $                | 0.28       |      | $          | 0.32 |   | $ | 1.40 |   |
| Diluted earnings per common share.                            |       | $                | 0.23       |             | $          | 0.55             |       | $                | 0.26       |      | $          | 0.29 |   | $ | 1.34 |   |
|                                                          |       |             |       |             |       |             |       |             |       |      |       |
| ** **                                                    | ** ** | **1st  Quarter** | ** ** | **2nd  Quarter** | ** ** | **3rd  Quarter** | ** ** | **4th  Quarter** | ** ** | **TOTAL** | ** ** |
| **2004:**                                                     |       |             |       |             |       |             |       |             |       |      |       |
| Total revenues                                                |       | $                | 30,884     |             | $          | 32,305           |       | $                | 33,446     |      | $          | 36,305 |   | $ | 132,940 |   |
| Operating income (3)                                          |       | 3,867            |       | 3,799            |       | 3,750            |       | 3,429            |       | 14,845    |       |
| Income from continuing operations                             |       | 1,194            |       | 1,157            |       | 1,185            |       | 927              |       | 4,463     |       |
| Net income (loss) (4)                                         |       | 622              |       | 910              |       | (775             | )          | 2,476            |       | 3,233     |       |
| Income (loss) available to common  stockholders (5)           |       | 503              |       | 777              |       | (1,798           | )          | 2,476            |       | 1,958     |       |
| Basic earnings per common share from  continuing operations   |       | $                | 0.17       |             | $          | 0.16             |       | $                | 0.02       |      | $          | 0.14 |   | $ | 0.49 |   |
| Diluted earnings per common share from  continuing operations |       | $                | 0.15       |             | $          | 0.14             |       | $                | 0.01       |      | $          | 0.13 |   | $ | 0.43 |   |
| Basic earnings (loss) per common share                        |       | $                | 0.08       |             | $          | 0.12             |       | $                | (0.28      | )         | $          | 0.38 |   | $ | 0.30 |   |
| Diluted earnings (loss) per common share                      |       | $                | 0.06       |             | $          | 0.10             |       | $                | (0.29      | )         | $          | 0.36 |   | $ | 0.26 |   |

 

----

*Basicand diluted EPS for each quarter is calculated based on the weighted averagenumber of shares outstanding during that quarter, while basic and diluted EPSfor the full year is calculated based on the weighted average number of sharesoutstanding for the year. As a result, the sum of the four quarters’ EPS may notequal the full-year EPS.

 

(1)   The first quarter of 2005 included expenses of$2,100 related to certain supplemental procedures and an internal investigation.

 

(2)   The second quarter of 2005 included thereversal of previously provided tax reserves of $1,684, which managementbelieved were no longer necessary.

 

(3)   The third and fourth quarter of 2004 includedexpenses of the Special Committee of $312 and $215, respectively. The fourthquarter of 2004 also included expenses of $900 related to the supplemental proceduresand internal investigation.

 

(4)   Net income in 2004 included a (loss) incomefrom discontinued operations of $(572), $(247), $(1,960) and $1,549 for thefirst, second, third and fourth quarters, respectively.

 

(5)   Income (loss) available to common stockholderswas after a deduction for the accretion of Preferred Stock of $119, $133 and$1,023 for the first, second and third quarters of 2004, respectively. The PreferredStock was redeemed in October 2004, and the third quarter of 2004 includedaccelerated accretion to increase the carrying value of the Preferred Stock toits redemption value.

 

56

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**Schedule I—Condensed FinancialInformation of Registrant**

 

**Security Capital Corporation (Parent Company)**

**Condensed Balance Sheets**

 
| ** **                                                                                                                        | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(in thousands, except share and per share amounts)**                                         | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                                                                                                              |       |                  |       |   |   |
| *Assets*                                                                                                                          |       |                  |       |   |   |
| Current assets:                                                                                                                   |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                         |       | $                     | 1,183      |   | $ | 3,260 |   |
| Accounts receivable from subsidiaries                                                                                             |       | 692                   |       | 382 |   |
| Other current assets                                                                                                              |       | 35                    |       | 120 |   |
| Total current assets                                                                                                              |       | 1,910                 |       | 3,762 |   |
| Investments in subsidiaries                                                                                                       |       | 48,762                |       | 39,386 |   |
| Notes receivable from subsidiaries                                                                                                |       | 3,916                 |       | 767 |   |
| Property and equipment, net                                                                                                       |       | 169                   |       | 208 |   |
| Deferred tax assets                                                                                                               |       | 37                    |       | 28 |   |
| Other assets                                                                                                                      |       | 161                   |       | 192 |   |
| Total assets                                                                                                                      |       | $                     | 54,955     |   | $ | 44,343 |   |
|                                                                                                                              |       |                  |       |   |   |
| *Liabilities and Stockholders’ Equity*                                                                                       |       |                  |       |   |   |
| Current liabilities:                                                                                                              |       |                  |       |   |   |
| Due to Capital Partners, Inc.                                                                                                |       | $                     | 4          |   | $ | 16 |   |
| Income tax payable                                                                                                                |       | 6,030                 |       | 7,136 |   |
| Accrued expenses and other liabilities                                                                                            |       | 1,142                 |       | 1,573 |   |
| Total current liabilities                                                                                                         |       | 7,176                 |       | 8,725 |   |
|                                                                                                                              |       |                  |       |   |   |
| Long-term liabilities                                                                                                             |       | 224                   |       | 251 |   |
|                                                                                                                              |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                        |       |                  |       |   |   |
| Common stock, $0.01 par value, 7,500 shares authorized, 380 shares  issued and outstanding                                        |       | —                |       | — |   |
| Class A common stock, $0.01 par value,  10,000,000 shares authorized, 6,458,309 shares issued, 6,450,587 shares  outstanding |       | 68                    |       | 65 |   |
| Additional paid-in capital                                                                                                        |       | 67,010                |       | 64,395 |   |
| Accumulated deficit                                                                                                               |       | (19,632               | )          | (29,067 | ) |
| Accumulated other comprehensive income                                                                                            |       | 194                   |       | 59 |   |
| Less: treasury stock, at cost, 7,722 shares                                                                                       |       | (85                   | )          | (85 | ) |
| Total stockholders’ equity                                                                                                   |       | 47,555                |       | 35,367 |   |
| Total liabilities and stockholders’ equity                                                                                   |       | $                     | 54,955     |   | $ | 44,343 |   |

 

The accompanying notes are an integral part ofthese condensed financial statements.

 

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**Security Capital Corporation (Parent Company)**

**Condensed Statements of Income**

 
| ** **                                            | ** ** | **For the Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------|------------|
| **(in thousands)**                               | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                  |       |                                     |       |   |   |   |   |
| Income:                                               |       |                                     |       |   |   |   |   |
| Equity in income of subsidiaries                      |       | $                                        | 9,595      |   | $ | 5,433 |   | $ | 6,480 |   |
| Management fee income from subsidiaries               |       | 1,252                                    |       | 1,214 |   | 1,226 |   |
| Tax-sharing income                                    |       | 5,627                                    |       | 5,347 |   | 2,956 |   |
| Interest and dividends                                |       | 51                                       |       | 209 |   | 41 |   |
| Interest income from subsidiaries                     |       | —                                   |       | 39 |   | 388 |   |
| Other                                                 |       | 56                                       |       | 1,310 |   | 107 |   |
| Total income                                          |       | 16,581                                   |       | 13,552 |   | 11,198 |   |
|                                                  |       |                                     |       |   |   |   |   |
| Expenses:                                             |       |                                     |       |   |   |   |   |
| Unallocated corporate administrative  expense         |       | 2,486                                    |       | 2,778 |   | 1,413 |   |
| Management fee expense to Capital Partners, Inc. |       | 1,550                                    |       | 1,550 |   | 1,400 |   |
| Depreciation expense                                  |       | 39                                       |       | 29 |   | — |   |
| Interest expense                                      |       | —                                   |       | 2,423 |   | — |   |
| Total expenses                                        |       | 4,075                                    |       | 6,780 |   | 2,813 |   |
|                                                  |       |                                     |       |   |   |   |   |
| Income before income taxes                            |       | 12,506                                   |       | 6,772 |   | 8,385 |   |
|                                                  |       |                                     |       |   |   |   |   |
| Income tax expense                                    |       | (3,071                                   | )          | (3,539 | ) | (5,096 | ) |
|                                                  |       |                                     |       |   |   |   |   |
| Net income                                            |       | 9,435                                    |       | 3,233 |   | 3,289 |   |
|                                                  |       |                                     |       |   |   |   |   |
| Less Preferred Stock accretion                        |       | —                                   |       | (1,275 | ) | (457 | ) |
|                                                  |       |                                     |       |   |   |   |   |
| Net income available to common stockholders           |       | $                                        | 9,435      |   | $ | 1,958 |   | $ | 2,832 |   |

 

The accompanying notes are an integral part of these condensedfinancial statements.

 

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**Security Capital Corporation (Parent Company)**

**Condensed Statements of Cash Flows**

 
| ** **                                                          | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(in thousands)**                                             | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                |       |                                     |       |   |   |   |   |
| Cash (used in) provided by operating activities                     |       | $                                        | (4,574     | ) | $ | (522 | ) | $ | 3,335 |   |
|                                                                |       |                                     |       |   |   |   |   |
| Cash flows from investing activities:                               |       |                                     |       |   |   |   |   |
| Additional investment in majority-owned  subsidiaries               |       | (3,341                                   | )          | — |   | — |   |
| Purchase of fixed assets                                            |       | —                                   |       | (236 | ) | — |   |
| Proceeds on sale of Texas land                                      |       | —                                   |       | — |   | 107 |   |
| Net cash (used in) provided by investing  activities                |       | (3,341                                   | )          | (236 | ) | 107 |   |
|                                                                |       |                                     |       |   |   |   |   |
| Cash flows from financing activities:                               |       |                                     |       |   |   |   |   |
| Proceeds from stock option exercise                                 |       | 2,243                                    |       | — |   | — |   |
| Tax benefit of stock option exercise                                |       | 195                                      |       | — |   | — |   |
| Dividend distribution from subsidiary                               |       | 3,400                                    |       | — |   | — |   |
| Cash payment to settle bankruptcy of  discontinued operation        |       | —                                   |       | (442 | ) | — |   |
| Dividend distribution from discontinued  operation                  |       | —                                   |       | 4,000 |   | — |   |
| Redemption of Preferred Stock                                       |       | —                                   |       | (5,000 | ) | — |   |
| Proceeds from long-term borrowings, net of  financing costs of $711 |       | —                                   |       | 29,289 |   | — |   |
| Repayment of long-term borrowings                                   |       | —                                   |       | (30,000 | ) | — |   |
| Net cash provided by (used in) financing  activities                |       | 5,838                                    |       | (2,153 | ) | — |   |
|                                                                |       |                                     |       |   |   |   |   |
| (Decrease) increase in cash and cash equivalents                    |       | (2,077                                   | )          | (2,911 | ) | 3,442 |   |
| Cash and cash equivalents, beginning of period                      |       | 3,260                                    |       | 6,171 |   | 2,729 |   |
| Cash and cash equivalents, end of period                            |       | $                                        | 1,183      |   | $ | 3,260 |   | $ | 6,171 |   |

 

The accompanying notes are an integral part ofthese condensed financial statements.

 

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**Security Capital Corporation (Parent Company)**

**Notes to Condensed Financial Statements**

 

**1.****            ****Basis of Presentation**

 

TheCompany’s investment in subsidiaries is stated at cost plus equity inundistributed earnings of the subsidiaries. The Company has a 98.5% ownershipinterest in Primrose and an 84.4% ownership interest in WC. During 2005, theCompany’s ownership interest in WC increased from 80% to 84.4%. See Note 3.

 

**2.****             Revisions andReclassifications**

 

The Company has revised its 2004 and 2003 condensed statement of cashflows as a result of recent guidance provided by the Securities and ExchangeCommission staff regarding the reporting of cash flows from discontinuedoperations. We had previously disclosed cash flows from discontinued operationson a combined basis. To comply with Statement of Financial Accounting StandardsNo. 95, *Statement of Cash Flows*, we haverevised our condensed statement of cash flows for 2004 and 2003 to report thecash flows from discontinued operations separately as investing or financingactivities.

 

We have also reclassified certain amounts to now report income from oursubsidiaries for amounts due under a tax-sharing agreement. These amounts werepreviously netted against income tax benefit or expense. Certain other prioryear amounts have been reclassified to conform to the 2005 presentation.

 

**3.****            ****Minority Interests**

 

The minority stockholders of WC (with an aggregate ownership interestof 15.6%) and Primrose (with an aggregate ownership interest of 1.5%) haveentered into agreements with the Company providing for restrictions on thetransfer of such shares, and other related share restrictions. See Note 8 forinformation with respect to the agreement to sell Primrose.

 

On September 16, 2005, the Company acquired 979.88 shares of WC common stock directly from theminority stockholders of WC for total cash consideration of $3,341. Alsoon September 16, 2005, certain option holders of WC exercised options topurchase shares of WC. As a result of the exercise of these options, anadditional 408.41 shares of WC common stock were issued to WC minoritystockholders. The resulting net increase of 571.47 shares of WC held by theCompany relative to the minority stockholders of WC, increased the Company’sownership interest in WC from 80% to84.4%.

 

**4.****            ****Note**

 

OnJanuary 14, 2004, the Company issued a $30,000 Senior Subordinated PromissoryNote (the “Note”) that was due September 30, 2008. The interest rate was10% per annum and would increase to 16% on September 30, 2004. Due to theavailability of less expensive financing alternatives, the Note was prepaidwithout penalty prior to September 30, 2004.

 

**5.**             **Redeemable ConvertiblePreferred Stock**

 

During 2004 and 2003, the Company had issued andoutstanding 500,000 shares of Redeemable Convertible Preferred Stock (the “PreferredStock”), with a stated redemption value of $10 per share. The Preferred Stockwas convertible into Class A Common Stock on a 1:1 basis. The PreferredStock was redeemable at the option of the stockholder upon the occurrence ofcertain events or on April 6, 2006. On November 10, 2004, alloutstanding shares of Preferred Stock were redeemed for $5,000, or $10 pershare.

 

The difference between the carrying value of thePreferred Stock and the redemption value was accreted using the interest methodover the remaining estimated period to redemption. Preferred Stock accretion of$1,275 and $457 was recognized in 2004 and 2003, respectively. Additionalaccretion was recorded in 2004 to accrete the carrying value of the PreferredStock to its redemption value.

 

60

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The Company had 2,500,000 shares of authorized preferred shares, $0.01par value, available for issuance at December 31, 2005.

 

**6.****            ****Sale of Subsidiary**

 

Duringthe fourth quarter of 2003, we committed to a plan to sell the operations of PumpkinMasters Holdings, Inc. (“Pumpkin”) and, in October 2004, we soldsubstantially all of the assets of Pumpkin for $8,741, which includes anadditional working capital payment of $1,741. A loss of $3,928 was recognizedon the sale and is reflected in equity in income of subsidiaries in thecondensed statements of income.

 

**7.****            ****Possible Dreams BankruptcySettlement**

 

InOctober 2003, P.D. Holdings, Inc. (“Possible Dreams”) filed forbankruptcy protection under Chapter 11 of the Bankruptcy Code. In November 2004,we settled all outstanding claims against the Company with the bankruptcyTrustee for $442. An after-tax gain of $1,516 was recognized from thesettlement and is reflected in other income in the condensed statements ofincome.

 

**8.****             SubsequentEvents**

 

OnFebruary 10, 2006, the Company signed a definitive agreement for the saleof Primrose to an affiliate of American Capital Strategies, Ltd. for anaggregate purchase price of $85,000, subject to adjustment. After adjustmentfor transaction costs and certain items specified in the agreement, the netpurchase price is anticipated to be approximately $82,800. The Company expectsto net, after taxes, approximately $58,200 for its 91.5% fully diluted interestin Primrose. The sale is subject to customary closing conditions and isanticipated to close by March 31, 2006.

 

OnMarch 9, 2006, the Company and its WC business entered into a SettlementAgreement and Release with two former executives of the WC business (the “Agreement”).Pursuant to the Agreement, the former executives agreed to three-year covenantsnot to complete and non-solicitation agreements, the Company and the formerexecutives agreed to be bound by a “drag/tag” arrangement with respect to theshares of WC held by the former executives in the event of a change of controlof the Company or WC, the former executives agreed to dismiss their wrongfultermination suit with prejudice, and the parties entered into mutual releasesand non-disparagement agreements. Under the Agreement, the Company agreed topay the former executives an aggregate of $1,781, with $846 of that amountpayable upon a change of control of the Company or WC. The Company accrued $935at December 31, 2005, representing the amount payable at the time of thesigning of the Agreement and the amounts to be paid on the first and secondanniversary date of the signing of the Agreement. The $846 payable upon achange in control of the Company or WC, was not accrued at December 31,2005.

 

During2006, an additional 378,000 shares of Class A Common Stock of the Companywere issued as a result of stock option exercises. Cash of $3,318 was receivedfrom the stock option exercises.

 

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**ITEM 9.****          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not applicable.

 

**ITEM 9A.****       CONTROLS AND PROCEDURES**

 

*Evaluation of Disclosure Controls andProcedures.*

 

The Company’s management, with the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe Company’s disclosure controls and procedures as of the end of the periodcovered by this report. Based on that evaluation, the Chief Executive Officerand Chief Financial Officer concluded that the Company’s disclosure controlsand procedures as of the end of the period covered by this report wereeffective to provide reasonable assurance that the information required to bedisclosed by the Company in reports filed under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. The Company believes that nosystem of disclosure controls, no matter how well designed and operated, canprovide absolute assurance that the objectives of the system are met, and nosuch controls can provide absolute assurance that all control issues andinstances of fraud, if any, within a company have been detected.

 

*Change in Internal Control Over FinancialReporting.*

 

Nochange in the Company’s internal control over financial reporting occurredduring the fourth quarter of 2005 that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**ITEM 9B.****       OTHER INFORMATION**

 

Not Applicable.

 

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**PART III**

 

**ITEM 10.****       DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

Information in response to this Item will be included in the Company’sProxy Statement, or other publicly filed document, to be filed on or prior to April 30,2006 with the SEC, except that “Executive Officers of the Registrant” afterItem 1 of this Annual Report responds to Items 401(b), (d) and (e) ofRegulation S-K with respect to executive officers.

 

**ITEM 11.****       EXECUTIVE COMPENSATION**

 

Information in response to this Item will be included in the Company’sProxy Statement, or other publicly filed document, to be filed on or prior to April 30,2006 with the SEC.

 

**ITEM 12.****       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

Information in response to this Item will be included in the Company’sProxy Statement, or other publicly filed document, to be filed on or prior to April 30,2006 with the SEC, except that “Equity Compensation Plan Information” inItem 5 of this Annual Report responds to Item 201(d) ofRegulation S-K.

 

**ITEM 13.****       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Information in response to this Item will be included in the Company’sProxy Statement, or other publicly filed document, to be filed on or prior to April 30,2006 with the SEC.

 

**ITEM 14.****       PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Information in response to this Item will be included in the Company’sProxy Statement, or other publicly filed document, to be filed on or prior to April 30,2006 with the SEC.

 

63

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**PART IV**

 

**ITEM 15. EXHIBITS AND FINANCIALSTATEMENT SCHEDULE**

 

(A)(1) and (2) Financial Statements and Financial Statement Schedules

 

         See “Index toConsolidated Financial Statements” set forth in Item 8 of this Form 10-K.

 

(C)                   Exhibits

 

The documents required to be filed as exhibits to this Form 10-Kare listed below. Each management contract or compensatory plan or arrangementrequired to be filed as an exhibit to this Form 10-K with an asterisk.All other schedules of the Company for which provision is made in theapplicable accounting regulations of the SEC are not required under the relatedinstructions, are inapplicable, or have been disclosed in the Notes toConsolidated Financial Statements and, therefore, have been omitted.

 
| **EXHIBIT NO.** | ** ** | ** ** | ** ** | **DESCRIPTION OF DOCUMENT**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|----------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1                  |       | —     |       | Restated Certificate of Incorporation of the Registrant (incorporated  by reference to Exhibit 2 to the Registrant’s Form 8-K Current  Report dated June 22, 1990), and amendment thereto (incorporated by  reference to Exhibit 1 to the Registrant’s Form 8-K Current Report  dated February 23, 1994).                                                                                                                                                                                                                                                                                                                                                                                                                |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1A                 |       | —     |       | Certificate of Amendment dated March 27, 1996 to Restated  Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1A  to the Registrant’s Form 10-K Annual Report for the fiscal year ended September 30,  1996).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1B                 |       | —     |       | Certificate of Amendment dated March 27, 1996 to Restated  Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1B  to the Registrant’s Form 10-K Annual Report for the fiscal year ended September 30,  1996).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2                  |       | —     |       | By-laws of the Registrant (incorporated by reference to Exhibit 3  to the Registrant’s Form 8-K Current Report dated June 22, 1990).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2                  |       | —     |       | Reference is made to Exhibit 3.1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.7                 |       | —     |       | Advisory Services Agreement dated April 27, 1990 and effective as  of January 26, 1990, between Security Capital Corporation and Capital  Partners, Inc. (“Capital Partners”) (incorporated by reference to Exhibit (10)(B) to  the Registrant’s Form 10-Q Quarterly Report for the period ended March 31,  1991).                                                                                                                                                                                                                                                                                                                                                                                             |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.8                 |       | —     |       | Loan Agreement dated June 11, 2004 among Pumpkin Ltd., as  borrower, Pumpkin Masters Holdings, Inc. and Security Capital  Corporation, as Guarantors, and Bank One, N.A., as lender (incorporated by  reference to Exhibit 10.8 to the Registrant’s Form 10-Q Quarterly  Report for the period ended June 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                               |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.9                 |       | —     |       | Amended and Restated Management Advisory Service Agreement dated January 1,  2004 between Security Capital Corporation (“Security Capital”) and Capital  Partners (incorporated by reference to Exhibit 10.9 to the Registrant’s Form 10-Q  Quarterly Report for the period ended June 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.10                |       | —     |       | Second Amended and Restated Loan Agreement dated March 31, 2005  among WC Holdings, Inc CompManagement, Inc., CompManagement Health  Systems, Inc., CompManagement Integrated Disability Services, Inc.,  CMI Management Company, CompManagement of Virginia, Inc., CompManagement  Disability Services Company, CMI Barron Risk Management Services, Inc.,  KRAMMCO Inc., Integrated Claims Strategies, Inc., Octagon Risk Services, Inc.,  Managed Care Holdings Corporation and Caronia Corporation, as Borrowers and  JP Morgan Chase Bank, as Lender. (incorporated by reference to Exhibit 10.10  to the Registrant’s Annual Report filed on Form 10-K for the year ended December 31,  2004). |

 

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| 10.11  |   | — |   | Stock Purchase Agreement dated March 31, 2005 between  Continental Casualty Company, as Seller and Octagon Risk Services, Inc.,  as Purchaser relating to Managed Care Holdings Corporation and its  subsidiary, Caronia Corp. (incorporated by reference to Exhibit 10.11 to  the Registrant’s Annual Report filed on Form 10-K for the year ended December 31,  2004). |
|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.20  |   | — |   | Registration Rights Agreement and Amendment to Stock Purchase Agreement  dated March 28, 1994 among the Registrant, CP Acquisition and FGS, Inc.  (incorporated by reference to Exhibit 10.20 to the Registrant’s  Registration Statement on Form S-1 (Reg. No. 33-74680)).                                                                                              |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.23  |   | — |   | Loan and Security Agreement dated December 31, 2001 (loan funds  drawn on January 3, 2002) among Possible Dreams Ltd. and LaSalle  Business Credit Inc. (incorporated by reference to Exhibit 10.23 to  the Registrant’s Form 10-K Annual Report dated December 31, 2001).                                                                                     |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.24  |   | — |   | Subordinated Promissory Note dated May 17, 1996 in the amount of  $2,128,000 from Possible Dreams to Possible Dreams, Ltd., a  Massachusetts corporation (incorporated by reference to Exhibit 2 to the  Registrant’s Form 8-K Current Report dated May 17, 1996).                                                                                                       |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.25  |   | — |   | Corrective Amendment dated November 25, 1996 to Subordinated  Promissory Note dated May 17, 1996 in the amount of $2,128,000 from  Possible Dreams to Possible Dreams, Ltd., a Massachusetts corporation  (incorporated by reference to Exhibit 10.25 to the Registrant’s Form 10-K  Annual Report for the fiscal year ended September 30, 1996).                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.26  |   | — |   | Subordinated Promissory Note dated May 17, 1996 in the amount of  $332,000 from Possible Dreams to Columbia National Corporation (incorporated  by reference to Exhibit 3 to the Registrant’s Form 8-K Current  Report dated May 17, 1996).                                                                                                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.27  |   | — |   | Corrective Amendment dated November 25, 1996 to Subordinated  Promissory Note dated May 17, 1996 in the amount of $332,000 from  Possible Dreams to Columbia National Corporation (incorporated by reference  to Exhibit 10.27 to the Registrant’s Form 10-K Annual Report for  the fiscal year ended September 30, 1996).                                               |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.28  |   | — |   | Credit Agreement dated May 17, 1996 among Possible Dreams, P.D.  Holdings, Inc., a Delaware corporation (“Holdings”), the Lenders  referred to therein and NationsCredit Commercial Corporation (“NationsCredit”),  as Agent (incorporated by reference to Exhibit 4 to the Registrant’s Form 8-K  Current Report dated May 17, 1996).               |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.29  |   | — |   | Warrant dated May 17, 1996 from Possible Dreams to NationsCredit  (incorporated by reference to Exhibit 5 to the Registrant’s Form 8-K  Current Report dated May 17, 1996).                                                                                                                                                                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.30  |   | — |   | Warrant holders Rights Agreement dated May 17, 1996 among  Possible Dreams, Holdings, Security Capital, Warren Stanley and Arnold Lee  and NationsCredit (incorporated by reference to Exhibit 6 to the  Registrant’s Form 8-K Current Report dated May 17, 1996).                                                                                                            |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.31  |   | — |   | Security Capital Pledge and Guarantee Agreement dated May 17,  1996 between Security Capital and NationsCredit, as Agent (incorporated by  reference to Exhibit 7 to the Registrant’s Form 8-K Current Report  dated May 17, 1996).                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.32  |   | — |   | Holdings Pledge Agreement dated May 17, 1996 among Holdings and  NationsCredit, as Agent (incorporated by reference to Exhibit 8 to the  Registrant’s Form 8-K Current Report dated May 17, 1996).                                                                                                                                                                            |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.33  |   | — |   | Investors Subordination Agreement dated May 17, 1996 among  Possible Dreams, the Subordinated Obligations Holders (as defined therein)  and NationsCredit, as Agent (incorporated by reference to Exhibit 9 to  the Registrant’s Form 8-K Current Report dated May 17, 1996).                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.34  |   | — |   | Sellers Subordination Agreement dated May 17, 1996 among  Possible Dreams, the Subordinated Obligations Holders (as defined therein)  and NationsCredit, as Agent (incorporated by reference to Exhibit 10 to  the Registrant’s Form 8-K Current Report dated May 17, 1996).                                                                                                  |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.38  |   | — |   | First Amendment to Advisory Services Agreement dated May 17, 1996  by and between Security Capital and Capital Partners (incorporated by  reference to Exhibit 14 to the Registrant’s Form 8-K Current Report  dated May 17, 1996).                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.39  |   | — |   | Consolidated Income Tax Sharing Agreement dated May 17, 1996  among Possible Dreams, Holdings and Security Capital (incorporated by  reference to Exhibit 15 to the Registrant’s Form 8-K Current Report  dated May 17, 1996).                                                                                                                                                |

 

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| 10.40  |   | — |   | Asset Purchase Agreement dated June 27, 1997 by and among  Pumpkin, Ltd. d/b/a Pumpkin Masters, Inc., a Colorado corporation  (the “Seller”), Pumpkin Ltd., a Delaware corporation (“Pumpkin”),  Pumpkin Masters Holdings, Inc., a Delaware corporation (“Pumpkin  Holdings”), and Security Capital (incorporated by reference to Exhibit 1(c)(1) to  the Registrant’s Form 8-K Current Report dated June 27, 1997). |
|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.41  |   | — |   | Credit Agreement dated June 27, 1997 among Pumpkin, Pumpkin  Holdings, the Lenders referred to therein and NationsCredit, as Agent  (incorporated by reference to Exhibit 1(c)(2) to the Registrant’s Form 8-K  Current Report dated June 27, 1997).                                                                                                                                                                                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.42  |   | — |   | Warrant dated June 27, 1997 from Pumpkin to NationsCredit  (incorporated by reference to Exhibit 1(c)(3) to the Registrant’s Form 8-K  Current Report dated June 27, 1997).                                                                                                                                                                                                                                                                                            |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.43  |   | — |   | Warrant holders Rights Agreement dated June 27, 1997 among  Pumpkin, Pumpkin Holdings, Security Capital, Seller and NationsCredit  (incorporated by reference to Exhibit 1(c)(4) to the Registrant’s Form 8-K  Current Report dated June 27, 1997).                                                                                                                                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.44  |   | — |   | Company Security Agreement dated June 27, 1997 between Pumpkin  and NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(5) to  the Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                                                                                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.45  |   | — |   | Pumpkin Holdings Pledge Agreement dated June 27, 1997 between  Pumpkin Holdings and NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(6) to  the Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                                                                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.46  |   | — |   | Security Capital Pledge and Guarantee Agreement dated June 27,  1997 between Security Capital and NationsCredit, as Agent (incorporated by  reference to Exhibit 1(c)(7) to the Registrant’s Form 8-K  Current Report dated June 27, 1997).                                                                                                                                                                                                                            |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.47  |   | — |   | Security Capital Subordination Agreement dated June 27, 1997  among Pumpkin, the Subordinated Obligations Holders (as defined therein) and  NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(8) to  the Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                                                                                                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.48  |   | — |   | Investors Subordination Agreement dated June 27, 1997 among  Pumpkin, the Subordinated Obligations Holders (as defined therein) and  NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(9) to  the Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                                                                                                                                          |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.49  |   | — |   | Seller Subordination Agreement dated June 27, 1997 among  Pumpkin, Pumpkin Holdings, the Subordinated Obligations Holders (as defined  therein) and NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(10) to  the Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                                                                                                                          |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.50  |   | — |   | Stockholders’ Agreement dated June 27, 1997 among Pumpkin,  Pumpkin Holdings and Gay Burke (incorporated by reference to Exhibit 1(c)(11)  to the Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                                                                                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.51  |   | — |   | Loan and Security Agreement dated June 13, 2001 between Pumpkin  and LaSalle Business Credit (incorporated by reference to Exhibit 10.51  to the Registrant’s Form 10-K Annual Report dated December 31,  2001).                                                                                                                                                                                                                                                            |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.55  |   | — |   | Advisory Services Agreement dated June 27, 1997, by and between  Pumpkin and Security Capital (incorporated by reference to Exhibit 1(c)(16)  to the Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                                                                                                                                                                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.56  |   | — |   | Second Amendment to Advisory Services Agreement dated June 27,  1997 by and between Security Capital and Capital Partners (incorporated by  reference to Exhibit 1(c)(17) to the Registrant’s Form 8-K Current  Report dated June 27, 1997).                                                                                                                                                                                                                                |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.57  |   | — |   | Joinder Agreement dated June 27, 1997 among Pumpkin, Pumpkin  Holdings and Security Capital to Consolidated Income Tax Sharing Agreement  dated May 17, 1996 among Possible Dreams, Holdings and Security Capital  (incorporated by reference to Exhibit 1(c)(18) to the Registrant’s Form 8-K  Current Report dated June 27, 1997).                                                                                                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.61  |   | — |   | Stock Purchase Agreement, dated April 6, 1999, by and among  Primrose Holdings, Inc., a Delaware corporation (“Holdings”), Security  Capital, and Paul L. Erwin Grantor Retained Annuity Trust (together with  Paul L. Erwin, the “Shareholders”) (incorporated by reference to Exhibit 1(c)(1) to  the Registrant’s Form 8-K Current Report dated April 6, 1999).                                                                       |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.62  |   | — |   | Credit Agreement, dated April 6, 1997, among Primrose School  Franchising Company, (“Primrose”), Holdings, the Lenders referred to therein  and Canadian Imperial Bank of Commerce (“CIBC”), as Agent (incorporated by  reference to Exhibit 1(c)(2) to the Registrant’s Form 8-K  Current Report dated April 6, 1999).                                                                                                                            |

 

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| 10.63  |   | — |   | Warrant Agreement, dated April 6, 1999 between Security Capital  and CIBC (incorporated by reference to Exhibit 1(c)(3) to the  Registrant’s Form 8-K Current Report dated April 6, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.65  |   | — |   | Management Advisory Services Agreement, dated April 6, 1999, by  and among Primrose, Metrocorp, Country Day and Security Capital (incorporated  by reference to Exhibit 1(c)(5) to the Registrant’s Form 8-K  Current Report dated April 6, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.66  |   | — |   | Third Amendment to Advisory Services Agreement, dated April 6,  1999, by and between Security Capital and Capital Partner (incorporated by  reference to Exhibit 1(c)(6) to the Registrant’s Form 8-K  Current Report dated April 6, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.67  |   | — |   | Tax Sharing Joinder Agreement, dated April 6, 1999, among  Holdings, Primrose, Metrocorp, Country Day and Security Capital to  Consolidated Income Tax Sharing Agreement, dated April 17, 1996, among  Possible Dreams, Ltd., P.D. Holdings, Inc. and Security Capital  (incorporated by reference to Exhibit 1(c)(7) to the Registrant’s Form 8-K  Current Report dated April 6, 1999).                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.68  |   | — |   | Lease Agreement, dated April 6, 1999 by and between Erwin Family  Partnership, LLLP and Primrose (incorporated by reference to Exhibit 1(c)(8) to  the Registrant’s Form 8-K Current Report dated April 6, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.69  |   | — |   | Lease Agreement, dated April 6, 1999 by and between Paul L.  Erwin and Country Day (incorporated by reference to Exhibit 1(c)(9) to  the Registrant’s Form 8-K Current Report dated April 6, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.70  |   | — |   | Stockholders’ Agreement dated December 21, 2000, by and among  Security Capital, WC Holdings, Inc. (“WC Holdings”), HP Acquisition, WC,  CompManagement, Inc. (“CMI”), CompManagement Health Systems, Inc. (“CHS”),  M&N Enterprises, Inc. (“M&NE”), M&N Risk Management, Inc.  (“M&NRM”) (CMI, CHS, M&NE and M&NRM being collectively referred  to with WC as the “Companies”), Robert J. Bossart, Jonathan R.  Wagner, Richard T. Kurth, Randy E. Jones, Daniel R. Sullivan  and Paul A. Miller (incorporated by reference to Exhibit 1(c)(4.1)  to the Registrant’s Form 8-K Current Report dated December 21,  2000). |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.71  |   | — |   | Loan Agreement dated December 21, 2000, among each of the  Companies, as borrowers, WC Holdings, as guarantor, and Bank One, N.A. (“Bank  One”), as lender (incorporated by reference to Exhibit 1(c)(99.1) to the  Registrant’s Form 8-K Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.72  |   | — |   | Note Purchase Agreement dated December 21, 2000, among WC  Holdings, as borrower, each of the Companies, as a guarantor, and Banc One  Mezzanine Corporation (“Banc One Mezzanine”), as purchaser (incorporated by  reference to Exhibit 1(c)(99.2) to the Registrant’s Form 8-K  Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.73  |   | — |   | Intercreditor and Subordination Agreement dated December 21,  2000, among the Companies, WC Holdings, Bank One and Banc One Mezzanine  (incorporated by reference to Exhibit 1(c)(99.3) to the registrant’s Form 8-K  Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.74  |   | — |   | Capital Contribution Agreement dated December 21, 2000, between  Security Capital and Banc One Mezzanine (incorporated by reference to Exhibit 1(c)(99.4)  to the Registrant’s Form 8-K Current report dated December 21,  2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.75  |   | — |   | Tax Allocation Agreement dated December 21, 2000, among Security  Capital, WC Holdings and each of the Companies (incorporated by reference to Exhibit 1(c)(99.5)  to the Registrant’s Form 8-K Current Report dated December 21,  2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.76  |   | — |   | Management Advisory Services Agreement dated December 21, 2000,  among each of the Companies and Security Capital (incorporated by reference  to Exhibit 1(c)(99.6) to the Registrant’s Form 8-K Current Report  dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.77  |   | — |   | Fourth Amendment to Advisory Services Agreement dated December 21,  2000 between Security Capital and Capital Partners (incorporated by reference  to Exhibit 1(c)(99.7) to the Registrant’s Form 8-K Current Report  dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.78* |   | — |   | Employment Agreement effective as of December 21, 2000 among WC  Holdings, WC, CMI, CHS and Robert J. Bossart (incorporated by reference  to Exhibit 1(c)(99.8) to the Registrant’s Form 8-K Current Report  dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.79* |   | — |   | Employment Agreement effective as of December 21, 2000 among WC  Holdings, WC, CMI, CHS and Jonathan R. Wagner (incorporated by reference  to Exhibit 1(c)(99.9) to the Registrant’s Form 8-K Current Report  dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

67

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| 10.80* |   | — |   | Employment Agreement effective as of December 21, 2000 among WC  Holdings, WC, CMI, CHS and Richard T. Kurth (incorporated by reference  to Exhibit 1(c)(99.10) to the Registrant’s Form 8-K Current Report  dated December 21, 2000).                                                                                                    |
|--------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.81* |   | — |   | Employment Agreement effective as of December 21, 2000 among WC  Holdings, WC, CMI, CHS and Randy E. Jones (incorporated by reference to Exhibit 1(c)(99.11)  to the Registrant’s Form 8-K Current Report dated December 21,  2000).                                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.82* |   | — |   | Employment Agreement effective as of December 21, 2000 among WC  Holdings, WC, CMI, CHS and Daniel R. Sullivan (incorporated by reference  to Exhibit 1(c)(99.12) to the Registrant’s Form 8-K Current Report  dated December 21, 2000).                                                                                                  |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.83* |   | — |   | Employment Agreement effective as of December 21, 2000 among WC  Holdings, WC, CMI, CHS and Paul A. Miller (incorporated by reference to Exhibit 1(c)(99.13)  to the Registrant’s Form 8-K Current Report dated December 21,  2000).                                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.84  |   | — |   | Management Consulting Agreement dated December 21 2000, among WC  Holdings and each of the Companies (incorporated by reference to Exhibit 1(c)(99.14)  to the Registrant’s Form 8-K Current Report dated December 21,  2000).                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.85* |   | — |   | CompManagement, Inc. Deferred Compensation Plan adopted December 21,  2000 (incorporated by reference to Exhibit 99.15 to the Registrant’s Form 8-K  Current Report dated December 21, 2000).                                                                                                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.87* |   | — |   | Security Capital Corporation’s 2000 Long-Term Incentive Plan  (incorporated by reference to Exhibit 1(4.) to the Registrant’s  Registration Statement on Form S-8 dated February 8, 2001).                                                                                                                                                     |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.88  |   | — |   | Loan Agreement dated April 5, 2002 among Primrose, as Borrower,  Holdings and Security Capital, as Corporate Guarantors, and Bank One, as  Lender (incorporated by reference to Exhibit 1 to the Registrant’s Form 10-Q  Quarterly Report dated March 31, 2002).                                                                               |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.89  |   | — |   | Unconditional Corporate Guaranty Agreement dated April 5, 2002  between Security Capital Corporation and Bank One, N.A. (incorporated by  reference to Exhibit 2 to the Registrant’s Form 10-Q Quarterly  Report dated March 31, 2002).                                                                                                        |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.90  |   | — |   | Fifth Amendment to Advisory Services Agreement dated April 5,  2002 by and between Security Capital and Capital Partners (incorporated by  reference to Exhibit 3 to the Registrant’s Form 10-Q Quarterly  Report dated March 31, 2002).                                                                                                       |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.91  |   | — |   | Amended and Restated Management Advisory Services Agreement, dated April 5,  2002, between Jewel I, Inc. d/b/a Primrose Country Day School and  Primrose School Franchising Company and Security Capital Corporation  (incorporated by reference to Exhibit 4 to the Registrant’s Form 10-Q  Quarterly Report dated March 31, 2002). |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.92  |   | — |   | Reimbursement Agreement dated April 5, 2002 by and between  Brian D. Fitzgerald, Security Capital and Primrose (incorporated by  reference to Exhibit 5 to the Registrant’s Form 10-Q Quarterly  Report dated March 31, 2002).                                                                                                            |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.93  |   | — |   | Guaranty Fee Agreement dated April 5, 2002 by and between  Security Capital and Brian D. Fitzgerald (incorporated by reference to Exhibit 6  to the Registrant’s Form 10-Q Quarterly Report dated March 31,  2002).                                                                                                                       |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.94  |   | — |   | First Amendment to Loan Agreement dated December 31, 2002 by and  among Primrose, Holdings, Security Capital, Brian D. Fitzgerald and Bank  One (incorporated by reference to Exhibit 10.94 to the Registrant’s Form 10-K  for the year ended December 31, 2002).                                                                         |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.95  |   | — |   | Advisory Services Agreement dated January 1, 2003 between  Security Capital and Capital Partners (incorporated by reference to Exhibit 10.95  to the Registrant’s Form 10-K for the year ended December 31,  2003).                                                                                                                            |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 10.96  |   | — |   | First Amendment to Advisory Services Agreement dated November 4,  2003 between Security Capital and Capital Partners (incorporated by reference  to Exhibit 10.96 to the Registrant’s Form 10-K for the year ended December 31,  2003).                                                                                                        |

 

68

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| 10.97   |   | — |   | Amended and restated loan agreement dated October 3, 2003 among  Health Power, Inc., CMI, CHS, CompManagement Integrated Disability  Services, Inc., CMI Management Company, CompManagement of Virginia, Inc.,  CompManagement Disability Services Company, CMI Barron Risk Management  Services, Inc. and Octagon Risk Services, Inc., as Borrowers, WC  Holdings, Inc., as Guarantor and Bank One, as Lender (incorporated by  reference to Exhibit 10.97 to the Registrant’s Form 10-K for the  year ended December 31, 2003). |
|---------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.98   |   | — |   | 10%-16% Senior Subordinated Promissory Note, due September 30,  2008, issued by Security Capital in favor of J.H. Whitney Mezzanine Fund L.P.  in the amount of $30.0 million (incorporated by reference to Exhibit 4.1  to the Registrant’s Form 8-K Current Report dated January 15,  2004).                                                                                                                                                                                                                                                             |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.99   |   | — |   | Security Purchase Agreement dated January 14, 2004, by and between  Security Capital and J.H. Whitney Mezzanine Fund, L.P. (incorporated by  reference to Exhibit 10.1 to the Registrant’s Form 8-K Current  Report dated January 15, 2004).                                                                                                                                                                                                                                                                                                                    |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.100+ |   |   |   | Second  Amended and Restated Advisory Services Agreement dated as of December 23,  2005, and effective as of January 1, 2006, among Security Capital  Corporation, Capital Partners, Inc., and Primrose Holdings, Inc.                                                                                                                                                                                                                                                                                                                                               |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 21+     |   | — |   | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 23.1+   |   |   |   | Consent of McGladrey & Pullen, LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 23.2+   |   | — |   | Consent of Ernst & Young, LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1+   |   | — |   | Certification of CEO pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2+   |   | — |   | Certification of the CFO pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32+     |   | — |   | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

----

+              Filedherewith.

 

69

----

 

**Signatures**

 

Pursuant to the requirements of the Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has caused this report tobe signed on its behalf by the undersigned thereto duly authorized.

 
|   | SECURITY CAPITAL CORPORATION |
|--------|------------------------------|
|   |                         |   |
|   |                         |   |
|   | By                           | /s/ BRIAN D. FITZGERALD |
|   |                         | Brian D. Fitzgerald |
|   |                         | Chairman of the Board,  President and Chief Executive Officer |
|   |                         |   |
|   | Date: March 31, 2006    |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the date indicated.

 
| **SIGNATURE**                       | ** ** | **POSITION**                                        | ** ** | **DATE**             |
|-------------------------------------|------------|-----------------------------------------------------|------------|----------------------|
|                                |       |                                                |       |                 |
| /s/ BRIAN D. FITZGERALD             |       | Chairman of the Board (Principal Executive Officer) |       | March 31, 2006  |
| Brian D. Fitzgerald                 |       |                                                |       |                 |
|                                |       |                                                |       |                 |
| /s/ WILLIAM R. SCHLUETER            |       | Chief Financial Officer (Principal Accounting and   |       | March 31 , 2006 |
| William R. Schlueter                |       | Financial Officer)                                  |       |                 |
|                                |       |                                                |       |                 |
| /s/ A. GEORGE GEBAUER               |       | Vice Chairman                                       |       | March 31, 2006  |
| A. George Gebauer                   |       |                                                |       |                 |
|                                |       |                                                |       |                 |
| /s/ SAMUEL B. FORTENBAUGH, III |       | Director                                            |       | March 31 , 2006 |
| Samuel B. Fortenbaugh, III     |       |                                                |       |                 |
|                                |       |                                                |       |                 |
| /s/ JOHN H.F. HASKELL, Jr.     |       | Director                                            |       | March 31 , 2006 |
| John H.F. Haskell, Jr.         |       |                                                |       |                 |
|                                |       |                                                |       |                 |
| /s/ EDWARD W. KELLEY, JR.      |       | Director                                            |       | March 31, 2006  |
| Edward W. Kelley, Jr.          |       |                                                |       |                 |
|                                |       |                                                |       |                 |
| /s/ M. PAUL KELLY                   |       | Director                                            |       | March 31, 2006  |
| M. Paul Kelly                       |       |                                                |       |                 |
|                                |       |                                                |       |                 |
| /s/ ROBERT M. WILLIAMS SR.          |       | Director                                            |       | March 31, 2006  |
| Robert M. Williams Sr.              |       |                                                |       |                 |

 

70

----

 

**INDEX TO EXHIBITS**

 

The documents required to be filed as exhibits to this Form 10-Kare listed below. Each management contract or compensatory plan or arrangementrequired to be filed as an exhibit to this Form 10-K pursuant toItem 15(c) of Form 10-K is marked with an asterisk.

 
| **EXHIBIT NO.** | ** ** | ** ** | ** ** | **DESCRIPTION OF DOCUMENT**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | —     |       | Restated Certificate of Incorporation of  the Registrant (incorporated by reference to Exhibit 2 to the Registrant’s  Form 8-K Current Report dated June 22, 1990), and amendment thereto  (incorporated by reference to Exhibit 1 to the Registrant’s Form 8-K  Current Report dated February 23, 1994).                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.1A                 |       | —     |       | Certificate of Amendment dated March 27,  1996 to Restated Certificate of Incorporation of the Registrant (incorporated  by reference to Exhibit 3.1A to the Registrant’s Form 10-K Annual  Report for the fiscal year ended September 30, 1996).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.1B                 |       | —     |       | Certificate of Amendment dated March 27,  1996 to Restated Certificate of Incorporation of the Registrant (incorporated  by reference to Exhibit 3.1B to the Registrant’s Form 10-K Annual  Report for the fiscal year ended September 30, 1996).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2                  |       | —     |       | By-laws of the Registrant (incorporated by  reference to Exhibit 3 to the Registrant’s Form 8-K Current Report  dated June 22, 1990).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.2                  |       | —     |       | Reference is made to Exhibit 3.1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.7                 |       | —     |       | Advisory Services Agreement dated April 27,  1990 and effective as of January 26, 1990, between Security Capital  Corporation and Capital Partners, Inc. (“Capital Partners”)  (incorporated by reference to Exhibit (10)(B) to the Registrant’s Form 10-Q  Quarterly Report for the period ended March 31, 1991).                                                                                                                                                                                                                                                                                                                                                                                               |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.8                 |       | —     |       | Loan Agreement dated June 11, 2004  among Pumpkin Ltd., as borrower, Pumpkin Masters Holdings, Inc. and  Security Capital Corporation, as Guarantors, and Bank One, N.A., as lender  (incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-Q  Quarterly Report for the period ended June 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9                 |       | —     |       | Amended and Restated Management Advisory  Service Agreement dated January 1, 2004 between Security Capital  Corporation (“Security Capital”) and Capital Partners (incorporated by reference  to Exhibit 10.9 to the Registrant’s Form 10-Q Quarterly Report for  the period ended June 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.10                |       | —     |       | Second Amended and Restated Loan Agreement  dated March 31, 2005 among WC Holdings, Inc.. CompManagement, Inc.,  CompManagement Health Systems, Inc., CompManagement Integrated  Disability Services, Inc., CMI Management Company, CompManagement of  Virginia, Inc., CompManagement Disability Services Company, CMI Barron  Risk Management Services, Inc., KRAMMCO Inc., Integrated Claims  Strategies, Inc., Octagon Risk Services, Inc., Managed Care  Holdings Corporation and Caronia Corporation, as Borrowers and JP Morgan  Chase Bank, as Lender (incorporated by reference to Exhibit 10.10 to the  Registrant’s Annual Report filed on Form 10-K for the year ended December 31,  2004). |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.11                |       | —     |       | Stock Purchase Agreement dated March 31,  2005 between Continental Casualty Company, as Seller and Octagon Risk  Services, Inc., as Purchaser relating to Managed Care Holdings  Corporation and its subsidiary, Caronia Corp. (incorporated by reference to Exhibit 10.11  to the Registrant’s Annual Report filed on Form 10-K for the year ended December 31,  2004).                                                                                                                                                                                                                                                                                                                                                             |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.20                |       | —     |       | Registration Rights Agreement and Amendment  to Stock Purchase Agreement dated March 28, 1994 among the Registrant,  CP Acquisition and FGS, Inc. (incorporated by reference to Exhibit 10.20  to the Registrant’s Registration Statement on Form S-1 (Reg. No. 33-74680)).                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.23                |       | —     |       | Loan and Security Agreement dated December 31,  2001 (loan funds drawn on January 3, 2002) among Possible  Dreams Ltd. and LaSalle Business Credit Inc. (incorporated by  reference to Exhibit 10.23 to the Registrant’s Form 10-K Annual  Report dated December 31, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.24                |       | —     |       | Subordinated Promissory Note dated May 17,  1996 in the amount of $2,128,000 from Possible Dreams to Possible  Dreams, Ltd., a Massachusetts corporation (incorporated by reference to Exhibit 2  to the Registrant’s Form 8-K Current Report dated May 17, 1996).                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

71

----

 
| 10.25  |   | — |   | Corrective Amendment dated November 25,  1996 to Subordinated Promissory Note dated May 17, 1996 in the amount of  $2,128,000 from Possible Dreams to Possible Dreams, Ltd., a  Massachusetts corporation (incorporated by reference to Exhibit 10.25 to  the Registrant’s Form 10-K Annual Report for the fiscal year ended September 30,  1996).                                                                                                                 |
|--------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.26  |   | — |   | Subordinated Promissory Note dated May 17,  1996 in the amount of $332,000 from Possible Dreams to Columbia National  Corporation (incorporated by reference to Exhibit 3 to the Registrant’s Form 8-K  Current Report dated May 17, 1996).                                                                                                                                                                                                                                  |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.27  |   | — |   | Corrective Amendment dated November 25,  1996 to Subordinated Promissory Note dated May 17, 1996 in the amount of  $332,000 from Possible Dreams to Columbia National Corporation (incorporated  by reference to Exhibit 10.27 to the Registrant’s Form 10-K Annual  Report for the fiscal year ended September 30, 1996).                                                                                                                                              |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.28  |   | — |   | Credit Agreement dated May 17, 1996  among Possible Dreams, P.D. Holdings, Inc., a Delaware corporation (“Holdings”),  the Lenders referred to therein and NationsCredit Commercial Corporation (“NationsCredit”),  as Agent (incorporated by reference to Exhibit 4 to the Registrant’s Form 8-K  Current Report dated May 17, 1996).                                                                                                              |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.29  |   | — |   | Warrant dated May 17, 1996 from  Possible Dreams to NationsCredit (incorporated by reference to Exhibit 5  to the Registrant’s Form 8-K Current Report dated May 17, 1996).                                                                                                                                                                                                                                                                                                  |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.30  |   | — |   | Warrant holders Rights Agreement dated May 17,  1996 among Possible Dreams, Holdings, Security Capital, Warren Stanley and  Arnold Lee and NationsCredit (incorporated by reference to Exhibit 6 to  the Registrant’s Form 8-K Current Report dated May 17, 1996).                                                                                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.31  |   | — |   | Security Capital Pledge and Guarantee  Agreement dated May 17, 1996 between Security Capital and NationsCredit,  as Agent (incorporated by reference to Exhibit 7 to the Registrant’s Form 8-K  Current Report dated May 17, 1996).                                                                                                                                                                                                                                          |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.32  |   | — |   | Holdings Pledge Agreement dated May 17,  1996 among Holdings and NationsCredit, as Agent (incorporated by reference to  Exhibit 8 to the Registrant’s Form 8-K Current Report dated May 17,  1996).                                                                                                                                                                                                                                                                          |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.33  |   | — |   | Investors Subordination Agreement dated May 17,  1996 among Possible Dreams, the Subordinated Obligations Holders (as defined  therein) and NationsCredit, as Agent (incorporated by reference to Exhibit 9  to the Registrant’s Form 8-K Current Report dated May 17, 1996).                                                                                                                                                                                                |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.34  |   | — |   | Sellers Subordination Agreement dated May 17,  1996 among Possible Dreams, the Subordinated Obligations Holders (as defined  therein) and NationsCredit, as Agent (incorporated by reference to Exhibit 10  to the Registrant’s Form 8-K Current Report dated May 17, 1996).                                                                                                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.38  |   | — |   | First Amendment to Advisory Services  Agreement dated May 17, 1996 by and between Security Capital and Capital  Partners (incorporated by reference to Exhibit 14 to the Registrant’s Form 8-K  Current Report dated May 17, 1996).                                                                                                                                                                                                                                          |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.39  |   | — |   | Consolidated Income Tax Sharing Agreement  dated May 17, 1996 among Possible Dreams, Holdings and Security Capital  (incorporated by reference to Exhibit 15 to the Registrant’s Form 8-K  Current Report dated May 17, 1996).                                                                                                                                                                                                                                               |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.40  |   | — |   | Asset Purchase Agreement dated June 27,  1997 by and among Pumpkin, Ltd. d/b/a Pumpkin Masters, Inc., a  Colorado corporation (the “Seller”), Pumpkin Ltd., a Delaware  corporation (“Pumpkin”), Pumpkin Masters Holdings, Inc., a Delaware  corporation (“Pumpkin Holdings”), and Security Capital (incorporated by  reference to Exhibit 1(c)(1) to the Registrant’s Form 8-K  Current Report dated June 27, 1997). |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.41  |   | — |   | Credit Agreement dated June 27, 1997  among Pumpkin, Pumpkin Holdings, the Lenders referred to therein and  NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(2) to  the Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                                                                                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.42  |   | — |   | Warrant dated June 27, 1997 from  Pumpkin to NationsCredit (incorporated by reference to Exhibit 1(c)(3) to  the Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                                                                                                                                                                                                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.43  |   | — |   | Warrant holders Rights Agreement dated June 27,  1997 among Pumpkin, Pumpkin Holdings, Security Capital, Seller and  NationsCredit (incorporated by reference to Exhibit 1(c)(4) to the  Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                                                                                                                                                                     |

 

72

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| 10.44  |   | — |   | Company Security Agreement dated June 27,  1997 between Pumpkin and NationsCredit, as Agent (incorporated by reference  to Exhibit 1(c)(5) to the Registrant’s Form 8-K Current Report  dated June 27, 1997).                                                                                                                                                                                           |
|--------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.45  |   | — |   | Pumpkin Holdings Pledge Agreement dated June 27,  1997 between Pumpkin Holdings and NationsCredit, as Agent (incorporated by  reference to Exhibit 1(c)(6) to the Registrant’s Form 8-K  Current Report dated June 27, 1997).                                                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.46  |   | — |   | Security Capital Pledge and Guarantee  Agreement dated June 27, 1997 between Security Capital and  NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(7) to  the Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                                                                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.47  |   | — |   | Security Capital Subordination Agreement  dated June 27, 1997 among Pumpkin, the Subordinated Obligations Holders  (as defined therein) and NationsCredit, as Agent (incorporated by reference  to Exhibit 1(c)(8) to the Registrant’s Form 8-K Current Report  dated June 27, 1997).                                                                                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.48  |   | — |   | Investors Subordination Agreement dated June 27,  1997 among Pumpkin, the Subordinated Obligations Holders (as defined therein)  and NationsCredit, as Agent (incorporated by reference to Exhibit 1(c)(9) to  the Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.49  |   | — |   | Seller Subordination Agreement dated June 27,  1997 among Pumpkin, Pumpkin Holdings, the Subordinated Obligations Holders  (as defined therein) and NationsCredit, as Agent (incorporated by reference  to Exhibit 1(c)(10) to the Registrant’s Form 8-K Current  Report dated June 27, 1997).                                                                                                          |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.50  |   | — |   | Stockholders’ Agreement dated June 27,  1997 among Pumpkin, Pumpkin Holdings and Gay Burke (incorporated by reference  to Exhibit 1(c)(11) to the Registrant’s Form 8-K Current Report  dated June 27, 1997).                                                                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.51  |   | — |   | Loan and Security Agreement dated June 13,  2001 between Pumpkin and LaSalle Business Credit (incorporated by reference  to Exhibit 10.51 to the Registrant’s Form 10-K Annual Report dated December 31,  2001).                                                                                                                                                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.55  |   | — |   | Advisory Services Agreement dated June 27,  1997, by and between Pumpkin and Security Capital (incorporated by reference  to Exhibit 1(c)(16) to the Registrant’s Form 8-K Current Report  dated June 27, 1997).                                                                                                                                                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.56  |   | — |   | Second Amendment to Advisory Services  Agreement dated June 27, 1997 by and between Security Capital and  Capital Partners (incorporated by reference to Exhibit 1(c)(17) to the  Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.57  |   | — |   | Joinder Agreement dated June 27, 1997  among Pumpkin, Pumpkin Holdings and Security Capital to Consolidated Income  Tax Sharing Agreement dated May 17, 1996 among Possible Dreams, Holdings  and Security Capital (incorporated by reference to Exhibit 1(c)(18) to  the Registrant’s Form 8-K Current Report dated June 27, 1997).                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.61  |   | — |   | Stock Purchase Agreement, dated April 6,  1999, by and among Primrose Holdings, Inc., a Delaware corporation (“Holdings”),  Security Capital, and Paul L. Erwin Grantor Retained Annuity Trust (together  with Paul L. Erwin, the “Shareholders”) (incorporated by reference to Exhibit 1(c)(1) to  the Registrant’s Form 8-K Current Report dated April 6, 1999).        |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.62  |   | — |   | Credit Agreement, dated April 6, 1997,  among Primrose School Franchising Company, (“Primrose”), Holdings, the  Lenders referred to therein and Canadian Imperial Bank of Commerce (“CIBC”),  as Agent (incorporated by reference to Exhibit 1(c)(2) to the  Registrant’s Form 8-K Current Report dated April 6, 1999).                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.63  |   | — |   | Warrant Agreement, dated April 6, 1999  between Security Capital and CIBC (incorporated by reference to Exhibit 1(c)(3) to  the Registrant’s Form 8-K Current Report dated April 6, 1999).                                                                                                                                                                                                              |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.65  |   | — |   | Management Advisory Services Agreement,  dated April 6, 1999, by and among Primrose, Metrocorp, Country Day and  Security Capital (incorporated by reference to Exhibit 1(c)(5) to  the Registrant’s Form 8-K Current Report dated April 6, 1999).                                                                                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.66  |   | — |   | Third Amendment to Advisory Services  Agreement, dated April 6, 1999, by and between Security Capital and  Capital Partner (incorporated by reference to Exhibit 1(c)(6) to  the Registrant’s Form 8-K Current Report dated April 6, 1999).                                                                                                                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.67  |   | — |   | Tax Sharing Joinder Agreement, dated April 6,  1999, among Holdings, Primrose, Metrocorp, Country Day and Security Capital  to Consolidated Income Tax Sharing Agreement, dated April 17, 1996,  among Possible Dreams, Ltd., P.D. Holdings, Inc. and Security  Capital (incorporated by reference to Exhibit 1(c)(7) to the  Registrant’s Form 8-K Current Report dated April 6, 1999). |

 

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| 10.68  |   | — |   | Lease Agreement, dated April 6, 1999  by and between Erwin Family Partnership, LLLP and Primrose (incorporated by  reference to Exhibit 1(c)(8) to the Registrant’s Form 8-K  Current Report dated April 6, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.69  |   | — |   | Lease Agreement, dated April 6, 1999  by and between Paul L. Erwin and Country Day (incorporated by reference to Exhibit 1(c)(9) to  the Registrant’s Form 8-K Current Report dated April 6, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.70  |   | — |   | Stockholders’ Agreement dated December 21,  2000, by and among Security Capital, WC Holdings, Inc. (“WC Holdings”),  HP Acquisition, WC, CompManagement, Inc. (“CMI”), CompManagement Health  Systems, Inc. (“CHS”), M&N Enterprises, Inc. (“M&NE”),  M&N Risk Management, Inc. (“M&NRM”) (CMI, CHS, M&NE and  M&NRM being collectively referred to with WC as the “Companies”),  Robert J. Bossart, Jonathan R. Wagner, Richard T. Kurth,  Randy E. Jones, Daniel R. Sullivan and Paul A. Miller  (incorporated by reference to Exhibit 1(c)(4.1) to the Registrant’s Form 8-K  Current Report dated December 21, 2000). |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.71  |   | — |   | Loan Agreement dated December 21,  2000, among each of the Companies, as borrowers, WC Holdings, as guarantor,  and Bank One, N.A. (“Bank One”), as lender (incorporated by reference to Exhibit 1(c)(99.1)  to the Registrant’s Form 8-K Current Report dated December 21,  2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.72  |   | — |   | Note Purchase Agreement dated December 21,  2000, among WC Holdings, as borrower, each of the Companies, as a guarantor,  and Banc One Mezzanine Corporation (“Banc One Mezzanine”), as purchaser  (incorporated by reference to Exhibit 1(c)(99.2) to the Registrant’s Form 8-K  Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.73  |   | — |   | Intercreditor and Subordination Agreement  dated December 21, 2000, among the Companies, WC Holdings, Bank One and  Banc One Mezzanine (incorporated by reference to Exhibit 1(c)(99.3) to  the registrant’s Form 8-K Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.74  |   | — |   | Capital Contribution Agreement dated December 21,  2000, between Security Capital and Banc One Mezzanine (incorporated by  reference to Exhibit 1(c)(99.4) to the Registrant’s Form 8-K  Current report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.75  |   | — |   | Tax Allocation Agreement dated December 21,  2000, among Security Capital, WC Holdings and each of the Companies  (incorporated by reference to Exhibit 1(c)(99.5) to the Registrant’s Form 8-K  Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.76  |   | — |   | Management Advisory Services Agreement  dated December 21, 2000, among each of the Companies and Security  Capital (incorporated by reference to Exhibit 1(c)(99.6) to the  Registrant’s Form 8-K Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.77  |   | — |   | Fourth Amendment to Advisory Services  Agreement dated December 21, 2000 between Security Capital and Capital  Partners (incorporated by reference to Exhibit 1(c)(99.7) to the  Registrant’s Form 8-K Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.78* |   | — |   | Employment Agreement effective as of December 21,  2000 among WC Holdings, WC, CMI, CHS and Robert J. Bossart (incorporated  by reference to Exhibit 1(c)(99.8) to the Registrant’s Form 8-K  Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.79* |   | — |   | Employment Agreement effective as of December 21,  2000 among WC Holdings, WC, CMI, CHS and Jonathan R. Wagner  (incorporated by reference to Exhibit 1(c)(99.9) to the Registrant’s Form 8-K  Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.80* |   | — |   | Employment Agreement effective as of December 21,  2000 among WC Holdings, WC, CMI, CHS and Richard T. Kurth (incorporated  by reference to Exhibit 1(c)(99.10) to the Registrant’s Form 8-K  Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.81* |   | — |   | Employment Agreement effective as of December 21,  2000 among WC Holdings, WC, CMI, CHS and Randy E. Jones (incorporated by  reference to Exhibit 1(c)(99.11) to the Registrant’s Form 8-K  Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.82* |   | — |   | Employment Agreement effective as of December 21,  2000 among WC Holdings, WC, CMI, CHS and Daniel R. Sullivan  (incorporated by reference to Exhibit 1(c)(99.12) to the Registrant’s Form 8-K  Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.83* |   | — |   | Employment Agreement effective as of December 21,  2000 among WC Holdings, WC, CMI, CHS and Paul A. Miller (incorporated by  reference to Exhibit 1(c)(99.13) to the Registrant’s Form 8-K  Current Report dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

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| 10.84   |   | — |   | Management Consulting Agreement dated December 21  2000, among WC Holdings and each of the Companies (incorporated by reference  to Exhibit 1(c)(99.14) to the Registrant’s Form 8-K Current Report  dated December 21, 2000).                                                                                                                                                                                                                                                                                                                                  |
|---------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.85*  |   | — |   | CompManagement, Inc. Deferred  Compensation Plan adopted December 21, 2000 (incorporated by reference  to Exhibit 99.15 to the Registrant’s Form 8-K Current Report dated December 21,  2000).                                                                                                                                                                                                                                                                                                                                                             |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.87*  |   | — |   | Security Capital Corporation’s 2000  Long-Term Incentive Plan (incorporated by reference to Exhibit 1(4.) to  the Registrant’s Registration Statement on Form S-8 dated February 8,  2001).                                                                                                                                                                                                                                                                                                                                                                     |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.88   |   | — |   | Loan Agreement dated April 5, 2002  among Primrose, as Borrower, Holdings and Security Capital, as Corporate  Guarantors, and Bank One, as Lender (incorporated by reference to Exhibit 1  to the Registrant’s Form 10-Q Quarterly Report dated March 31,  2002).                                                                                                                                                                                                                                                                                               |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.89   |   | — |   | Unconditional Corporate Guaranty Agreement  dated April 5, 2002 between Security Capital Corporation and Bank One,  N.A. (incorporated by reference to Exhibit 2 to the Registrant’s Form 10-Q  Quarterly Report dated March 31, 2002).                                                                                                                                                                                                                                                                                                                         |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.90   |   | — |   | Fifth Amendment to Advisory Services  Agreement dated April 5, 2002 by and between Security Capital and  Capital Partners (incorporated by reference to Exhibit 3 to the  Registrant’s Form 10-Q Quarterly Report dated March 31, 2002).                                                                                                                                                                                                                                                                                                                        |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.91   |   | — |   | Amended and Restated Management Advisory  Services Agreement, dated April 5, 2002, between Jewel I, Inc.  d/b/a Primrose Country Day School and Primrose School Franchising Company and  Security Capital Corporation (incorporated by reference to Exhibit 4 to  the Registrant’s Form 10-Q Quarterly Report dated March 31, 2002).                                                                                                                                                                                                                  |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.92   |   | — |   | Reimbursement Agreement dated April 5,  2002 by and between Brian D. Fitzgerald, Security Capital and Primrose  (incorporated by reference to Exhibit 5 to the Registrant’s Form 10-Q  Quarterly Report dated March 31, 2002).                                                                                                                                                                                                                                                                                                                             |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.93   |   | — |   | Guaranty Fee Agreement dated April 5,  2002 by and between Security Capital and Brian D. Fitzgerald (incorporated  by reference to Exhibit 6 to the Registrant’s Form 10-Q Quarterly  Report dated March 31, 2002).                                                                                                                                                                                                                                                                                                                                        |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.94   |   | — |   | First Amendment to Loan Agreement dated December 31,  2002 by and among Primrose, Holdings, Security Capital, Brian D.  Fitzgerald and Bank One (incorporated by reference to Exhibit 10.94 to  the Registrant’s Form 10-K for the year ended December 31, 2002).                                                                                                                                                                                                                                                                                          |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.95   |   | — |   | Advisory Services Agreement dated January 1,  2003 between Security Capital and Capital Partners (incorporated by reference  to Exhibit 10.95 to the Registrant’s Form 10-K for the year ended December 31,  2003).                                                                                                                                                                                                                                                                                                                                             |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.96   |   | — |   | First Amendment to Advisory Services  Agreement dated November 4, 2003 between Security Capital and Capital  Partners (incorporated by reference to Exhibit 10.96 to the Registrant’s  Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                         |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.97   |   | — |   | Amended and restated loan agreement dated October 3,  2003 among Health Power, Inc., CMI, CHS, CompManagement Integrated  Disability Services, Inc., CMI Management Company, CompManagement of  Virginia, Inc., CompManagement Disability Services Company, CMI Barron  Risk Management Services, Inc. and Octagon Risk Services, Inc., as  Borrowers, WC Holdings, Inc., as Guarantor and Bank One, as Lender  (incorporated by reference to Exhibit 10.97 to the Registrant’s Form 10-K  for the year ended December 31, 2003). |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.98   |   | — |   | 10%-16% Senior Subordinated Promissory  Note, due September 30, 2008, issued by Security Capital in favor of  J.H. Whitney Mezzanine Fund L.P. in the amount of $30.0 million  (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K  Current Report dated January 15, 2004).                                                                                                                                                                                                                                                             |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.99   |   | — |   | Security Purchase Agreement dated January 14,  2004, by and between Security Capital and J.H. Whitney Mezzanine Fund, L.P.  (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K  Current Report dated January 15, 2004).                                                                                                                                                                                                                                                                                                                    |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.100+ |   |   |   | Second Amended and Restated Advisory Services Agreement dated as of December 23,  2005, and effective as of January 1, 2006, among Security Capital  Corporation, Capital Partners, Inc., and Primrose Holdings, Inc.                                                                                                                                                                                                                                                                                                                                                |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 21+     |   | — |   | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 23.1+   |   |   |   | Consent of McGladrey & Pullen, LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

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| 23.2+  |   | — |   | Consent of Ernst & Young, LLP.                                                                                                                 |
|--------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                    |
| 31.1+  |   | — |   | Certification of CEO pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                   |
|   |   |   |   |                                                                                                                                                    |
| 31.2+  |   | — |   | Certification of the CFO pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                               |
|   |   |   |   |                                                                                                                                                    |
| 32+    |   | — |   | Certification of CEO and CFO pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |

 

----

+              Filedherewith.

 

76

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