**UNITED STATESSECURITIES AND 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 31,2004**

 

**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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**SECURITY CAPITAL CORPORATION**

(Exact name of registrant as specified in itscharter)

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

 

**Eight Greenwich Office Park**

**Greenwich, Connecticut 06831**

(Address of principal executive offices) (ZipCode)

 

Registrant’s telephone number, including areacode: **(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, $.01 par value |       | American Stock Exchange                       |

 

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

None.

 

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Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days. Yes o  No ý

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not becontained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. ý

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Act). Yes o  No ý

 

As of June 30, 2004, 6,450,967 shares of the Registrant’s votingstock were outstanding, of which 5,277,632 shares were held by affiliates ofthe Registrant.  The aggregate marketvalue of the remaining 1,173,335 shares of voting stock held by non-affiliates(based upon the closing price of the Registrant’s Class A Common Stock on June 30,2004 of $7.01) was $8,225,078.

 

Number of shares outstanding of each of the Registrant’s classes ofcommon stock as of June 15, 2005: 6,770,587 shares of Class A Common Stock; 380 shares of CommonStock.

** **

**DocumentsIncorporated by Reference**

**Part IV incorporates certainexhibits by reference from the Registrant’s previous filings.**

 

 

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**TABLE OF CONTENTS**

 
| PART I   |                                                                                                                    |   |
|---------------|-------------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                    |   |
| Item 1.  | Business                                                                                                                |   |
| 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 Schedule                                                                               |   |

 

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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.  At December 31,2004, we had two operating subsidiaries, WC Holdings, Inc. (“WC”) andPrimrose Holdings, Inc. (“Primrose”). Each subsidiary has a certain degree of operating autonomy, withits own chief executive officer and senior management.

 

WCis an 80%-owned subsidiary that, through its wholly-owned subsidiary,CompManagement, Inc. (“CMI”), provides various services tocorporations and their employees relating to reducing or containing employers’workers’ compensation costs, including employee lost time, medical managementand administrative services related to workers’ compensation and medicalliability claims, consulting, training and education services designed to improve,and managed the costs of, workplace health and safety, and, to a lesser extent,management and administrative services related to auto and general liabilityinsurance claims.  CMI services arecategorized into two general categories: (1) third-party administration or“TPA” services related to workers’ compensation, professional medicalliability, automobile and general liability claims and (2) medicalmanagement of workers’ compensation claims, or “MCO” services.

 

Primroseis a 98.5%-owned subsidiary involved in the franchising of educational childcare centers, with related activities in real estate consulting and siteselection services.  Currently, Primroseschools are located in the Southeast, Southwest and Midwest.

 

The Company also owned 100% of Pumpkin Masters Holdings, Inc. (“Pumpkin”)until its sale in October 2004. Pumpkin was engaged in the business ofdesigning and distributing Halloween-oriented pumpkin carving kits and relatedaccessories throughout the United States and in Canada.  During the fourth quarter of 2003, wecommitted to a plan to sell the operations of Pumpkin, and accordingly, Pumpkinis accounted for as a discontinued operation for all periods presented.  On October 25, 2004, Pumpkin Ltd., theCompany’s wholly owned subsidiary and parent company of Pumpkin, entered into adefinitive agreement and consummated the sale of substantially all of theassets of Pumpkin.

 

The Company also had a 75% ownership interest in P.D. Holdings, Inc.(“Possible Dreams”) until it filed for bankruptcy protection under Chapter 11of the Bankruptcy Code in October 2003. At the time of the bankruptcy filing, we no longer had control over thissubsidiary and therefore, excluded the accounts of Possible Dreams from ourconsolidated financial statements. Accordingly, for the periods prior to thebankruptcy filing, Possible Dreams is reported as a discontinuedoperation.  Possible Dreams operated as adesigner, importer and distributor of giftware and collectible figurines.  On November 5, 2004, we entered into anagreement with the Possible Dreams bankruptcy trustee to resolve alloutstanding claims against the Company.

 

We have two reportable operating segments at December 31,2004.  The Employer Cost Containment andHealth Services segment consists of WC, CMI and its wholly owned subsidiaries, andthe Educational Services segment consists of Primrose.

 

**EMPLOYER COST CONTAINMENT AND HEALTH SERVICESSEGMENT**

 

**Overview**

 

Througha series of acquisitions and internal growth, revenues for the Employer CostContainment and Health Services segment have grown from $53.6 million in 2001to $121.3 million for the year ended December 31, 2004.  In December 2000, the Company, throughits 80%-owned subsidiary WC Holdings, Inc., acquired 100% of theoutstanding stock of Health Power, Inc. and its wholly-owned subsidiary,CMI.  In April 2001, CMI acquired100% of the outstanding stock of Trigon Administrators, Inc. (“Trigon”),  a TPA in Virginia, Maryland and NorthCarolina.  In October 2002, CMIacquired 100% of the outstanding stock of Barron Risk Management Services, Inc.(“Barron”), a TPA in Texas that offers various services for the administrationof self-insured property and casualty programs. In October 2003, CMI acquired 100% of the outstanding stock ofOctagon Risk Services, Inc. (“Octagon”), a full-service claimsadministration and consulting services

 

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providerfor workers’ compensation, medical professional liability and general liabilitybased in California.  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., and in May 2004, CMI acquired 100% of the outstandingstock of Integrated Claims Strategies (“ICS”), a provider of insurance claimsprocessing and administrative services in the Tampa, Florida area.   Segment revenues were $121,335, $84,598 and$64,460, representing approximately 90% of consolidated revenues fromcontinuing operations, for each of the years ended December 31, 2004, 2003and 2002, respectively.

 

In March 2005, Octagon acquired 100% of the outstanding stock ofManaged Care Holdings Corporation, which through its wholly owned subsidiary,Caronia Corporation (“Caronia”), is a leading provider of third-party professionalmedical liability claims administration and risk management services tohospitals and healthcare systems, physician and paraprofessional groups,nursing homes, rehabilitation centers and clinics.  Caronia services over 700 hospitals, 23,000physicians and 4,000 long-term care facilities.  Itsbusiness is headquartered in Melville, New York, and it services clientsthrough 40 locations nationwide.  Withthe acquisition of Caronia, management believes that CMI is now one of thelargest providers of professional medical liability claims services in theUnited States.

 

**Services**

 

*Third-Party Administration Services*

 

CMI provides group rating, risk management, medical cost containmentand claims management services to employers with respect to workers’compensation, professional medical liability, auto and general liability claimsas well as claims administration services for short-term disability and FamilyMedical Leave Act claims.  CMI’s TPA 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 andanalysis of employers for inclusion in group rating plans.  In the state of Ohio, CMI services alsoinclude assisting employers before the Ohio Industrial Commission and The OhioBureau of Workers’ Compensation (the “OBWC”). Many Ohio employers have entered into contracts with CMI because oftheir participation in group rating plans sponsored by trade associations ofwhich such employers are members.  CMIalso acts as a TPA of workers’ compensation claims for self-insuredemployers.  Each employer selects thetypes of services it desires and then enters into a contract with CMI toprovide such services.  These contractsare generally for a one-year period.  CMIcurrently provides its TPA services to over 23,000 State Fund and self-insured employers,many of whom also receive MCO services (see below).  CMI has one customer that accountedfor approximately 13% of the employer cost containment and health servicessegment revenues for 2004.

 

*MCO Services*

 

CMI owns and operates a state-wide MCO under Ohio’s Health PartnershipProgram.  CMI is an OBWC-certified andURAC-accredited (American Accreditation HealthCare Commission, Inc.) MCO, andprovides medical management services for workers’ compensation cases resultingfrom injuries suffered by employees arising out of the course and scope oftheir employment, as required by law. Because all workers’ compensation claim liabilities are paid by theOBWC, CMI does not assume any risk for the payment of medical or disabilitybenefits to employees with respect to their claims.

 

MCO services provided in Ohio by CMI are offered pursuant to a contractwith the OBWC.  Under this contract, CMIis responsible for providing, among other things, a state-wide health careprovider network; treatment guidelines and utilization review procedures; peerreview and quality assurance programs; provider sanction and terminationprocedures; medical and vocational case management programs; utilizationmanagement programs; medical bill adjudication and payment procedures; disputeresolution procedures; provider, employer and employee relations and educationprograms; and health care fraud detection and reporting programs.

 

CMI receives an administrative fee equal to 4% of the annual workers’compensation premiums for employers assigned to its MCO, as well as a quarterlyincentive payment of up to 3% of the annual workers’ compensation premiums foremployers assigned to its MCO, provided that CMI meets the performance criteriarequired by OBWC and established in the MCO contract.  The administrative fee is paid monthly and issubject to setoffs if CMI does not meet certain criteria with respect to firstreport of injuries, bill submissions or data accuracy, or if CMI makes amisfiling of death claims.  The quarterlyincentive payment is based upon the attainment of certain return-to-workmeasurements established in the contract. Revenues from the contract with the OBWC were $29,004, $27,164 and$28,568, representing 24%, 32% and 44%

 

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of total segment revenues in 2004, 2003 and 2002, respectively.  The current contract with the OBWC isscheduled to expire in December 2006. CMI considers its relationship with the OBWC to be good, and while theOBWC has historically renewed the contract with the CMI, no assurances can begiven that this contract will be renewed. The loss of the OBWC contract could have a material adverse effect onour financial condition, operating results and cash flows.

 

In other states, CMI offers its own case management, bill review andutilization review services solutions for many of its large self-insured andinsurance company customers throughout the country.  CMI owns or has arrangements with various state-widehealth care provider networks consisting of physicians, hospitals and ancillaryproviders.  In those states where CMIoperates its own network (South Carolina, Maryland, Virginia and Texas), CMIhas a provider services department, which recruits new providers for its ownnetwork and offers educational materials and training seminars to its clients.  CMI currently provides MCO services to over55,000 employers.

 

**Customers and Marketing**

 

CMI markets its TPA and MCO services through its own employees whocontact prospective and existing employer groups.  In addition, CMI has relationships with over500 independent insurance agencies and brokers. CMI maintains service centers in California, Georgia, Illinois,Maryland, Michigan, North Carolina, Ohio, Pennsylvania, South Carolina, Texas,Virginia, Washington and West Virginia.

 

**Competition**

 

The TPA and MCO industries are comprised of numerous independentcompanies, typically operating on a regional basis, and a few large, nationalcompanies, including CMI.  Managementconsiders the large, national companies to be the primary competitors of CMI;however, the regional independent companies offer one or more services similarto those offered by CMI.  Some of CMI’scompetitors are significantly larger and have greater financial and marketingresources than CMI.

 

The principal competitive factors are the range of services offered andresponsiveness to customer needs.  CMIcompetes principally on the basis of its specialization in the non-healthclaims management area, breadth of services, attention to customer service andindependence from insurance carriers and brokers.

 

**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.  Its business issubstantially dependent on the workers’ compensation systems in Ohio and theother states in which it operates.

 

CMI’s MCO is certified and regulated by the OBWC under Ohio’s HealthPartnership Program.  The MCO is not,however, subject to Ohio’s laws governing health insuring corporations, sinceit is not responsible for payment of health care claims or benefits, nor is itotherwise responsible for risk-bearing activities commonly associated withorganizations licensed under Ohio’s insurance laws.  Management believes that its MCO is presentlyin compliance in all material respects with all applicable laws, regulationsand certification requirements.

 

**Employees**

 

As of December 31, 2004, CMI had 1,242 employees, of which 875were employed in connection with its TPA operations, 267 were employed inconnection with its MCO operations and 100 were employed in administrativefunctions, including accounting/finance, human resources, informationtechnology and executive management.  CMI’semployees are not represented by a union, and CMI considers its relationshipwith its employees to be good.

 

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**EDUCATIONAL SERVICES SEGMENT**

 

**Overview**

 

In April 1999, the Company acquired Primrose School FranchisingCompany, Inc., the exclusive franchiser of Primrose Schools, an industryleader in early childhood education and high-quality childcare services, withrelated activities in real estate consulting and site selection services.  At the end of 2004, Primrose had 125franchised schools operating in the Southeast, Southwest and Midwest and hadawarded 58 additional franchise units that were in various stages ofdevelopment and construction.  Primrosealso has a Company-owned school, which was opened in January 2003 andserves an important role in training, testing new curricula, and business initiatives.

 

Revenuesfrom the Educational Services segment are composed of royalties, franchisingfees, assignment fees, transfer fees, real estate services fees, forfeiturefees and tuition fees.  Revenues fromthe Educational Services segment have experienced double-digit annual growthdue to the quality of the brand, opening of additional franchise schools andannual increases in existing school revenues. Segment revenues were $11,605, $9,834 and $8,243, representing approximately10% of consolidated revenues from continuing operations for each of the yearsended December 31, 2004, 2003 and 2002. 

 

**Educational Services**

 

Primrose has established a position as a major provider of earlychildhood education and high-quality childcare in the upscale demographicsegment of the childcare industry. Primrose is a franchised system of private,curriculum-based pre-schools that provide early childhood education and high-qualitychildcare services for children six weeks to five years old and after-schoolprograms for children five through 12 years old.  The primary strategies of Primrose are aimedat delivering a consistent, high-quality educational product throughout all itsschools.  The overall franchise system andproduct are tightly controlled and uniform.

 

Primrose provides a proven copyrighted early childhood curriculum andprogramming to its franchisees.  Theseinclude detailed daily educational lesson plans, management guidelines andother collateral materials. Primrose integrates nationally recognized packagedcurriculums with its own copyrighted Balanced Learningsm programs.

 

Primrose provides its franchisees with detailed on-line manuals thatcover all aspects of operating a Primrose School. The Primrose Schools’curriculum and operating systems have been approved for national accreditationby the Southern Associations of Schools and Colleges and the North CentralAssociation.

 

**Operational and Business Services**

 

Primrose provides extensive training to new franchisees prior to theopening of their school.  Primrose has anongoing operations support infrastructure that includes comprehensive business,operational and marketing plans for franchisees.  Operations consultants provide consultingservices and visit schools on a continual basis to ensure that Primrose’squality standards are maintained.  Acomplete internal and external equipment package is provided by Primrose forfranchisees’ use in their schools.  Thispackage includes furniture, educational programs and materials, playgroundequipment, school supplies and customized childcare management software.

 

**Other Services**

 

Primrose also provides real estate services and marketing services toits current and prospective franchisees. Real estate services include architectural design based on proprietaryprototype building and site plans, site selection assistance and developmentconsulting.

 

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 franchised schools primarily to working parents whodesire more than “day care” or babysitting through targeted marketing withnumerous media, including public relations, direct mail, radio, newspapers,internet and various magazines.  Itsfranchise opportunities are targeted towards successful individuals withmanagement

 

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experience and entrepreneurial desires.  Primrose receives favorable publicitygenerated by its quality curriculum and service.  Primrose advertises in newspapers, tradepublications, magazines, presentations and by referral. 

 

Primrose has alliances with national lending sources to providecompetitive financing for franchisees. These strategic partnerships provide a degree of familiarity andefficiency to the financing process for Primrose franchisees.  Primrose does not guarantee any franchiseeloans or leases.

 

**Trademarks and Other Proprietary Rights**

 

Primrose owns and maintains trademarks and copyrights relating to its curriculum,programs, characters, logos and building plans. Additionally, Primrose strivesto protect itself, franchisees, parents and children through a strong,comprehensive franchise agreement that explicitly spells out theresponsibilities of both Primrose and the franchisee.  This agreement gives Primrose the ability to enforceits standards, helping to ensure system-wide quality and consistency.

 

**Competition and Markets**

 

Primrose Schools compete in the center-based for-profit sector of thechildcare industry.  The industry ishighly fragmented with more than 100,000 licensed childcare centers, of whichonly a small percentage consists of national for-profit child care “chains”such as Primrose.  Primrose also competeswith the pre-kindergarten and kindergarten programs offered in private andpublic schools.  Management believes thefragmented nature of the industry, together with an increasing demand foreducational childcare, provides growth opportunities for well-managed childcarecenters with professional, owner-operated childcare providers.

 

Management believes that the principal elements defining competitivenessare curriculum, product quality and consistency, well-trained staff, strongcustomer service and good business center management.  Although Primrose competes favorably withrespect to these factors, some of Primrose’s competitors are larger and have greaterfinancial resources, with a larger number of facilities and a broader nationalor regional presence.

 

**Government Regulation**

 

Primrose is subject to various federal, state and local laws as well asa variety of regulatory provisions relating to zoning of school sites,sanitation, curriculum, health and safety.  As a franchisor, Primrose is subject to stateand federal laws regulating various aspects of franchise operations and sales.  These laws impose registration and disclosurerequirements on franchisors in the offer and sale of franchises.  In certain cases, they also apply substantivestandards to the relationship between franchisor and franchisee, relatingprimarily to defaults, termination, non-renewal of franchises and the potentialimpact of new Primrose schools on enrollment levels at existing Primrose sites.  Management believes that Primrose ispresently in compliance in all material respects with all applicable federal,state and local laws and regulatory provisions.

 

**Employees**

 

Primrose had 60 employees at December 31, 2004.  None of the employees of Primrose isrepresented by a labor union, and Primrose considers its relationship with itsemployees to be good.

 

Various federal and state labor laws govern Primrose’s relationshipswith its employees.  These include suchmatters as minimum wage requirements, overtime and other workingconditions.  Significant additionalgovernment-imposed increases in paid leaves of absence or mandated healthbenefits could, however, be detrimental to the economic viability of franchisee-operatedand Company-operated schools.

 

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**SEASONAL PRODUCTS SEGMENT**

(Reported as DiscontinuedOperations)

 

Our Seasonal Products segment was composed of Pumpkin and Possible Dreams,which are classified as discontinued operations for all periods presented.

 

Pumpkin was a wholly owned subsidiary engaged in the business ofdesigning and distributing Halloween-oriented pumpkin carving kits and relatedaccessories primarily throughout the United States and in Canada.  During the fourth quarter of 2003, wecommitted to a plan to sell the operations of Pumpkin and, accordingly, Pumpkinwas accounted for as a discontinued operation. On October 25, 2004, we consummated the sale of substantially allof the assets of Pumpkin.

 

PossibleDreams was an indirect, 75%-owned subsidiary that formerly operated as adesigner, importer and distributor of giftware and collectible figurines.  In October 2003, Possible Dreams filedfor bankruptcy protection under Chapter 11 of the Bankruptcy Code, at whichtime we no longer had control over this subsidiary and therefore excluded theaccounts of Possible Dreams from our consolidated financial statements.  Possible Dreams is reported as a discontinuedoperation up through the date the subsidiary was deconsolidated.  On November 5, 2004, we settled allclaims of Possible Dreams against the Company with the bankruptcy trustee.

 

**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 public referenceroom at 100 F Street, N.E., Washington, D.C. 20549.  Please call the SEC at 1-800-SEC-0330 forinformation on the public reference room. The SEC maintains a website (www.sec.gov) that contains annual,quarterly and current reports, proxy statements and other information that wefile electronically with the SEC.  Youmay also obtain, free of charge, copies of our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,Forms 3, 4 and 5 filed on behalf of directors and executive officers, andany amendments to those reports filed or furnished pursuant to the SecuritiesExchange Act of 1934 by contacting Investor Relations, at our principalcorporate office, Eight Greenwich Office Park, Greenwich, CT 06831, telephone (203) 625-0770,or by visiting our website at www. securitycapitalcorporation.com.

 

**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 building was for a term of 15 years and wasscheduled to expire in 2012.  In 2002,CMI exercised a renewal option and extended the lease for an additional fiveyears, through 2017.  The lease requiresCMI to pay all operating expenses for the building.  The lease also provides for two renewaloptions of five years each.

 

CMI leases 56,000 square feet of office space in Oakland, Californiafor its Octagon headquarters.  Theinitial lease term is for five and one-half years and is scheduled to expire inAugust 2009.  The lease provides fora renewal 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 regional offices.  The Cincinnati, Richmond and Cleveland leasesexpire in December 2007, November 2008 and April 2008,respectively.  Both the Cleveland andCincinnati leases contain two renewal options of five years each.

 

CMI has 26 other leases for office space of between 1,000 and 14,000square feet that serve as regional offices and service centers.  These leases have initial terms between twoand six years and expire between 2005 and 2010.

 

Primrose leases a 13,000 square foot facility in Acworth, Georgia asits corporate headquarters.  The initiallease is for a term of five years and expires in 2008.  The lease contains two renewal options offive years each.  Primrose also leases an8,000 square foot building, also located in Acworth, Georgia, for its Company-ownedand operated educational childcare facility. The initial lease term is 10 years and expires in 2013.  The lease contains two renewal options of 10years each.

 

The Company leases office space in Greenwich, Connecticut for itscorporate headquarters.  The initiallease is for a

 

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term of seven years four months and expires February 2011 andcontains a renewal option for an additional five years.  The Company shares the office space withCapital Partners, Inc. (“Capital Partners”), a controlling stockholder.  Under the terms of a Management AdvisoryServices Agreement (the “MAS Agreement”), Capital Partners pays the rent, andthe Company’s reimbursement for its portion of the rent is included in themanagement advisory services fee the Company pays to Capital Partners (see Item13.  Certain Relationships and RelatedTransactions in this Form 10-K for further details regarding the annualmanagement advisory services fee paid to Capital Partners pursuant to the MASAgreement).

 

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

 

**ITEM 3.LEGAL PROCEEDINGS**

 

CMIwas party to a lawsuit brought by the Cleveland Bar Association that alleged thatcertain practices by CMI and its hearing representatives in Ohio constitutedthe unauthorized practice of law.  CMIbelieves that its practices do not differ from any other Ohio workers’compensation third-party administrator and do not constitute the practice oflaw.  On May 15, 2004, the Board ofCommissioners on the Unauthorized Practice of Law (the “UPL Board”) found thatthe activities of CMI and its hearing representatives did constitute theunauthorized practice of law; CMI appealed these findings to the Ohio StateSupreme Court (the “Supreme Court”).  On December 15,2004, the Supreme Court ruled that the activities engaged in by CMI did notconstitute the unauthorized practice of law. However, in its decision, the Supreme Court remanded the matter back tothe UPL Board to consider whether those activities that were the subject of theoriginal suit were in violation of a recently enacted Industrial Commissionresolution.  Oral arguments on this issueare scheduled for July 6, 2005.  Atthis time, we are unable to evaluate the outcome of this matter.

 

In connection with an offer made by Mr. Brian Fitzgerald, our Chairman ofthe Board of Directors, President and Chief Executive Officer, and, throughCapital Partners, the controlling person of our majority stockholder, CPAcquisition, 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, at a price of $9.00 per share (the “Initial Capital PartnersOffer”), three complaints were filed in theCourt of Chancery of the State of Delaware in and for New Castle County (the “Court”)naming the Company, each then-member of its Board of Directors and CPI asdefendants.  Each of the complaintsalleges that the defendants breached their fiduciary duties to theputative class and that the then-proposed Initial Capital Partners Offer wasunfair, inadequate and not the result of arm’s-length negotiations.  Eachcomplaint sought an injunction against the proposed merger or, if the merger wasconsummated, the rescission of the merger, as well as money damages, attorneys’fees, expenses and other relief.  TheCourt has issued an order of consolidation, consolidating the three complaintsinto one class action.  Plaintiffs havesubmitted their first request for the production of documents.  Since the announcement of the Initial CapitalPartners Offer, Mr. Fitzgerald and CapitalPartners have increased their offer to$10.60 per share, and offers to acquire the entire Company for $11.00 and$13.00 per share have been submitted by others. In addition, on June 7, 2005, the Company announced that it hadretained UBS Securities LLC to conduct a formal sale process for theCompany, and that Mr. Fitzgerald and Capital Partners have declared theirfull support for that sale process and committed to sell the shares theycontrol if appropriate value is achieved in the transaction (see Item 7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Proposed Sale of the Company”).  At this time, we are unable to evaluate the possibleoutcome of the class action.

 

Weare party to several legal actions arising in the ordinary course ofbusiness.  It is management’s opinionthat we have adequate legal defenses to these actions, and that the resolutionof such matters will not have a material adverse effect on our financialcondition, results of operations or cash flows.

 

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

 

Not Applicable.

 

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**PART II**

 
| **ITEM 5.** | ** ** | **MARKET FOR THE REGISTRANT’S COMMON EQUITY  AND RELATED STOCKHOLDER 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”.  We have received letters from the AMEXadvising us that we were not in compliance with the AMEX’s continued listingstandards because we failed to timely file our Form 10-K for the fiscalyear ended December 31, 2004 (the “2004 Form 10-K”) and Form 10-Qfor the quarter ended March 31, 2005 (the “First Quarter Form 10-Q”),as required pursuant to Section 1101 of the AMEX Company Guide (the “CompanyGuide”).  The AMEX’s letters noted that ourfailure to timely file the 2004 Form 10-K and the First Quarter Form 10-Qis a material violation of the Company’s listing agreement with the AMEX and,therefore, pursuant to Section 1003(d) of the Company Guide, oursecurities are subject to suspension and delisting from the AMEX.  In addition, we are subject to the proceduresand requirements of Section 1009 of the Company Guide. The AMEX’s lettersfurther noted that, if we do not regain compliance by June 30, 2005, theAMEX may initiate delisting proceedings, as appropriate.  We announced on May 23, 2005 that weanticipated that the First Quarter Form 10-Q would not be filed by the June 30,2005 extended due date and that we instead believed that we would be able tofile the First Quarter Form 10-Q by July 29, 2005.  As required by the AMEX’s letters, wecontinue to provide the AMEX with updates to our plan to regain compliance withthe AMEX’s continued listing standards. As a result of such delayed filings, however, it is possible that theAMEX may initiate delisting proceedings with respect to the Company’s Class ACommon Stock.

 

Asa result of the late filing of the 2004 Form 10-K and First Quarter Form 10-Q,the Company is now included in a list of issuers who are not in compliance withthe AMEX’s continued listing standards, which is posted daily onwww.amex.com.  In addition, until suchtime that we regain compliance with the AMEX’s continued listing standards, theAMEX will use the indicator “.LF” in the financial status indicator fields inthe Consolidated Quote System and Consolidated Quote Systems Low Speed and HighSpeed Tapes to denote the Company’s non-compliance.

 

The following table states the high and low sales prices for the Class ACommon Stock on the AMEX for the 2004 and 2003 quarterly periods indicated:

 
| **2004 PRICE RANGE**    | ** ** | **2003 PRICE RANGE** | ** ** |
|-------------------------|------------|----------------------|------------|
| ** **              | ** ** | **HIGH**             | ** ** | **LOW** | ** ** | ** ** | ** ** | **HIGH** | ** ** | **LOW** | ** ** |
| Quarter Ended           |       |                 |       |   |   | Quarter Ended |   |   |   |   |   |
| March 31, 2004     |       | $                    | 7.96       |   | $ | 6.35 |   | March 31, 2003 |   | $ | 8.34 |   | $ | 6.25 |   |
| June 30, 2004      |       | $                    | 7.49       |   | $ | 6.70 |   | June 30, 2003 |   | $ | 9.15 |   | $ | 6.33 |   |
| September 30, 2004 |       | $                    | 10.30      |   | $ | 6.90 |   | September 30, 2003 |   | $ | 9.95 |   | $ | 6.70 |   |
| December 31, 2004  |       | $                    | 10.90      |   | $ | 9.56 |   | December 31, 2003 |   | $ | 7.14 |   | $ | 6.00 |   |

 

As of June 15, 2005, there were approximately 749 stockholders ofrecord of the Class A Common Stock and 6,770,587 shares outstanding, and12 stockholders of record of the Common Stock and 380 shares outstanding.  On such date, the closing price of the Class ACommon Stock on the AMEX was $13.30.

 

The Company has not paid any dividends to common stockholders during atleast the last five years.  In January 2004,the Board of Directors of the Company formed a Special Committee to evaluatevarious strategic alternatives, one of which included the payment of anextraordinary cash dividend to stockholders. No such extraordinary dividend was paid during 2004, or is contemplatedat this time.  Certain financingarrangements limit the ability of our subsidiaries’ to pay dividends to SecurityCapital, thus limiting our ability to pay dividends to our stockholders.

 

8

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**ITEM 6.  SELECTED FINANCIAL DATA**

 

The following table sets forth certain selected consolidated financialdata for the Company.  The selectedconsolidated financial data should be read in conjunction with the consolidatedfinancial statements and the notes thereto included in Item 8. “FinancialStatements and Supplementary Data” and Item 7. “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” of this Form 10-K. Prior year financial information for theyears ended December 31, 2003, 2002 and 2001 and at December 31,2003, 2002, 2001 and 2000 has been restated to reflect adjustments for leaseaccounting as discussed in Item 7 and Note 2 of Notes to Consolidated FinancialStatements in Item 8 of this report.

 

**Statement of Operations Data:**

 
| ** **                                                                                                                                | ** ** | **YEARS ENDED DECEMBER 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(amounts  in thousands, except per share data)**                                                                                        | ** ** | **2004**                          | ** ** | **2003 (6)** | ** ** | **2002 (6)** | ** ** | **2001 (6)** | ** ** | **2000** | ** ** |
| ** **                                                                                                                                | ** ** | ** **                        | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | ** ** | ** ** |
|                                                                                                                                      |       |                              |       |   |   |   |   |   |   |   |   |
| Revenues (1)                                                                                                                              |       | $                                 | 132,940    |   | $ | 94,432 |   | $ | 72,703 |   | $ | 61,286 |   | $ | 8,145 |   |
| Selling, general and administrative  expenses                                                                                             |       | 114,315                           |       | 79,639 |   | 57,479 |   | 48,775 |   | 5,663 |   |
| Depreciation and amortization                                                                                                             |       | 3,780                             |       | 2,451 |   | 2,277 |   | 4,980 |   | 1,496 |   |
| Operating income                                                                                                                          |       | 14,845                            |       | 12,342 |   | 12,947 |   | 7,531 |   | 986 |   |
| Interest expense (2)                                                                                                                      |       | (4,351                            | )          | (1,565 | ) | (3,633 | ) | (4,162 | ) | (1,370 | ) |
| Other income (expense), net (2)                                                                                                           |       | 652                               |       | 185 |   | 881 |   | (770 | ) | (7 | ) |
| Income (loss) from continuing operations  before income taxes, minority interest and cumulative effect of change in  accounting principle |       | 11,146                            |       | 10,962 |   | 10,195 |   | 2,599 |   | (391 | ) |
| Income tax (expense) benefit                                                                                                              |       | (5,245                            | )          | (4,617 | ) | (4,114 | ) | (1,762 | ) | 212 |   |
| Minority interest                                                                                                                         |       | (1,438                            | )          | (1,087 | ) | (1,023 | ) | (254 | ) | (24 | ) |
| Income (loss) from continuing operations  before cumulative effect of change in accounting principle                                      |       | 4,463                             |       | 5,258 |   | 5,058 |   | 583 |   | (203 | ) |
| (Loss) income from discontinued operations  (3)                                                                                           |       | (1,230                            | )          | (1,969 | ) | 2,073 |   | 2,157 |   | 1,628 |   |
| Income before cumulative effect of change  in accounting principle                                                                        |       | 3,233                             |       | 3,289 |   | 7,131 |   | 2,740 |   | 1,425 |   |
| Cumulative effect of change in accounting  principle (4)                                                                                  |       | —                            |       | — |   | (3,402 | ) | — |   | — |   |
| Net income                                                                                                                                |       | 3,233                             |       | 3,289 |   | 3,729 |   | 2,740 |   | 1,425 |   |
| Less preferred stock accretion (5)                                                                                                        |       | (1,275                            | )          | (457 | ) | (401 | ) | (352 | ) | (309 | ) |
| Income available to common stockholders                                                                                                   |       | $                                 | 1,958      |   | $ | 2,832 |   | $ | 3,328 |   | $ | 2,388 |   | $ | 1,116 |   |
|                                                                                                                                      |       |                              |       |   |   |   |   |   |   |   |   |
| *Basic  earnings per common share:*                                                                                                       |       |                              |       |   |   |   |   |   |   |   |   |
| Earnings (loss) from continuing operations                                                                                                |       | $                                 | 0.49       |   | $ | 0.74 |   | $ | 0.72 |   | $ | 0.04 |   | $ | (0.08 | ) |
| (Loss) earnings from discontinued  operations                                                                                             |       | (0.19                             | )          | (0.31 | ) | 0.32 |   | 0.34 |   | 0.25 |   |
| Cumulative effect of change in accounting  principle                                                                                      |       | —                            |       | — |   | (0.52 | ) | — |   | — |   |
| Basic earnings per common share available  to common stockholders                                                                         |       | $                                 | 0.30       |   | $ | 0.43 |   | $ | 0.52 |   | $ | 0.38 |   | $ | 0.17 |   |
|                                                                                                                                      |       |                              |       |   |   |   |   |   |   |   |   |
| *Diluted  earnings per common share:*                                                                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Earnings (loss) from continuing operations                                                                                                |       | $                                 | 0.43       |   | $ | 0.68 |   | $ | 0.66 |   | $ | 0.02 |   | $ | (0.08 | ) |
| (Loss) earnings from discontinued  operations                                                                                             |       | (0.17                             | )          | (0.31 | ) | 0.29 |   | 0.31 |   | 0.25 |   |
| Cumulative effect of change in accounting  principle                                                                                      |       | —                            |       | — |   | (0.48 | ) | — |   | — |   |
| Diluted earnings per common share available  to common stockholders                                                                       |       | $                                 | 0.26       |   | $ | 0.37 |   | $ | 0.47 |   | $ | 0.33 |   | $ | 0.17 |   |
|                                                                                                                                      |       |                              |       |   |   |   |   |   |   |   |   |
| Dividends per share of common stock                                                                                                       |       | —                            |       | — |   | — |   | — |   | — |   |

 

9

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**BalanceSheet Data:**

 
| ** **                                 | ** ** | **DECEMBER 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2004**              | ** ** | **2003 (6)** | ** ** | **2002 (6)** | ** ** | **2001 (6)** | ** ** | **2000 (6)** | ** ** |
| ** **                                 | ** ** | ** **            | ** ** | **(as  restated)** | ** ** | **(as  restated)** | ** ** | **(as  restated)** | ** ** | **(as  restated)** | ** ** |
|                                       |       |                  |       |   |   |   |   |   |   |   |   |
| Total assets                               |       | $                     | 116,635    |   | $ | 123,850 |   | $ | 100,943 |   | $ | 107,472 |   | $ | 100,675 |   |
| Long-term obligations                      |       | 21,256                |       | 27,441 |   | 19,042 |   | 37,063 |   | 39,006 |   |
| Redeemable convertible preferred stock (5) |       | —                |       | 3,725 |   | 3,268 |   | 2,867 |   | 2,515 |   |
| Total stockholders’ equity            |       | 35,367                |       | 33,350 |   | 30,518 |   | 27,190 |   | 24,789 |   |
|                                            |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Growth in revenues reflect acquisitions made by the Company.  In 2004, CMI acquired KRAMMCO, Inc.,whose sole asset is a management contract with an Ohio association thatprovides association members with, among other value-added services, an Ohiogroup rating sponsor, and ICS, aprovider of insurance claims processing and administration services in theTampa, Florida area.  In October 2003,CMI acquired Octagon, a full-service claims administration and consultingservices provider for workers’ compensation, medical professional liability andgeneral liability based in California. In October 2002, CMI acquired Barron, a TPA provider of variousservices for the administration of self-insured property and casualty programsbased in Texas In April 2001, CMI acquired Trigon, a TPA in Virginia, Marylandand North Carolina.  In December 2000,the Company acquired Health Power, Inc. and CMI.  In April 1999, the Company acquiredPrimrose.

 

(2)          Interest expense in 2004 includes interest expense of $2,423 related toa $30,000 Senior Subordinated Promissory Note (the “Note”) issued in January 2004.  The Note was issued to provide us withimmediately available funds while we reviewed and analyzed various alternativestrategic uses for the proceeds.  Theinterest rate was 10% per annum, and the Note was repaid in full in September 2004.  During 2002, Primrose refinanced its debt andrecorded additional interest expense of $860 related to the write-off oforiginal issue discount and deferred financing costs associated with theoriginal debt.  The proceeds from therefinancing were used to repurchase warrants and, as a result of therepurchase, a gain of $1,334 was recorded as other income (expense), net. 

 

(3)          Discontinued operations consist of Pumpkin and Possible Dreams.  In 2004, we sold substantially all of theassets of Pumpkin and recognized an after-tax loss on the sale of $3,928.  Pumpkin had net income from operations in2004 of $1,182, resulting in a net loss from discontinued operations related toPumpkin in 2004 of $2,746.  In 2004, wealso recognized a discontinued operations gain of $1,516 from the PossibleDreams bankruptcy settlement.  Inaddition, the 2003 loss from discontinued operations includes the write-off ofa deferred tax asset of $2,420 as it was deemed no longer realizable upon thedeconsolidation of Possible Dreams.

 

(4)          During 2002, the Company completed the required transitional test forimpairment of goodwill.  As a result ofthe test, an impairment charge of $3,402 (net of tax benefit of $2,420) wasrecognized in the seasonal products segment, and the impairment charge wasreflected as a cumulative effect of a change in accounting principle as of January 1,2002 in accordance with prescribed guidance in SFAS 142.  In addition, the Company ceased recordingamortization expense relating to goodwill effective January 1, 2002.  Such amounts were $3,158 and $1,424 for theyears ended December 31, 2001 and 2000, respectively.

 

(5)          In November 2004, we redeemed all shares of our zero coupon,redeemable convertible preferred stock (“Preferred Stock”) for $10 per share,or $5,000.  Preferred Stock accretion of$1,275 was recognized in 2004 to accrete the carrying value of the PreferredStock to its redemption value.

 

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(6)          The Company restated its Consolidated Financial Statements for fiscalyears 2003 and 2002 as described in Note 2 of the Notes to ConsolidatedFinancial Statements.  In addition, statementof operations financial information for 2001 and balance sheet information atDecember 31, 2002, 2001 and 2000 have also been restated as summarized in thefollowing table:

 
| **Adjustments  to Consolidated Results of Operations Data for the  Year Ended December 31, 2001** | ** ** | **As Previously  Reported** | ** ** | **Adjustments** | ** ** | **As  Restated** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------|------------|------------------|------------|
|                                                                                                   |       |                        |       |            |       |             |       |
| Operating income                                                                                       |       | $                           | 7,729      |            | $          | (198             | )          | $ | 7,531 |   |
| Income from continuing operations                                                                      |       | 678                         |       | (95             | )          | 583              |       |
| Net income                                                                                             |       | 2,835                       |       | (95             | )          | 2,740            |       |
| Income available to common stockholders                                                                |       | 2,483                       |       | (95             | )          | 2,388            |       |
| Diluted EPS from continuing operations                                                                 |       | $                           | 0.04       |            | $          | (0.02            | )          | $ | 0.02 |   |
| Diluted EPS available to common  stockholders                                                          |       | $                           | 0.35       |            | $          | (0.02            | )          | $ | 0.33 |   |
|                                                                                                   |       |                        |       |            |       |             |       |
| **Adjustments  to Consolidated Balance Sheet Data at December 31,**                               | ** ** | **2002**                    | ** ** | **2001**        | ** ** | **2000**         | ** ** |
|                                                                                                   |       |                        |       |            |       |             |       |
| Total assets, as reported                                                                              |       | $                           | 100,711    |            | $          | 107,285          |       | $ | 100,557 |   |
| Adjustment                                                                                             |       | 232                         |       | 187             |       | 118              |       |
| Total assets, as restated                                                                              |       | $                           | 100,943    |            | $          | 107,942          |       | $ | 100,675 |   |
|                                                                                                   |       |                        |       |            |       |             |       |
| Total long-term obligations, as reported                                                               |       | $                           | 18,612     |            | $          | 36,760           |       | $ | 38,890 |   |
| Adjustment                                                                                             |       | 430                         |       | 303             |       | 116              |       |
| Total long-term obligations, as restated                                                               |       | $                           | 19,042     |            | $          | 37,063           |       | $ | 39,006 |   |
|                                                                                                   |       |                        |       |            |       |             |       |
| Total stockholders’ equity, as reported                                                           |       | $                           | 30,678     |            | $          | 27,285           |       | $ | 24,789 |   |
| Adjustment                                                                                             |       | (160                        | )          | (95             | )          | —           |       |
| Total stockholders’ equity, as restated                                                           |       | $                           | 30,518     |            | $          | 27,190           |       | $ | 24,789 |   |
|                                                                                                        |            |                             |            |                 |            |                  |            |  |  |  |  |  |  |  |

 

11

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

 

 

***Forward-Looking Statements***

 

*This filing contains “forward-looking” statements within the meaning ofthe “safe harbor” provisions of the Private Litigation Reform Act of 1995.  Such statements are based on management’scurrent expectations and are subject to a number of factors and uncertaintieswhich could cause actual results to differ materially from those described inthe forward-looking statements.** **Such factors and uncertaintiesinclude, but are not limited to: future legislative changes which could impactthe laws governing workers’ compensation and medical malpractice insurance inthe various states in which the Company’s employer cost containment and healthservices segment operates, the Company’s ability to enhance its existingservices and successfully introduce and market new services, new servicedevelopments by the Company’s competitors, market acceptance of new services ofboth the Company and its competitors, competitive pressures on prices, theability to attract and retain qualified personnel, interest rates, the Company’sability to attract qualified franchisees or access to financing for thesefranchisees, the effects on the Company if a lender to one of the Company’ssubsidiaries utilizes remedies available to it upon an event of default onloans at one of the Company’s subsidiaries, the Company’s ability to file the2004 Form 10-K and the First Quarter Form 10-Q, the Company’s abilityto regain compliance with the AMEX’s continued listing standards and decisionsrelative to and the outcome of any such decisions regarding strategicalternatives with respect to maximizing stockholder value and enhancingstockholder liquidity.*

 

The following discussion should be read in conjunction with thefinancial statements of the Company and the related notes thereto appearing inItem 8. “Financial Statements and Supplementary Data” in this Report on Form 10-K.Amounts are in thousands except share and per share amounts.

 

**CompanyOverview**

 

Security Capital operates as a holding company that activelyparticipates in the management of our subsidiaries, but also gives eachsubsidiary a certain degree of operating autonomy, with its own chief executiveofficer and senior management.  TheCompany itself is managed by Capital Partners, pursuant to the MASAgreement.  Capital Partners controlsapproximately 81% of the Company’s shares, held principally by CPI, andprovides us with management services under the MAS Agreement.  Mr. Brian Fitzgerald controls CapitalPartners and serves as our Chairman of the Board of Directors, President andChief Executive Officer.

 

As discussed in Item 1. “Business” above, we have purchased, soldor otherwise disposed of a number of businesses over the last few years.  Our current operations consist of tworeportable operating segments, Employer Cost Containment and Health Services,conducted through WC, CMI and its wholly owned subsidiaries, and EducationalServices, conducted through Primrose.  Inrecent years, we have sought to strengthen these two valuable businesses, whileat the same time shedding unneeded or unprofitable businesses.  In keeping with our management philosophy,the senior management of both WC (approximately 20%) and Primrose(approximately 1.5%) have equity participations in our businesses, as well asstock options in those subsidiaries.

 

In January 2004, we announced that our Board of Directors hadformed a Special Committee to explore strategic alternatives.  In particular, the Special Committee wascharged with considering various ways of maximizing stockholder value andproviding an opportunity for liquidity to our public stockholders.

 

We recognized that, with the costs of being a public company increasing,and only 19% of our shares in public hands, it might not make sense for us tocontinue as a publicly traded company.  Accordingly,Mr. Fitzgerald and Capital Partners submitted an offer to the SpecialCommittee in July 2004 for the public shares they did not control (the “CapitalPartners Offer”).  The Special Committee subsequentlyreceived other offers for the entire Company, including an offer in September 2004from a group that included certain current and former members of the managementof CMI, the main operating subsidiary of WC (the “CMI Management Offer”).  Both the Capital Partners Offer and the CMIManagement Offer were subsequently increased.

 

Unfortunately, the Special Committee’s ability to move forward with theprocess of exploring strategic

 

12

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alternatives andproviding a liquidity event for public stockholders was hampered by a number ofunforeseen events.  Most notably, theCompany’s management, beginning in July 2004, had to perform varioussupplemental procedures (“Supplemental Procedures”), and the Audit Committee ofthe Company’s Board of Directors, beginning in November 2004, performed andan internal independent investigation (“Investigation”) into certain related-partytransactions and conflicts of interest involving certain members of CMI’smanagement team.  The Investigation,which concluded in March 2005, caused a delay in the filing of ourquarterly report on Form 10-Q for the quarter ended September 30,2004 until March 11, 2005, and set back our work on the Company’sfinancial statements for the year ended December 31, 2004, our annualaudit and the filing of this Form 10-K. In addition, in response to an SEC letter issued to the AmericanInstitute of Certified Public Accountants in February 2005, the Company’smanagement conducted an internal review of our accounting practices withrespect to leases and leasehold improvements, concluding that variousadjustments were required, and that previously issued financial statements shouldbe restated.

 

While the exploration of strategic alternatives was ongoing, wecontinued to pursue our objectives of shedding unwanted businesses,strengthening the core WC and Primrose businesses that we viewed as our mostvaluable assets, and otherwise resolving various matters that needed to beaddressed in order to maximize the value of the Company and achieve anappropriate liquidity event for public stockholders.  Thus, in 2004, we successfully sold Pumpkinand resolved outstanding matters with respect to the bankruptcy of PossibleDreams.  We redeemed, for $5,000, ouroutstanding Preferred Stock that we had issued in 1999 in connection with ouracquisition of Primrose, in the process resolving an arbitration that had beenbrought by the holder of the Preferred Stock with respect to theredemption.  We also were successful inan appeal to the Ohio Supreme Court regarding whether certain of our WCoperations in Ohio constituted the unauthorized practice of law.

 

In addition to successfully addressing these challenges, we havecontinued to focus on building the strength of our core WC and Primrosebusinesses and delivering strong operating results for our stockholders.  We have strengthened the management at WC afterthe Company, upon the recommendation of the Audit Committee, terminated twosenior members of the CMI management team based upon the findings of theInvestigation.  We have improved ouroperating systems at WC and strengthened our controls at the subsidiarylevel.  We have continued to generatestrong operating results and cash flows at WC, in spite of the $3,000 that WChad to spend on the Supplemental Procedures and the Investigation,approximately $900 of which was included in expenses for the fourth quarter of2004, with the remainder recorded in the first quarter of 2005.  We have successfully negotiated our latestacquisition at WC – Caronia – which closed on March 31, 2005.

 

At Primrose, we have continued to expand the number of franchisees andto achieve improved operating results. During 2004, Primrose opened seven newschools, bring the total number of Primrose schools to 125.  In addition, at December 31, 2004, wehad awarded 58 additional franchise units that were in various stages ofdevelopment and construction.

 

With respect to financial matters, we have successfully refinanced the$30,000 Note that we had issued at the corporate level in January 2004 inconnection with our exploration of strategic alternatives and paid down ouroverall debt by almost $10,000 to $24,929 at December 31, 2004 from $34,889at December 31, 2003.  In March 2005,we entered into a $40,500 Credit Agreement and used the proceeds to acquireCaronia ($16,000 purchase price) and refinance existing debt.  As a result, consolidated debt at March 31,2005 increased to $40,500.

 

Recognizing that we were now a stronger and much more valuable company,and that the market for control of companies such as ours had recoveredconsiderably over the last year and one-half, in May 2005 our Board ofDirectors, upon the recommendation of the Special Committee, determined toswitch to a formal sale process to seek the highest price reasonably attainablefor the Company.  On June 6, 2005,the Board retained UBS Securities LLC to assist it in that process.

 

While there can be no assurance that the formal sale process willresult in the sale of the Company at an acceptable price, the management andBoard of Directors, including the Special Committee, believe that a formal saleprocess represents the best possibility at this time to maximize stockholdervalue.  The formal sale process will takeseveral months and will involve considerable management time, energy andcosts.  Management and our Board ofDirectors are, however, committed to the process as the best and most efficientway to provide liquidity for our stockholders. For their part, Mr. Fitzgerald and Capital Partners also fullysupport the formal sale process, have stated to the Board that they would notparticipate as a bidder in the process and have committed to sell the shares

 

13

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they control ifappropriate value is achieved in the transaction.

 

In the coming months, we will continue to actively manage WC andPrimrose, to keep them on a solid operational footing and to grow theminternally and through acquisitions as opportunities arise.  Both businesses now have strong managementand solid financial positions and are poised to produce improved operatingresults while the formal sale process continues.

 

**Internal Independent Investigation Into PotentialRelated-Party Transactions and Conflicts of Interest**

 

InJuly 2004, the Company discovered that CMI and CompManagement HealthSystems, Inc. (“CHS”, and collectively with CMI, the “CMI Companies”), whollyowned subsidiaries of WC, may have engaged in potential related-partytransactions with an entity that was controlled by certain officers of the CMICompanies (“CMI Management”).  Managementof the Company (“SCC Management”) immediately notified the Company’s AuditCommittee of these potential related-party transactions and resulting conflictsof interest and launched a review of the matter by making additional inquiriesand performing supplemental procedures (the “Supplemental Procedures”).  The Supplemental Procedures, which wereconducted through October 2004, revealed that certain members of CMIManagement owned, operated and controlled two entities that had certainunauthorized and undisclosed transactional, operational and financialrelationships with the CMI Companies.  The Supplemental Procedures also revealed thatthe unauthorized and undisclosed transactional, operational and financialrelationships with the CMI Companies resulted in conflicts of interest, but nofraud or financial impropriety that would indicate the Company’s historicalfinancial statements were misstated.  CMIManagement had either previously divested its controlling interest or, as aresult of the Supplemental Procedures, divested its controlling interest, ineach of these entities.  

 

Additionally,in November 2004, the Company’s Audit Committee initiated an internalindependent investigation (the “Investigation”) into the above-described related-partytransactions and conflicts of interest designed to investigate those matterspreviously discovered by SCC Management, to search for other instances ofpotential related-party transactions or conflicts of interest and to determinethe impact, if any, of such matters on the Company’s previously issuedfinancial statements.  To assist in theInvestigation, the Audit Committee retained independent legal counsel andforensic accounting experts.

 

TheInvestigation uncovered a third entity controlled by CMI Management thatengaged in related-party transactions with the CMI Companies.  CMI Management had previously divested itscontrolling interest in this entity.  TheInvestigation also reconfirmed the findings of the Supplemental Procedures thatthere were no instances of fraud or financial impropriety that would indicatethe Company’s historical financial statements were misstated.  The Investigation did reveal, however, that insome instances, these related-party entities used the personnel, office spaceand equipment of the CMI Companies.

 

Asa result of the findings of the Investigation, and upon the recommendation ofthe Company’s Audit Committee, the CEO and CFO/General Counsel of the CMICompanies were terminated for cause.  TheCompany has implemented enhanced controls and procedures related to theidentification and reporting of related-party transactions and conflicts ofinterest.  

 

TheInvestigation was completed in March 2005.  The total cost of the Supplemental Proceduresand Investigation was approximately $3,000. Approximately $900 of these costs were recorded in the fourth quarter of2004 and the remaining costs were recorded in the first quarter of 2005.  Apart from these costs, we do not believethat the issues uncovered are material to our financial condition, results ofoperations or cash flows.  

 

**Restatement of Financial Statements**

 

InFebruary 2005, the Office of the Chief Accountant of the SEC issued aletter to the American Institute of Certified Public Accountants expressing itsviews regarding certain lease accounting issues and their application underStatement of Financial Accounting Standards No. 13, *Accountingfor Leases* and other authoritative pronouncements (“SFAS 13”).  In light of this letter, management initiateda review of our accounting for leases and leasehold improvements and determined that our then-currentaccounting practices for leasesand leasehold improvements were incorrect in our Employer Cost Containment andHealth Services segment and at our corporate headquarters.  Accordingly, management conducted an in-depthreview of the Company’s leaseaccounting to determine the magnitudeof the potential error on the financial statements.  Based on the results of our review, wedetermined

 

14

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thatour previously issued financial statements for the years ended December 31,2003, 2002 and 2001, and each of the first three quarters of 2004 and fourquarters of 2003 should no longer be reliedupon and should therefore be restated.

 

Theimpact of the restatement on our 2001 earnings has been reflected as a $95increase to accumulated deficit as of December 31, 2001 in the accompanyingconsolidated statements of stockholders’ equity.  We have also restated the applicable statementof operations information for the year ended December 31, 2001 and balancesheet information at December 31, 2002, 2001 and 2000 in Item 6. “SelectedFinancial Data” of this report.  We havenot amended our previously filed Annual Reports on Form 10-K or QuarterlyReports on Form 10-Q for the restatement, and the financial statements andthe related financial information contained in those reports should no longerbe relied upon.  Throughout this AnnualReport on Form 10-K, including in this management’s discussion andanalysis, all referenced amounts for prior periods and prior period comparisonsreflect balances and amounts on a restated basis.

 

Theincorrect application of SFAS 13 related to the way we accounted for periods of“free-rent”, or rent holidays, contractual increases in the minimum rentalpayments and lease incentives.  Theeffect of the restatement was to decrease each of consolidated income fromcontinuing operations, net income and income available to common stockholdersby $94 and $65 for the years ended December 31, 2003 and 2002,respectively, and earnings per diluted share by $0.01 and $0.00, respectively(see Note 2 to the Consolidated Financial Statements for the effects of therestatement on our consolidated balance sheet at December 31, 2003 and onour consolidated statements of income for the years ended December 31,2003 and 2002).

 

**Proposed Sale of the Company**

 

OnJune 7, 2005, we announced that the Special Committee had recommended, andthe full Board of Directors had approved, a formal sale process of the Companyand the retention of UBS Securities LLC (“UBS”) to conduct the process.  For the past year and one-half, the SpecialCommittee has evaluated various strategic alternatives to maximize stockholdervalue and provide liquidity to our public stockholders, including the offersdescribed below, and now supports the switch to a formal sale process.  Management fully supports the recommendationof the Special Committee and the actions of the full Board and believes that aformal sale process represents the best possibility of achieving the highestprice reasonably obtainable for the stockholders of the Company.

 

Priorto the announcement of the formal sale process, Brian D. Fitzgerald, ourChairman of the Board, President and Chief Executive Officer and, throughCapital Partners, the controlling person of our majority stockholder, CPI, hadsubmitted an offer to acquire the stock that they do not control, at a price of$10.60 per share.  However, Mr. Fitzgeraldand Capital Partners, who control approximately 81% of the stock, have declaredtheir support for the formal sale process and have committed to sell the sharesthey control if appropriate value is achieved in the transaction.  As a declared seller in the formal saleprocess, Mr. Fitzgerald and Capital Partners have stated that they wouldnot participate as a bidder in such process.  In addition to the Capital Partners Offer, twoother offers to acquire the entire company for $11.00 per share and $13.00 pershare that have been submitted to the Special Committee.  The Special Committee has informed thebidders that their offers were being referred to UBS for consideration in theformal sales process.

 

**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. These critical accounting policies are described below.  For additional disclosures with respect toour significant accounting policies, see Note 4 to Consolidated FinancialStatements in this Annual Report on Form 10-K.

 

*Use of Estimates*

 

The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.  Significant estimatesinclude an allowance for doubtful accounts, allowance for uncollectibleassignment development costs, bankruptcy accruals, reserves for contingencies,the utilization of carry forward tax benefits, the determination of fair valueand economic lives of intangible assets, the estimates and assumptions inherentin our goodwill impairment testing procedures and the allocation of

 

15

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the purchase price of an acquisition to the fair value of tangible andintangible assets acquired and liabilities assumed.

 

*Revenue Recognition*

 

Revenues for the Employer Cost Containment andHealth Services segment are derived from third-party administrative services,self-insured plan administrator services, consulting services, group ratingservices, and managed care administration services.  Revenues from third-party administrativeservices, self-insured plan administrator services, consulting services andgroup rating services are recorded based on the terms and duration of therelated contracts.  Cash received inadvance of the services being provided is initially deferred and recognized asrevenue on a pro rata basis over the related contract period, which typicallyranges between three and twelve months.  Revenuesfrom managed care administration services are recognized on a monthly basisbased on the contracted administrative fee with the OBWC.  Certain contracts also provide for anincentive or bonus award based on the attainment of certain criteria stipulatedin the contracts.  Revenues fromincentive or bonus awards are recognized when they are earned andcollectibility is reasonably assured. 

 

Revenuesfrom the Educational Services segment are composed of royalties, franchisingfees, assignment fees, transfer fees, real estate services fees, forfeiturefees and tuition fees.  Royalties arereceived from franchisees based on a percentage of the school’s monthly revenueand includes fees for corporate services provided to franchisees.  Royalty revenue is recorded in the monthearned and typically collected in the subsequent month.  Franchising fees are received when a franchiseagreement is signed with a franchisee and recognized as revenue when the schoolreceives its certificate of occupancy, which is generally concurrent with thecommencement of operations.  Assignmentfees are received for pre-development services, such as site identification andthe preparation for the construction of the school, including applying for andobtaining all required building and zoning permits.  Assignment fees are recognized upon the saleof the property to the franchisee.  Realestate services fees are received for consulting services related toarchitectural and engineering design services provided to the franchisee duringthe construction of the school.  Thesefees are received when the franchise agreement is signed with a franchisee andrecognized when the school receives its certificate of occupancy.  Transfer fees are received and earned uponthe sale of an existing franchise to another franchisee.  Forfeiture fees include fees applicable tothe termination of franchise agreements or for the expiration of optionagreements.  Tuition fees are earned atthe Company-owned school and are generally billed weekly for services to beprovided in the following week.  All feesreceived in advance of the services being provided are initially deferred.  

 

Primrosewill occasionally provide existing franchisees an option to purchase afranchise in a designated geographical area for a stated period of time(typically six to twelve months) for which Primrose receives a fee.  This fee is initially deferred when received.  When the option is exercised, the option feeis credited against the amount of the franchise fee and recognized as revenuewhen the school receives its certificate of occupancy.  If the option expires, the fee is recognizedas a forfeiture fee.

 

*Receivables*

 

Receivables are composed primarily of amounts due for contract servicesprovided by WC and royalty payments due to Primrose from franchisees.  We establish an allowance for doubtfulaccounts based on customer credit evaluations, collection history and otherpertinent information. Receivables are generally not collateralized.

 

*Assignment Development Costs*

 

Assignmentdevelopment costs are recoverable costs incurred on behalf of futurefranchisees that have executed assignment agreements with Primrose forpre-development services, such as site identification and the preparation forthe construction of the school, including applying for and obtaining allrequired building and zoning permits. These costs are reimbursed by the franchisee upon the purchase of theproperty by the franchisee.  A reserve isestablished for potentially uncollectible assignment development costs based onfranchisee credit evaluations, historical experience and other pertinentinformation.  

 

*Goodwill and Identified Intangible Assets*

 

Acquisitions are accounted for under the “purchase method” wherebyacquired tangible and intangible assets and assumed liabilities are recorded atfair value.  Identified intangible assetsare amortized over their estimated useful lives.

 

16

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Goodwill is not amortized; however, it is subject to annual impairmenttesting.

 

To test goodwill for impairment, the carrying amount of the net assetsof each “reporting unit” is compared to the fair value of the reportingunit.  If the fair value of the reportingunit is greater than the carrying amount, no additional testing isrequired.  However, if the fair value ofthe reporting unit is less than its carrying amount, then the fair value of thereporting unit is allocated to the assets and liabilities of the reportingunit, including an amount for any “implied” goodwill.  If implied goodwill exceeds the net carryingamount of goodwill, no impairment loss is recorded.  Otherwise, an impairment loss is recognizedfor the difference.

 

We determine fair value of the reporting unit using a discounted cashflow approach, which requires management to make assumptions and estimates offuture cash flows of the reporting unit, the appropriate discount rate and aterminal value of the reporting unit. The discount rate used for each reporting unit is determined byassessing the appropriate risk level of the cash flows of the respectivereporting units and adjusting the risk-free rate by a factor dependent uponthis risk assessment.  The terminal periodcash flow of the respective reporting units is based upon assigning a multipleof earnings before income taxes, depreciation and amortization (“EBITDA”)consistent with companies of similar size and industry in which each of theunits operates.  With the exception ofthe impairment charge recorded in connection with the transitional test forgoodwill impairment in 2002, no impairment charges have been recognized duringthe years ended December 31, 2004, 2003 and 2002.

 

*Impairment of Long-lived Assets, Other ThanGoodwill*

 

We review long-lived assets, including identified intangible assets,for impairment in accordance with the provisions of Statement of FinancialAccounting Standards No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* (“SFAS 144”). SFAS 144 requires companies to testlong-lived assets when events or circumstances lead management to believe that thecarrying value of an asset may not be recoverable.  Recoverability is assessed based on thecarrying value of an asset and its fair value, which is generally determined bythe sum of the estimated undiscounted cash flows expected to result from theuse and eventual disposal of the asset in question.  If the fair value is less than the asset’scarrying value, an impairment loss is recognized based on the excess of thecarrying amount of the asset over its fair value.  We have not recognized any impairment losseson long-lived assets, including identified intangible assets, during each ofthe three years ended December 31, 2004, 2003 and 2002.

 

*Stock Options*

 

We measure compensation cost for stock options issued to employeesunder Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(“APB 25”).  Under APB 25, when the exercise price ofthe Company’s stock options equals the market value of the underlying stock onthe date of the grant, no compensation expense is recognized.  The Company has adopted the disclosure onlyprovisions of Statement of Financial Accounting Standards No. 123, *Accounting for Stock-Based Compensation* (“SFAS 123”),as amended by Statement of Accounting Standards No. 148, *Accounting for Stock-Based Compensation - Transitionsand Disclosure, an amendment to FASB Statement No. 123*(“SFAS 148”).

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123R”).  Under SFAS 123R, the cost of share-basedpayment awards should be recognized through earnings based on the fair value ofthe award on the grant date and the estimated number of awards expected tovest.  SFAS 123R requires this cost to berecognized over the expected vesting period. The provisions of SFAS 123R will become effective for the Company beginningJanuary 1, 2006.  SFAS 123R allowspublic companies to select from two alternative transition methods whenadopting SFAS 123R, the modified prospective application or the modifiedretrospective application.  Under themodified prospective application, the provisions of SFAS 123R are applied tonew awards and awards modified, repurchased or cancelled after the effectivedate.  Under the modified retrospectiveapplication, the provisions of SFAS 123R may be applied to (i) all awardsgranted, modified or settled in cash in fiscal years in which SFAS 123 waseffective (years beginning after December 15, 1994) or (ii) onlyinterim periods in the year of adoption unless the effective date of SFAS 123Rcoincides with a company’s fiscal year.  At this time, we have not determined theimpact of SFAS 123R on our financial statements, nor have we decided which transitionmethod to use.  

 

17

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**RESULTS OF OPERATIONS**

 

*Revenues*

 

Consolidatedrevenues 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.  Consolidated revenues for the yearended December 31, 2003 increased $21,729, or 30% to $94,432 compared torevenues of $72,703 for the year ended December 31, 2002.  Revenues by segment were as follows:

 
| ** **                                     | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                     | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                           |       |                                     |       |   |   |   |   |
| Employer Cost Containment and Health  Services |       | $                                        | 121,335    |   | $ | 84,598 |   | $ | 64,460 |   |
| Educational Services                           |       | 11,605                                   |       | 9,834 |   | 8,243 |   |
| Total revenues                                 |       | $                                        | 132,940    |   | $ | 94,432 |   | $ | 72,703 |   |

 

Revenuesfrom the Employer Cost Containment and Health Services segment for the yearended December 31, 2004 increased $36,737, or 43% to $121,335 compared to$84,598 reported for 2003. The increase was primarily driven by the acquisitionof 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 Octagon wereincluded for the entire year.  Theinclusion of Octagon for twelve months in 2004 compared to only three months in2003 resulted in additional revenue of $33,918.

 

Revenues from the Employer Cost Containment andHealth Services segment for the year ended December 31, 2003 increased$20,138, or 31% to $84,598 compared to $64,460 reported for 2002.  This increase resulted from revenues from Octagonof $9,459 for the three months following its acquisition in October 2003,additional revenue of $3,714 due to a full year of revenue from Barron, whichwas acquired in October 2002, and additional revenue of $4,045 from newcontracts entered into in late 2002 and early 2003.

 

Revenues from the Educational Services segmentfor the year ended December 31, 2004 increased $1,771, or 18% to $11,605compared to $9,834 for the same period last year.  Royalty revenues for 2004 increased $1,357,or 17% compared to 2003 due to higher same school revenue, a full yearcontribution from schools opened in 2003 and the opening of seven additionalschools during 2004.  At December 31,2004, there were 125 schools opened compared to 118 schools at December 31,2003.  Assignment revenue increased $220as there were 16 property sale closings with franchisees during 2004 comparedto five in 2003, and Company-owned school revenues increased $293 due toincreasing enrollment as the school becomes established.  These increases were partially offset bylower franchise fees of $309 as seven new schools were opened during 2004compared to 13 openings in 2003.

 

Revenues from the Educational Services segmentfor the year ended December 31, 2003 increased $1,591, or 19% to $9,834compared to $8,243 for 2002.  Thisincrease was primarily attributable to an increase in royalty revenue of $1,166,or 17% compared to the prior year, due to same school revenue increases and therevenue contributions made by the 13 new schools opened since December 31,2002.

 

*Selling, General and Administrative Expenses*

 

Consolidatedselling, general and administrative expense (“SG&A”) for the year ended December 31,2004 increased $34,676, or 44% to $114,315 compared to SG&A of $79,639 for2003.  Consolidated SG&A for the yearended December 31, 2003 increased $22,160, or 39% compared to SG&A of$57,479 for 2002.  SG&A by segmentwas as follows:

 

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| ** **                                    | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                          |       |                                     |       |   |   |   |   |
| Employer Cost Containment and Health Services |       | $                                        | 104,006    |   | $ | 71,709 |   | $ | 51,601 |   |
| Educational Services                          |       | 5,980                                    |       | 5,267 |   | 4,026 |   |
| Total segment SG&A                        |       | 109,986                                  |       | 76,976 |   | 55,627 |   |
| Corporate                                     |       | 2,779                                    |       | 1,263 |   | 579 |   |
| Management advisory fee to Capital Partners   |       | 1,550                                    |       | 1,400 |   | 1,273 |   |
| Total SG&A                                |       | $                                        | 114,315    |   | $ | 79,639 |   | $ | 57,479 |   |

 

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 twelve months in 2004 compared to only thelast three months in 2003 following its acquisition.  Also, for the year ended December 31,2004, SG&A expense included $900 for the Supplemental Procedures and the Investigationand higher audit fees of $892.

 

SG&Aexpenses in the Employer Cost Containment and Health Services segment increased$20,108, or 39% to $71,709 for the year ended December 31, 2003, comparedto $51,601 for 2002.  The increase wasprimarily due to expenses of $8,073 for Octagon for three months during 2003,additional expenses of $3,712 directly associated with the Barronoperation acquired in October 2002 and additional personnel expensesnecessary to service the new contracts entered into in late 2002 and early 2003.

 

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.  This increase was primarily attributable tohigher personnel costs due to increased headcount necessary to service the numberof franchised schools and higher expenses in our Company-owned school as aresult of increasing enrollment as the school matured.

 

SG&Aexpenses in the Educational Services segment increased $1,241, or 31% to $5,267for the year ended December 31, 2003 compared to $4,026 for 2002.  The increase was primarily due to the closingof a Company-owned school in early 2002 and the opening of a new Company-ownedschool in January 2003.  Expenses ofthe Company-owned school closed in 2002 were $320 through the date it wasclosed (May 2002), whereas total expenses in 2003 associated with thestart-up and operation of the new Company-owned school were $806.  Expenses also increased in 2003 due toincreased headcount necessary to service the number of franchised schools.

 

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.  This increase was mainly due to an increasein audit fees, legal fees, and the costs of the Special Committee.  Audit fees for corporate increased $850 dueto an increase in the hourly billing rates of our accountants, additional workincurred for the lease accounting restatement, and other factors associatedwith the planning and execution of audit procedures.  Legal fees were $383 higher than last yearmainly due to services pertaining to the review of strategic alternatives, theredemption of the Preferred Stock, the sale of Pumpkin, the settlement of thePossible Dreams bankruptcy and public filing requirements resulting from theoffers to purchase the Company, the Supplemental Procedures and the Investigationand the late filing of our quarterly and annual reports.  The costs of the Special Committee in 2004 were$580 and include costs of an investment banking firm, independent legal counseland fees paid to the Special Committee members.

 

SG&Aexpenses at our corporate headquarters increased $684, or 118% to $1,263 forthe year ended December 31, 2003 compared to $579 in 2002.  This increase was primarily due to bad debtand severance expenses of $503 relating to the Possible Dreams bankruptcy andhigher legal costs of $114.

 

Under the Company’s MAS Agreement with Capital Partners, the controllingstockholder of the Company, Capital Partners provides certain managementadvisory services related to investments, general administration, corporatedevelopment, strategic planning, stockholder relations, financial matters andgeneral business policy.  Under thecurrent MAS Agreement, we pay Capital Partners $1,550 per annum, subject toadjustment upon the occurrence of any unforeseen event.  Total management advisory fees included inSG&A were $1,550, $1,400 and $1,273 for the years ended December 31,2004, 2003 and 2002, respectively.  In2003, an investment banking fee of $150 was also paid to Capital Partners inconnection with the Octagon acquisition.

 

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*Depreciationand Amortization Expense*

 

Consolidateddepreciation and amortization expense (“D&A”) increased by $1,329, or 54%to $3,780 for the year ended December 31, 2004 compared to $2,451 for2003.  Consolidated D&A increased$174, or 8% for the year ended December 31, 2003 compared to $2,277 for2002.  D&A by segment was as follows:

 
| ** **                                     | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                     | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                           |       |                                     |       |   |   |   |   |
| Employer Cost Containment and Health  Services |       | $                                        | 3,214      |   | $ | 1,893 |   | $ | 1,699 |   |
| Educational Services                           |       | 537                                      |       | 558 |   | 578 |   |
| Total segment D&A                          |       | 3,751                                    |       | 2,451 |   | 2,277 |   |
| Corporate                                      |       | 29                                       |       | — |   | — |   |
| Total D&A                                  |       | $                                        | 3,780      |   | $ | 2,451 |   | $ | 2,277 |   |

 

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.  Thisincrease was primarily due to a full year of depreciation and amortization offixed and intangible assets acquired as part of the Octagon acquisition.

 

D&A for the Employer Cost Containment and Health Services segmentincreased $194, or 11% for the year ended December 31, 2003 from $1,699 in2002.  This was primarily due to depreciationand amortization of fixed and intangible assets acquired in the Octagonacquisition, partially offset by a decrease in depreciation and amortization expenseas certain office furniture and equipment were fully depreciated by the end of2002.

 

*InterestExpense*

 

Consolidatedinterest expense increased $2,786, or 178% to $4,351 for the year ended December 31,2004 from $1,565 for 2003.  Consolidatedinterest expense decreased $2,068, or 57% in the year ended December 31,2003 from $3,633 for 2002.

 

Borrowingsunder the WC Term Debt and WC Revolver (prior to their refinancing on March 31,2005), the Primrose Revolver and the Credit Agreement are at variable rates (asdescribed in “ – Liquidity and Capital Resources”). Borrowings under the $30,000Note issued in January 2004 were at a stated fixed rate of 10.0%(effective interest rate of 10.8%, including financing costs).

 

WCseeks to mitigate its exposure to changes in variable rates through the use ofinterest rate swaps, which effectively convert variable rate debt to fixed ratedebt.  WC has an interest rate swapagreement with a notional value of $8,500, under which it pays a fixed rate of5.85% and receives a variable rate based one-month LIBOR, and an interest rateswap with a notional value of $10,000 under which it pays a fixed rate of 3.44%and receives a variable rate based on one-month LIBOR.  During 2004, WC borrowed under itsthen-existing senior term debt (“WC Term Debt”).  The borrowings bore interest at one-monthLIBOR plus 1.75%.  The interest rateswaps effectively fix the borrowing rate on $18,500 of WC Term Debt to the weightedaverage fixed rate paid under the swaps of 4.5% plus 1.75%.    Interestexpense by segment was as follows:

 
| ** **                                     | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                     | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                           |       |                                     |       |   |   |   |   |
| Employer Cost Containment and Health  Services |       | $                                        | 1,789      |   | $ | 1,265 |   | $ | 2,067 |   |
| Educational Services                           |       | 139                                      |       | 300 |   | 1,566 |   |
| Total segment interest expense                 |       | 1,928                                    |       | 1,565 |   | 3,633 |   |
| Corporate                                      |       | 2,423                                    |       | — |   | — |   |
| Total interest expense                         |       | $                                        | 4,351      |   | $ | 1,565 |   | $ | 3,633 |   |

 

Interestexpense at the Employer Cost Containment and Health Services segment increased$524, or 41% to $1,789 for the year ended December 31, 2004 from $1,265for 2003 due to the additional debt related to the Octagon acquisition.  Interest expense at the Employer Cost Containment and HealthServices segment decreased $802, or 39% to

 

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$1,265for the year ended December 31, 2003 from $2,067 for 2002 due to lowerdebt levels for the first nine months of the year preceding the Octagonacquisition and as a result of scheduled term debt repayments and lowerborrowing rates.

 

Interestexpense at the Educational Services segment decreased $161, or 54% to $139 forthe year ended December 31, 2004 from $300 for 2003 due to the repaymentof debt during 2004.  Interestexpense decreased $1,266, or 81% to $300 for the year ended December 31,2003 from $1,566 for 2002.  In April 2002,the segment’s debt was refinanced.  As aresult of the refinancing, additional interest expense of $860 was recorded towrite off the remaining unamortized original issue discount and deferredfinancing costs associated with the debt. Also, in connection with the refinancing, the Chairman of SecurityCapital issued a personal guaranty for a portion of the debt and received aguarantee fee of $170, which was recognized as interest expense in 2002.  The guaranty was terminated on December 31,2002.

 

Interestexpense at corporate was $2,423 for the year ended December 31, 2004compared to no interest expense in 2003 due to the issuance of the Note.  The Note was issued to provide us withimmediately available funds while we reviewed various alternative strategicuses for the proceeds.  The proceeds wereheld in a collateral account and were to be released once a use of the proceedswas approved by the lender.  The interestrate was initially 10% per annum, but was scheduled to increase to 16% on September 30,2004.  The proceeds were not used and,because of the significant increase in the cost of the debt at September 30,2004, and the availability of less expensive financing alternatives, we prepaidthe Note without penalty prior to September 30, 2004.

 

*Other Income, net*

 

Other income, net for the years ended December 31,2004, 2003 and 2002 was composed of the following:

 
| ** **                            | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                  |       |                                     |       |   |   |   |   |
| Interest income                       |       | $                                        | 220        |   | $ | 84 |   | $ | 79 |   |
| Warrant income                        |       | —                                   |       | — |   | 1,334 |   |
| Unrealized gain (loss) on derivatives |       | 401                                      |       | 245 |   | (378 | ) |
| Gain on sale of land                  |       | —                                   |       | 107 |   | — |   |
| Loss on sale of marketable securities |       | —                                   |       | (251 | ) | — |   |
| Other income (expense)                |       | 31                                       |       | — |   | (154 | ) |
| Total other income, net               |       | $                                        | 652        |   | $ | 185 |   | $ | 881 |   |

 

The increase in interest income in the yearended December 31, 2004 compared to 2003 was due to interest earned on theproceeds from the Note held in escrow from January 2004 through September 2004.  The unrealized gain (loss) from derivativesresulted from changes in the fair value of our $8,500 notional value interestrate swap.  This swap has not beendesignated as a hedge for accounting purposes and, as a result, changes in thefair value of this swap are recorded as other income or expense.  The loss on marketable securities of $251 in2003 was from the sale of securities acquired in the Octagon acquisition, andwarrant income in 2002 of $1,334 was from the gain on the Primrose redemptionof bank warrants.

 

*Income Taxes*

 

Income tax expense was $5,245, $4,617 and $4,114for the years ended December 31, 2004, 2003 and 2002, respectively,representing an overall effective tax rate on continuing operations of 47.1%,42.1% and 40.4%, respectively.  Theincrease in our effective tax rates in 2004 and 2003 was due to increased statetaxes, mainly as a result of the acquisition of Octagon, which is located inCalifornia and subject to a high state tax rate, and state losses for which wereceive no benefit.

 

The effective tax rate in 2004 benefited fromstate tax credits of approximately $330 earned by WC.  The impact of these credits had the effect ofreducing our overall effective tax rate by 3.0%.  Additional state tax credits may be earned inthe future; however, the application process to receive certain state taxcredits is cumbersome and on a first-come, first-serve basis.  Accordingly, we cannot determine or estimateat this time the amount, if any, of state tax credits that will be received inthe future.

 

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While we believe that our tax return positionsare fully supportable, 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.  Inthe second quarter of 2005, the reserves established for certain positionstaken on our 2001 tax return will be reversed as management believes thesereserves are no longer necessary. Accordingly, our tax provision for 2005 will be reduced by approximately$1,600 due to the reversal of these reserves. The reversal of these reserves will not have an impact on 2005 cashflows.

 

*Discontinued Operations*

 

Discontinued operations include the results ofPumpkin and Possible Dreams as follows:

 
| ** **                                       | ** ** | **For the year ended December 31,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                             |       |                                     |       |   |   |   |   |
| Pumpkin                                          |       | $                                        | (2,746     | ) | $ | 1,143 |   | $ | 1,761 |   |
| Possible Dreams                                  |       | 1,516                                    |       | (3,112 | ) | 312 |   |
| Total (loss) income from discontinued operations |       | $                                        | (1,230     | ) | $ | (1,969 | ) | $ | 2,073 |   |

 

OnOctober 25, 2004, we consummated the sale of substantially all of the assetsof Pumpkin to Rauch Industries, Inc. (“Rauch”) for $7,000, which was subjectto a working capital adjustment. The working capital adjustment has beenfinalized, resulting in the Company’s receiving an additional payment fromRauch of $1,741.  The net loss fromPumpkin is composed of net income from operations of $1,182 and a net loss onthe sale of $3,928.

 

OnNovember 5, 2004, we entered into an agreement with the bankruptcy trusteefor Possible Dreams to resolve all outstanding claims against the Company for$442.  As a result, an after-tax gain of$1,516 was recognized as we had established reserves for potential losses andthe settlement amount was substantially less than our reserves.

 

*Cumulative Effect of Change in Accounting Principle*

 

During 2002, we completed the transitional test for impairment ofgoodwill using the two-step process prescribed by SFAS 142, and impairmentwas recognized in the former Seasonal Products segment.  The impairment charge of $3,402 (net of taxbenefit) was reflected as the cumulative effect of a change in accountingprinciple as of January 1, 2002.

 

*First Quarter 2005 Update*

 

Due to the late filing of this Form 10-K, we do not anticipatefiling our Quarterly Report on Form 10-Q for the quarter ended March 31,2005 until July 29, 2005.  However, preliminaryresults for the first quarter of 2005 indicate that revenues will be upapproximately $4,000, or 13% over the first quarter of 2004.  Revenues from the Employer CostContainment and Health Services segment will be approximately $3,400, or 12%higher than the first quarter of 2004 and revenues from the EducationalServices segment will be approximately $600, or 22% higher.  The growth in revenues in the Employer CostContainment and Health Services segment is mainly due to growth at Octagon andto a lesser extent, the impact of 2004 acquisitions.  The growth in the Educational Servicessegment is due to higher royalties, franchise fees and real estate servicesfees.  Royalty fees increasedapproximately $200, or 10% in the first quarter of 2005 compared to the firstquarter of 2004, primarily due to royalties from schools opened during2004.  Franchise fees and real estateservices fees in total increased approximately $350, as seven franchises wereawarded in the first quarter of 2005 compared to none in the first quarter of2004.

 

Netincome for the quarter ended March 31, 2005 is estimated to be approximately$1,515 compared to income from continuing operations of $1,194 for the quarterended March 31, 2004.  We compare 2005net income to 2004 income from continuing operations because net income in 2004included the results of our then-discontinued operations.  Due to the sale of Pumpkin and the settlementof the Possible Dreams bankruptcy in 2004, for 2005, we will no longer reportdiscontinued operations.  Net incomereported in the first quarter of 2004 was $622 and included a loss fromdiscontinued operations of $572.  Theestimated results for the quarter ended March 31, 2005 includeapproximately $2,100 of expenses incurred in connection with the Investigation,which concluded in March 2005.

 

22

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Thefirst quarter 2005 amounts above are preliminary and subject to change based ona more detailed review and analysis by management and the results of our firstquarter review to be conducted by our independent registered public accountingfirm.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Forthe year ended December 31, 2004, net cash flows from operations was $17,632.  This represents an increase of $5,090, or 41%compared to 2003 net cash flows from operations of $12,542.  This increase was primarily due to anincrease in unearned revenue of $4,168.  Unearnedrevenue at WC increased $2,897 in 2004 as a result of growth at Octagon and growthin the managed care operations.  WCenters into certain service contracts with terms of as much as one year andreceives advance payments for services to be provided.   Similarly, unearned revenue at Primroseincreased $1,271 as the number of prospective franchisees increased in 2004compared to 2003.  Upon the signing of afranchise agreement, prospective franchisees pay a franchise fee and a realestate services fee for services to be provided by Primrose to the prospectivefranchisee up until the school receives its certificate of occupancy.

 

Netcash flow from operations of $12,542 for the year ended December 31, 2003 decreased$2,972, or 19% from $15,514 for 2002. The decrease was due to lower operating income of $605, an increase inaccounts receivable of $737, primarily due to Octagon, and an increase in otherassets and assignment development costs totaling $879.

 

Netcash used in investing activities was $1,118, $15,970 and $5,190 for the yearsended December 31, 2004, 2003 and 2002, respectively.  Cash of $3,841 and $1,801 was used in 2004for capital expenditures and acquisitions, respectively.  These uses of cash were partially offset bynet cash of $4,524 received from discontinued operations.  Cash used in 2003 was primarily due to theacquisition of Octagon for $14,893, net of cash and investments acquired.  Capital expenditures in 2004 increasedcompared to 2003 and 2002, primarily due to facilities expansion at Octagon in2004.  Under our Credit Agreement(defined below), capital expenditures at WC cannot exceed $4,500 in 2005 and$2,500 in each fiscal year thereafter. We currently have no commitments for capital expenditures.

 

Netcash of $15,671 was used in financing activities during 2004, primarily for thenet repayment of debt of $9,960 and the redemption of all issued andoutstanding shares of Preferred Stock for $5,000.  Net cash of $11,932 was provided by financingactivities during 2003, primarily due to the debt proceeds to fund the Octagonacquisition partially offset by repayments of existing debt.  Finally, net cash of $11,851 was used infinancing activities during 2002, primarily for the repayment of debt.

 

OnMarch 31, 2005, pursuant to the terms of a stock purchase agreement, datedMarch 17, 2005, between Octagon and Continental Casualty Company, ourmajority owned subsidiary, Octagon, acquired 100% of the outstanding capitalstock of Caronia , for $16,000 in cash, subject to a working capital adjustment.  Such working capital adjustment has not beenfinalized.

 

Inconnection with the Caronia acquisition, WC entered into a Second Amended andRestated Loan Agreement (the “Credit Agreement”).  The Credit Agreement provides WC with a$40,500 five-year, fully-amortizing term loan (the “Term Loan”) and an $8,000revolving credit facility (“Amended WC Revolver”), which replaces the WCRevolver (defined below).  The Term Loanbears interest at LIBOR plus 2.5% or Prime, at the Company’s option, andborrowings

 

23

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underthe Amended WC Revolver bear interest at LIBOR plus 2% or Prime minus 0.5%, atthe Company’s option.  Principal paymentsof $675 are due monthly beginning May 1, 2005, and additional principalpayments are due each year, beginning on March 31, 2006, based on cashflow, as defined in the Credit Agreement, for the preceding fiscal year. Theproceeds of the Term Loan were used to fund the Caronia acquisition and repay theWC Term Debt.

 

AtDecember 31, 2004, WC maintained an $8,000 revolving line of credit (the “WCRevolver”), and Primrose maintained a $1,000 revolving line of credit (the “PrimroseRevolver”).  The WC Revolver was replacedwith the Amended WC Revolver on March 31, 2005.  There were no borrowings under the WCRevolver or the Primrose Revolver at December 31, 2004.  Management believes that cash flow fromoperations along with the available borrowing capacity under the Revolvers willbe sufficient to fund our operations and service our debt for the next 12 to 24months.

 

Asa result of the transactional, financial and operational relationships betweenthe CMI Companies and certain members of CMI Management, as previously describedabove, and the failure to obtain the lender’s prior written consent for certainacquisitions and other actions taken during 2004, WC was in default of certaincovenants under the WC Revolver and the WC Term Debt.  WC had obtained a waiver from the lender forthese events of default prior to the filing of its Form 10-Q for thequarter ended September 30, 2004.

 

TheTerm Loan and Amended WC Revolver contain restrictive covenants that prohibitor limit certain actions, including specified levels of capital expenditures,investments and incurrence of additional debt, and require the maintenance of aminimum 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 Credit Agreement contains provisions thatrequired WC to deliver audited financial statements for 2004 to the lender bythe end of April and require WC to deliver monthly financial statementsbeginning April 2005.  WC has obtained awaiver from the lender until June 30, 2005 to deliver audited financialstatements for 2004 and until August 31, 2005 to begin delivering monthlyfinancial statements.  WC anticipatesthat it will provide the lender with its audited financial statements prior toJune 30, 2005.

 

DuringApril 2005, we received notification from certain employees of WC (“WCShareholders”) that they wished to sell or convert to Company stock their minorityshares in WC (“Shares”) and exercise their vested options (“Vested Options”) topurchase shares of WC stock and sell or convert them to Company stock.  Under the terms of the agreement governingthese options, the per share value of WC stock is determined based on a formulastipulated in the agreement and the Company may settle these options in Companyshares or cash, at its discretion.  TheCompany has provided the WC Shareholders with the per share value calculationand notified them that it intends to settle the Shares and Vested Options forcash.  The WC Shareholders have notifiedthe Company that they do not agree with the per share value calculation.  In addition, with the recent announcementthat the Board of Directors has approved a formal sale process of the Company,the WC Shareholders have notified us that they are considering amending orrevoking their request to convert their Shares and Vested Options.  If we were to settle the Shares and VestedOptions at the fair value per share determined by the Company, we would payapproximately $4,200 to $4,300 to the WC Shareholders.

 

Priorto the announcement of the formal sale process, Brian D. Fitzgerald, ourChairman of the Board, President and Chief Executive Officer and, throughCapital Partners, the controlling person of our majority stockholder, CPI, hadsubmitted an offer to acquire the stock that they do not control, at a price of$10.60 per share.  However, Mr. Fitzgeraldand Capital Partners, who control approximately 81% of the stock, have declaredtheir support for the formal sale process and have committed to sell the sharesthey control if appropriate value is achieved in the transaction.  As a declared seller in the formal saleprocess, Mr. Fitzgerald and Capital Partners have stated that they wouldnot participate as a bidder in such process. In addition to the Capital Partners Offer,  two other offers to acquire the entire companyfor $11.00 per share and $13.00 per share that have been submitted to theSpecial Committee.  The Special Committeehas informed the bidders that their offers were being referred to UBS forconsideration in the formal sales process.

 

24

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*Contractual Obligations*

 

The table below shows our payments due undercontractual obligations at December 31, 2004 for the periods indicated.

 
| ** **       | ** ** | **Payments due by period** | ** ** |
|------------------|------------|----------------------------|------------|
| ** **       | ** ** | **Total**                  | ** ** | **2005** | ** ** | **2006-2007** | ** ** | **2008-2009** | ** ** | **Thereafter** | ** ** |
|             |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt   |       | $                          | 24,929     |   | $ | 5,970 |   | $ | 13,067 |   | $ | 5,892 |   | $ | — |   |
| Operating leases |       | 32,824                     |       | 6,527 |   | 11,291 |   | 5,894 |   | 9,112 |   |
| Management fees  |       | 1,550                      |       | 1,550 |   | — |   | — |   | — |   |
| Total            |       | $                          | 59,303     |   | $ | 14,047 |   | $ | 24,358 |   | $ | 11,786 |   | $ | 9,112 |   |

 

Operatinglease amounts do not include sublease income of $218 in 2005 and $296 in 2006-2007.  The obligation for management fees is theamount due to Capital Partners under the MAS Agreement.  The MAS Agreement is effective for thecalendar year and is automatically renewed on December 31 unless eitherparty gives at least 60 days’ prior written notice to the other.  Unless both parties decide to amend the MAS Agreement,the Agreement would renew under its then-existing terms.  Although the MAS Agreement will be revisitedin the course of the formal sales process for the Company, neither the Company norCapital Partners has any immediate plans to rescind or materially change theterms of the Agreement.  The obligationsfor long-term debt represent the minimum required principal repayments for thelong-term debt outstanding at December 31, 2004.

 

As previously mentioned, on March 31, 2005, WC entered into theCredit Agreement and used a portion of the proceeds to fund the Caroniaacquisition and the remainder of the proceeds to refinance existing debt.  Under the Credit Agreement, principalpayments of $675 are due each month beginning May 1, 2005.  Also, additional principal paymentsare due each year, beginning on March 31, 2006, based on cash flow of WC,as defined in the Credit Agreement, for the preceding fiscal year.  Accordingly, principal paymentsrequired under the Credit Agreement presented in the table below do not includeany additional principal payments that may be due based on the cash flows of WCas as we cannot, at this time,estimate the amount, if any, that may be required.

 
| ** **     | ** ** | **Payments due by period** | ** ** |
|----------------|------------|----------------------------|------------|
| ** **     | ** ** | **Total**                  | ** ** | **2005** | ** ** | **2006-2007** | ** ** | **2008-2009** | ** ** | **Thereafter** | ** ** |
|           |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt |       | $                          | 40,500     |   | $ | 5,400 |   | $ | 16,200 |   | $ | 16,200 |   | $ | 2,700 |   |
|                |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**QUARTERLY INFORMATION (UNAUDITED)**

 

The following is a summary of operating results by quarter.  The information presented below for the firstthree quarters of 2004 and the four quarters of 2003 has been restated toreflect the impact of the restatement for lease accounting.

 
| ** **                                                    | ** ** | **1st  Quarter**  | ** ** | **2nd  Quarter**  | ** ** | **3rd  Quarter**  | ** ** | **4th  Quarter** | ** ** | **TOTAL**  | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|------------|------------|
| ** **                                                    | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | ** **       | ** ** | ** ** | ** ** |
| **2004:**                                                     |       |              |       |              |       |              |       |             |       |       |       |
| Total  revenues                                               |       | $                 | 30,884     |              | $          | 32,305            |       | $                | 33,446     |       | $          | 36,305 |   | $ | 132,940 |   |
| Income from  continuing operations (1) (2)               |       | 1,194             |       | 1,157             |       | 1,185             |       | 927              |       | 4,463      |       |
| (Loss) income from discontinued operations,  net (3)          |       | (572              | )          | (247              | )          | (1,960            | )          | 1,549            |       | (1,230     | )          |
| Net income  (loss)                                            |       | 622               |       | 910               |       | (775              | )          | 2,476            |       | 3,233      |       |
| Income  (loss) available to common stockholders (4)           |       | 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 |   |

 
| ** **                                                    | ** ** | **1st  Quarter**   | ** ** | **2nd  Quarter**   | ** ** | **3rd  Quarter**   | ** ** | **4th  Quarter**   | ** ** | **TOTAL**          | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                    | ** ** | **(as  restated)** | ** ** | **(as  restated)** | ** ** | **(as  restated)** | ** ** | **(as  restated)** | ** ** | **(as  restated)** | ** ** |
|                                                          |       |               |       |               |       |               |       |               |       |               |       |
| **2003:**                                                     |       |               |       |               |       |               |       |               |       |               |       |
| Total  revenues                                               |       | $                  | 20,347     |               | $          | 20,590             |       | $                  | 21,587     |               | $          | 31,908 |   | $ | 94,432 |   |
| Income from  continuing operations                            |       | 1,366              |       | 1,145              |       | 1,073              |       | 1,674              |       | 5,258              |       |
| (Loss)  income from discontinued operations, net              |       | (1,005             | )          | (824               | )          | 153                |       | (293               | )          | (1,969             | )          |
| Net income                                                    |       | 361                |       | 322                |       | 1,226              |       | 1,380              |       | 3,289              |       |
| Income  available to common stockholders                      |       | 252                |       | 210                |       | 1,110              |       | 1,260              |       | 2,832              |       |
| Basic earnings per common share from  continuing operations   |       | $                  | 0.19       |               | $          | 0.16               |       | $                  | 0.15       |               | $          | 0.24 |   | $ | 0.74 |   |
| Diluted earnings per common share from  continuing operations |       | $                  | 0.18       |               | $          | 0.15               |       | $                  | 0.12       |               | $          | 0.22 |   | $ | 0.68 |   |
| Basic earnings per common share                               |       | $                  | 0.04       |               | $          | 0.03               |       | $                  | 0.17       |               | $          | 0.20 |   | $ | 0.43 |   |
| Diluted earnings per common share                             |       | $                  | 0.02       |               | $          | 0.02               |       | $                  | 0.14       |               | $          | 0.18 |   | $ | 0.37 |   |

 

25

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----

*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 not equal the full-year EPS.

 

(1)          Thethird and fourth quarter of 2004 includes expenses of the Special Committee of$312 and $215, respectively.  The fourthquarter also includes expenses of $900 related to the Supplemental Proceduresand the Investigation.

 

(2)          Includesinterest expense on the Note of $866, $987 and $570 for the first, second andthird quarters of 2004, respectively.

 

(3)          Thethird quarter of 2004 includes a charge of $4,020 relating to the estimatedloss on the sale of Pumpkin and the fourth quarter of 2004 includes a gain of$1,516 on the Possible Dreams settlement.

 

(4)          ThePreferred Stock was redeemed in October 2004, and the third quarterincludes accelerated accretion of $1,023 to increase the carrying value of the PreferredStock to its redemption value.  For thefull year, Preferred Stock accretion was $1,275 compared to $457 for 2003.

 

**ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

*RiskManagement*

 

Marketrisks relating to our operations result primarily from changes in the U.S.Prime interest rate or LIBOR.  Ourinterest rate risk management objective is to lower our overall borrowing costsand to mitigate the impact of changing interest rates on our net income andcash flows.  We seek to achieve ourobjective primarily through the use of interest rate swap agreements, whicheffectively convert variable rate debt to fixed rate debt.  See Item 7. “Management’s Discussion andAnalysis of Financial Condition and Results of Operations – Interest Expense”above for a discussion of our interest rate swaps.  We do not utilize interest rate swaps orother derivative financial instruments for trading or speculative purposes.

 

Theoutstanding interest rate swaps expose us to credit risk in the event that thecounterparty to the agreements does not or cannot meet its obligations.  The notional amount is used to measureinterest to be paid or received and does not represent the amount of exposureto credit loss.  The loss would belimited to the amount that would have been received, if any, over the remaininglife of the swap agreements.  Thecounterparty to the swaps is a major financial institution, which we expect tofully perform under the terms thereof.

 

*MarketRisk Sensitive Instruments*

 

Borrowingsunder the WC Term Debt and WC Revolver (prior to their refinancing on March 31,2005), the Primrose Revolver and the Credit Agreement are at variablerates.  Also, in 2004, borrowings underthe Note were at a stated fixed rate of 10.0% (effective interest rate of 10.8%,including financing costs).  The weightedaverage borrowing rates for the years ended December 31, 2004 and 2003,including the effect of the interest rate swaps, was 10.2% and 6.3%,respectively.  The increase in theweighted average borrowing rate in 2004 was due to fixed interest paid on theNote.  Assuming a one percentage pointincrease in our weighted average borrowing rate, interest expense would havebeen higher by $162 and $263 for the years ended December 31, 2004 and2003, respectively.

 

26

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**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**Index To Consolidated Financial Statements**

 
| Report of Independent Registered Public  Accounting Firm                                                         |   |
|------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets  at December 31, 2004 and 2003                                                  |   |
| Consolidated  Statements of Income for the years ended December 31, 2004, 2003 and  2002                    |   |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31,  2004, 2003 and 2002 |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2003 and  2002                |   |
| Notes to  Consolidated Financial Statements                                                                      |   |
| Schedule I—Condensed Financial  Information of Registrant                                              |   |

 

27

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

Board of Directors and Stockholders

Security Capital Corporation

 

We have audited the accompanying consolidated balance sheets ofSecurity Capital Corporation and subsidiaries (the “Company”) as of December 31,2004 and 2003, and the related consolidated statements of income, stockholders’equity, and cash flows for each of the three years in the period ended December 31,2004. Our audits also included the financial statement schedule listed inthe Index at Item 15(a). These financial statements and schedule arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements and schedule based on ouraudits.

 

We conducted our audits 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 about whetherthe financial statements are free of material misstatement. We were not engagedto perform an audit of the Company’s internal control over financialreporting.  Our audit 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 such opinion. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofSecurity Capital Corporation and subsidiaries at December 31, 2004 and2003, and the consolidated results of their operations and their cash flows foreach of the three years in the period ended December 31, 2004, inconformity with U.S. generally accepted accounting principles. Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

 

As discussed in Note 2 to the consolidated financial statements, theCompany has restated its financial statements for each of the three years inthe period ended December 31, 2004 to correct its accounting for leasesand leasehold improvements.

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

 

28

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**SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                          | ** ** | **DECEMBER 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(in thousands, except share and  per share amounts)**                                                                                                                             | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                                          | ** ** | ** **            | ** ** | **(as  restated)** | ** ** |
| **ASSETS**                                                                                                                                                                          |       |                  |       |   |   |
| Current assets:                                                                                                                                                                     |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                           |       | $                     | 12,488     |   | $ | 11,645 |   |
| Restricted cash                                                                                                                                                                     |       | 373                   |       | 117 |   |
| Accounts receivable, net                                                                                                                                                            |       | 18,340                |       | 15,496 |   |
| Assignment and development costs, net                                                                                                                                               |       | 1,548                 |       | 972 |   |
| Deferred income taxes                                                                                                                                                               |       | 2,681                 |       | 1,618 |   |
| Other current assets                                                                                                                                                                |       | 1,345                 |       | 1,543 |   |
| Current assets of discontinued operations                                                                                                                                           |       | —                |       | 4,425 |   |
| Total current assets                                                                                                                                                                |       | 36,775                |       | 35,816 |   |
| Property and equipment, net                                                                                                                                                         |       | 6,036                 |       | 4,283 |   |
| Goodwill, net                                                                                                                                                                       |       | 59,041                |       | 59,284 |   |
| Identified intangible assets, net                                                                                                                                                   |       | 12,563                |       | 13,271 |   |
| Deferred income taxes                                                                                                                                                               |       | 1,358                 |       | 3,137 |   |
| Long-lived assets of discontinued  operations                                                                                                                                       |       | —                |       | 7,044 |   |
| Other assets                                                                                                                                                                        |       | 862                   |       | 1,015 |   |
| Total assets                                                                                                                                                                        |       | $                     | 116,635    |   | $ | 123,850 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                       |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                    |       | $                     | 5,363      |   | $ | 2,859 |   |
| Accrued expenses and other liabilities                                                                                                                                              |       | 9,899                 |       | 10,288 |   |
| Income taxes payable                                                                                                                                                                |       | 8,191                 |       | 8,229 |   |
| Unearned revenue                                                                                                                                                                    |       | 24,566                |       | 20,263 |   |
| Current portion of long-term debt                                                                                                                                                   |       | 5,970                 |       | 9,031 |   |
| Current liabilities of discontinued operations                                                                                                                                      |       | —                |       | 2,678 |   |
| Total current liabilities                                                                                                                                                           |       | 53,989                |       | 53,348 |   |
| Long-term debt                                                                                                                                                                      |       | 18,959                |       | 25,858 |   |
| Other long-term obligations                                                                                                                                                         |       | 2,297                 |       | 1,271 |   |
| Long-term liabilities of discontinued  operations                                                                                                                                   |       | —                |       | 312 |   |
| Losses in excess of investment in Possible  Dreams                                                                                                                                  |       | —                |       | 1,401 |   |
| Minority interests                                                                                                                                                                  |       | 6,023                 |       | 4,585 |   |
| Redeemable convertible preferred stock,  $.01 par value, 2,500,000 shares authorized; 0 and 500,000 shares issued and  outstanding at December 31, 2004 and 2003, respectively |       | —                |       | 3,725 |   |
| Commitments and contingencies                                                                                                                                                       |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                          |       |                  |       |   |   |
| Common stock, $.01 par value, 7,500 shares  authorized; 380 shares issued and outstanding                                                                                           |       | —                |       | — |   |
| Class A common stock, $.01 par value,  10,000,000 shares authorized; 6,458,309 shares issued, 6,450,587 shares  outstanding                                                    |       | 65                    |       | 65 |   |
| Additional paid-in capital                                                                                                                                                          |       | 64,395                |       | 65,670 |   |
| Accumulated deficit                                                                                                                                                                 |       | (29,067               | )          | (32,300 | ) |
| Accumulated other comprehensive income                                                                                                                                              |       | 59                    |       | — |   |
| Less: treasury stock, at cost, 7,722 shares                                                                                                                                         |       | (85                   | )          | (85 | ) |
| Total stockholders’ equity                                                                                                                                                     |       | 35,367                |       | 33,350 |   |
| Total liabilities and stockholders’ equity                                                                                                                                     |       | $                     | 116,635    |   | $ | 123,850 |   |

 

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)**                                                                                           | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                                              | ** ** | ** **                        | ** ** | **(as  restated)** | ** ** | **(as  restated)** | ** ** |
| Revenues:                                                                                                                               |       |                              |       |   |   |   |   |
| Employer cost containment and health  services                                                                                          |       | $                                 | 121,335    |   | $ | 84,598 |   | $ | 64,460 |   |
| Educational services                                                                                                                    |       | 11,605                            |       | 9,834 |   | 8,243 |   |
| Total revenues                                                                                                                          |       | 132,940                           |       | 94,432 |   | 72,703 |   |
| Selling, general and administrative  expenses                                                                                           |       | 114,315                           |       | 79,639 |   | 57,479 |   |
| Depreciation and amortization                                                                                                           |       | 3,780                             |       | 2,451 |   | 2,277 |   |
| Operating income                                                                                                                        |       | 14,845                            |       | 12,342 |   | 12,947 |   |
| Interest expense                                                                                                                        |       | (4,351                            | )          | (1,565 | ) | (3,633 | ) |
| Other income, net                                                                                                                       |       | 652                               |       | 185 |   | 881 |   |
| Income from continuing operations before  income taxes, minority interests and cumulative effect of change in  accounting principle     |       | 11,146                            |       | 10,962 |   | 10,195 |   |
| Income tax expense                                                                                                                      |       | (5,245                            | )          | (4,617 | ) | (4,114 | ) |
| Minority interest in income of consolidated  subsidiaries                                                                               |       | (1,438                            | )          | (1,087 | ) | (1,023 | ) |
| Income from continuing operations before  cumulative effect of change in accounting principle                                           |       | 4,463                             |       | 5,258 |   | 5,058 |   |
| (Loss) income from discontinued operations  (net of income tax expense of $162, $2,351, and $660 in 2004, 2003 and 2002,  respectively) |       | (1,230                            | )          | (1,969 | ) | 2,073 |   |
| Income before cumulative effect of change  in accounting principle                                                                      |       | 3,233                             |       | 3,289 |   | 7,131 |   |
| Cumulative effect of a change in accounting  principle (net of income tax benefit of $2,420)                                            |       | —                            |       | — |   | (3,402 | ) |
| Net income                                                                                                                              |       | 3,233                             |       | 3,289 |   | 3,729 |   |
| Less preferred stock accretion                                                                                                          |       | (1,275                            | )          | (457 | ) | (401 | ) |
| Income available to common stockholders                                                                                                 |       | $                                 | 1,958      |   | $ | 2,832 |   | $ | 3,328 |   |
|                                                                                                                                    |       |                              |       |   |   |   |   |
| Net income                                                                                                                              |       | $                                 | 3,233      |   | $ | 3,289 |   | $ | 3,729 |   |
| Unrealized gain on interest rate swap, net  of taxes and minority interest of $51 and $14, respectively                                 |       | 59                                |       | — |   | — |   |
| Comprehensive income                                                                                                                    |       | $                                 | 3,292      |   | $ | 3,289 |   | $ | 3,729 |   |
|                                                                                                                                    |       |                              |       |   |   |   |   |
| *Basic  earning per common share:*                                                                                                      |       |                              |       |   |   |   |   |
| Earnings from continuing operations                                                                                                     |       | $                                 | 0.49       |   | $ | 0.74 |   | $ | 0.72 |   |
| (Loss) earnings from discontinued  operations                                                                                           |       | (0.19                             | )          | (0.31 | ) | 0.32 |   |
| Cumulative effect of change in accounting  principle                                                                                    |       | —                            |       | — |   | (0.52 | ) |
| Basic earnings per common share available  to common stockholders                                                                       |       | $                                 | 0.30       |   | $ | 0.43 |   | $ | 0.52 |   |
|                                                                                                                                    |       |                              |       |   |   |   |   |   |   |   |
| *Diluted  earnings per common share:*                                                                                                   |       |                              |       |   |   |   |   |
| Earnings from continuing operations                                                                                                     |       | $                                 | 0.43       |   | $ | 0.68 |   | $ | 0.66 |   |
| (Loss) earnings from discontinued  operations                                                                                           |       | (0.17                             | )          | (0.31 | ) | 0.29 |   |
| Cumulative effect of change in accounting  principle                                                                                    |       | —                            |       | — |   | (0.48 | ) |
| Diluted earnings per common share available  to common stockholders                                                                     |       | $                                 | 0.26       |   | $ | 0.37 |   | $ | 0.47 |   |
|                                                                                                                                    |       |                              |       |   |   |   |   |   |   |   |
| Basic weighted average shares used in  computation                                                                                      |       | 6,451                             |       | 6,451 |   | 6,451 |   |
|                                                                                                                                    |       |                              |       |   |   |   |   |
| Diluted weighted average shares used in  computation                                                                                    |       | 6,598                             |       | 6,536 |   | 7,133 |   |

 

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

 

30

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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, 2001                                                                                                      |       | 6,450,967                            |       | $                  | 65         |                             | $          | 66,528                   |       | $                                             | (39,223    | )                   | $          | —    |       | $ | (85 | ) | $ | 27,285 |   |
| Effect  on accumulated deficit from restatement of prior years’ financial statements                                             |       | —                               |       | —             |       | —                           |       | (95                      | )          | —                                        |       | —              |       | (95       | )          |
| Restated  balance, December 31, 2001                                                                                             |       | 6,450,967                            |       | 65                 |       | 66,528                           |       | (39,318                  | )          | —                                        |       | (85                 | )          | 27,190    |       |
|                                                                                                                                  |       |                                 |       |               |       |                             |       |                     |       |                                          |       |                |       |      |       |
| Net  income - restated                                                                                                                |       | —                               |       | —             |       | —                           |       | 3,729                    |       | —                                        |       | —              |       | 3,729     |       |
| Preferred  stock accretion                                                                                                            |       | —                               |       | —             |       | (401                             | )          | —                   |       | —                                        |       |                |       | (401      | )          |
| Balance,  December 31, 2002                                                                                                      |       | 6,450,967                            |       | 65                 |       | 66,127                           |       | (35,589                  | )          | —                                        |       | (85                 | )          | 30,518    |       |
|                                                                                                                                  |       |                                 |       |               |       |                             |       |                     |       |                                          |       |                |       |      |       |
| Net  income - restated                                                                                                                |       | —                               |       | —             |       | —                           |       | 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 qualifying as cash flow hedges, net of taxes and  minority interest of $51 and $14, respectively |       | —                               |       | —             |       | —                           |       | —                   |       | 59                                            |       | —              |       | 59        |       |
| Balance,  December 31, 2004                                                                                                      |       | 6,450,967                            |       | $                  | 65         |                             | $          | 64,395                   |       | $                                             | (29,067    | )                   | $          | 59        |       | $ | (85 | ) | $ | 35,367 |   |

 

----

*Includes both Common Stock and Class A Common Stock

 

 

The accompanying notes are an integral partof these consolidated financial statements.

 

31

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**SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                                | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(amounts in thousands)**                                                                                | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                | ** ** | ** **                        | ** ** | **(as  restated)** | ** ** | **(as  restated)** | ** ** |
| Cash flows from operating activities:                                                                     |       |                              |       |   |   |   |   |
| Income from continuing operations                                                                         |       | $                                 | 4,463      |   | $ | 5,258 |   | $ | 5,058 |   |
| Adjustments to reconcile income from  continuing operations to net cash provided by operating activities: |       |                              |       |   |   |   |   |
| Gain on sale of Texas land                                                                                |       | —                            |       | (107 | ) | — |   |
| Loss on sale of marketable securities                                                                     |       | —                            |       | 251 |   | — |   |
| Deferred income taxes                                                                                     |       | 779                               |       | 668 |   | 106 |   |
| Warrant income                                                                                            |       | —                            |       | — |   | 220 |   |
| Amortization                                                                                              |       | 1,774                             |       | 811 |   | 512 |   |
| Depreciation                                                                                              |       | 2,006                             |       | 1,640 |   | 1,765 |   |
| Amortization of deferred financing costs                                                                  |       | 951                               |       | 256 |   | 1,312 |   |
| Minority interest in income of consolidated  subsidiaries                                                 |       | 1,438                             |       | 1,087 |   | 1,376 |   |
| Allowances for doubtful accounts receivable  and assignment development costs                             |       | 800                               |       | 713 |   | 481 |   |
| Unrealized (gain) loss on derivative                                                                      |       | (401                              | )          | (245 | ) | 378 |   |
| Changes in operating assets and  liabilities:                                                             |       |                              |       |   |   |   |   |
| Increase in accounts receivable                                                                           |       | (3,191                            | )          | (3,135 | ) | (2,397 | ) |
| Decrease (increase) in other assets                                                                       |       | 293                               |       | (455 | ) | 290 |   |
| Increase in assignment development costs                                                                  |       | (774                              | )          | (602 | ) | (468 | ) |
| Increase in unearned revenue                                                                              |       | 4,168                             |       | 853 |   | 1,281 |   |
| Increase in accounts payable, accrued  expenses and other liabilities                                     |       | 5,326                             |       | 5,549 |   | 5,600 |   |
| Net cash provided by operating activities  of continuing operations                                       |       | 17,632                            |       | 12,542 |   | 15,514 |   |
|                                                                                                      |       |                              |       |   |   |   |   |
| Cash flows from investing activities:                                                                     |       |                              |       |   |   |   |   |
| Capital expenditures                                                                                      |       | (3,841                            | )          | (1,538 | ) | (1,807 | ) |
| Proceeds on sale of Texas land                                                                            |       | —                            |       | 107 |   | — |   |
| Net cash received from discontinued  operations                                                           |       | 4,524                             |       | 354 |   | — |   |
| Proceeds on sale of investments—Octagon                                                              |       | —                            |       | 11,402 |   | — |   |
| Acquisitions (net of acquired cash of  $4,374 in 2003)                                                    |       | (1,801                            | )          | (26,295 | ) | (3,383 | ) |
| Net cash used in investing activities of  continuing operations                                           |       | (1,118                            | )          | (15,970 | ) | (5,190 | ) |
|                                                                                                      |       |                              |       |   |   |   |   |
| Cash flows from financing activities:                                                                     |       |                              |       |   |   |   |   |
| Proceeds from long-term borrowings                                                                        |       | 30,000                            |       | 18,978 |   | 4,240 |   |
| Repayments of long-term borrowings and  capital leases                                                    |       | (39,960                           | )          | (6,156 | ) | (14,613 | ) |
| Repurchase of warrants                                                                                    |       | —                            |       | — |   | (1,554 | ) |
| Redemption of preferred stock                                                                             |       | (5,000                            | )          | — |   | — |   |
| Deferred financing costs incurred                                                                         |       | (711                              | )          | (3 | ) | (212 | ) |
| Proceeds from lines of credit                                                                             |       | 16,507                            |       | 28,051 |   | 24,478 |   |
| Repayment of lines of credit                                                                              |       | (16,507                           | )          | (28,938 | ) | (24,190 | ) |
| Net cash (used in) provided by financing  activities of continuing operations                             |       | (15,671                           | )          | 11,932 |   | (11,851 | ) |
| Increase (decrease) in cash and cash  equivalents                                                         |       | 843                               |       | 8,504 |   | (1,527 | ) |
| Cash and cash equivalents, beginning of  year                                                             |       | 11,645                            |       | 3,141 |   | 4,668 |   |
| Cash and cash equivalents, end of year                                                                    |       | $                                 | 12,488     |   | $ | 11,645 |   | $ | 3,141 |   |
|                                                                                                      |       |                              |       |   |   |   |   |
| Interest paid                                                                                             |       | $                                 | 3,504      |   | $ | 1,926 |   | $ | 3,479 |   |
|                                                                                                      |       |                              |       |   |   |   |   |
| Income taxes paid                                                                                         |       | $                                 | 4,343      |   | $ | 709 |   | $ | 498 |   |

 

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

 

32

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**SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2004**

**(Amounts in thousands, except share and pershare amounts, 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 31,2004, we operated two subsidiaries, WC Holdings, Inc. (“WC”) and PrimroseHoldings, Inc. (“Primrose”).  WC isan 80%-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.  WC’s activitiesare primarily centered in California, Ohio, Virginia, Maryland, Texas, Michigan,Florida, Washington and Minnesota.  Primroseis a 98.5%-owned subsidiary involved in the franchising of educationalchildcare centers, with related activities in real estate consulting and siteselection services. At December 31, 2004, Primrose schools are located inthe Southeast, Southwest and Midwest.

 

PumpkinMasters Holdings, Inc. (“Pumpkin”) was a wholly owned subsidiary engagedin the business of designing and distributing Halloween-oriented pumpkincarving kits and related accessories throughout the United States and inCanada.  During the fourth quarter of2003, we committed to a plan to sell the operations of Pumpkin and,accordingly, for all periods presented, the net assets and results ofoperations of Pumpkin were reported as a discontinued operation.  As discussed in Note 7, we sold the assets ofPumpkin in October 2004.

 

P.D.Holdings, Inc. (“Possible Dreams”) was a 75%-owned subsidiary thatformerly operated as a designer, importer and distributor of giftware andcollectible figurines.  In October 2003,Possible Dreams filed for bankruptcy protection under Chapter 11 of theBankruptcy Code, at which time we no longer had control over this subsidiaryand, therefore, excluded the accounts of Possible Dreams from our consolidatedfinancial statements.  For the periodsprior to the bankruptcy filing, Possible Dreams was reported as a discontinuedoperation.  As discussed in Note 7, wesettled all outstanding claims against the Company with the bankruptcy Trusteein November 2004.

 

Wehad two reportable operating segments at December 31, 2004.  The Employer Cost Containment and HealthServices segment consists of WC, and the Educational Services segment consistsof Primrose.  See Note 19 for furtherdetails regarding our reportable operating segments.

 

**2.****                                     ****Restatement of FinancialStatements for Accounting for Leases and Leasehold Improvements**

 

InFebruary 2005, the Office of the Chief Accountant of the Securities andExchange Commission (“SEC”) issued a letter to the American Institute ofCertified Public Accountants expressing its views regarding certain leaseaccounting issues and their application under Statement of Financial AccountingStandards No. 13, *Accounting for Leases*and other authoritative pronouncements (“SFAS 13”).  In light of this letter, management initiateda review of our accounting for leases and leasehold improvements and determined that our then-currentaccounting practices for leasesand leasehold improvements were incorrect in our Employer Cost Containment andHealth Services segment and at our corporate headquarters.  Accordingly, management conducted an in-depthreview of the Company’s leaseaccounting to determine the magnitudeof the potential error on the financial statements.  Based on the results of our review, wedetermined that our previously issued financial statements at December 31,2003 and for the years ended December 31, 2003 and 2002 should no longer be relied upon and shouldtherefore be restated.

 

Theincorrect application of SFAS 13 related to the way we accounted for periods of“free-rent”, or rent holidays, contractual increases in the minimum rentalpayments and lease incentives.  Theeffect of the restatement was to decrease each of consolidated income fromcontinuing operations, net income and income available to common stockholdersby $94 and $65 for the years ended December 31, 2003 and 2002,respectively, and earnings per diluted share available to common stockholders by$0.01 and $0.00, respectively.  Theimpact of the restatement also affected our 2001 earnings and has beenreflected as a $95 increase to accumulated deficit as of December 31, 2001in the accompanying consolidated statements of stockholders’ equity.  The restatement had no impact on net revenueor cash flows

 

33

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Thefollowing is a summary of the effects of the restatement on our consolidated statementsof income for the years ended December 31, 2003 and 2002 and on ourconsolidated balance sheet at December 31, 2003.

 
| ** **                                                                    | ** ** | **Year ended December 31, 2003** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                    | ** ** | **As  previously  reported**          | ** ** | **Lease  adjustments** | ** ** | **As restated** | ** ** |
|                                                                          |       |                                  |       |   |   |   |   |
| Revenues:                                                                     |       |                                  |       |   |   |   |   |
| Employer cost containment and health  services                                |       | $                                     | 84,598     |   | $ | — |   | $ | 84,598 |   |
| Educational services                                                          |       | 9,834                                 |       | — |   | 9,834 |   |
| Total revenues                                                                |       | 94,432                                |       | — |   | 94,432 |   |
| Selling, general and administrative  expenses                                 |       | 79,459                                |       | 180 |   | 79,639 |   |
| Depreciation and amortization                                                 |       | 2,441                                 |       | 10 |   | 2,451 |   |
| Operating income                                                              |       | 12,532                                |       | (190 | ) | 12,342 |   |
| Interest expense                                                              |       | (1,565                                | )          | — |   | (1,565 | ) |
| Other income, net                                                             |       | 185                                   |       | — |   | 185 |   |
| Income from continuing operations before  income taxes and minority interests |       | 11,152                                |       | (190 | ) | 10,962 |   |
| Income tax expense                                                            |       | (4,693                                | )          | 76 |   | (4,617 | ) |
| Minority interest in income of consolidated  subsidiaries                     |       | (1,107                                | )          | 20 |   | (1,087 | ) |
| Income from continuing operations                                             |       | 5,352                                 |       | (94 | ) | 5,258 |   |
| Loss from discontinued operations (net of  income tax expense $2,351)         |       | (1,969                                | )          | — |   | (1,969 | ) |
| Net income                                                                    |       | 3,383                                 |       | (94 | ) | 3,289 |   |
| Less preferred stock accretion                                                |       | (457                                  | )          | — |   | (457 | ) |
| Income available to common stockholders                                       |       | $                                     | 2,926      |   | $ | (94 | ) | $ | 2,832 |   |
|                                                                          |       |                                  |       |   |   |   |   |
| *Basic  earning per common share:*                                            |       |                                  |       |   |   |   |   |
| Earnings from continuing operations                                           |       | $                                     | 0.76       |   | $ | (0.02 | ) | $ | 0.74 |   |
| Loss from discontinued operations                                             |       | (0.31                                 | )          | — |   | (0.31 | ) |
| Basic earnings per common share available  to common stockholders             |       | $                                     | 0.45       |   | $ | (0.02 | ) | $ | 0.43 |   |
|                                                                          |       |                                  |       |   |   |   |   |
| *Diluted  earnings per common share:*                                         |       |                                  |       |   |   |   |   |
| Earnings from continuing operations                                           |       | $                                     | 0.69       |   | $ | (0.01 | ) | $ | 0.68 |   |
| Loss from discontinued operations                                             |       | (0.31                                 | )          | — |   | (0.31 | ) |
| Diluted earnings per common share available  to common stockholders           |       | $                                     | 0.38       |   | $ | (0.01 | ) | $ | 0.37 |   |

 

34

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| ** **                                                                                                                          | ** ** | **Year ended December 31, 2002** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **As  previously  reported**          | ** ** | **Lease  adjustments** | ** ** | **As restated** | ** ** |
|                                                                                                                                |       |                                  |       |   |   |   |   |
| Revenues:                                                                                                                           |       |                                  |       |   |   |   |   |
| Employer cost containment and health  services                                                                                      |       | $                                     | 64,460     |   | $ | — |   | $ | 64,460 |   |
| Educational services                                                                                                                |       | 8,243                                 |       | — |   | 8,243 |   |
| Total revenues                                                                                                                      |       | 72,703                                |       | — |   | 72,703 |   |
| Selling, general and administrative  expenses                                                                                       |       | 57,352                                |       | 127 |   | 57,479 |   |
| Depreciation and amortization                                                                                                       |       | 2,267                                 |       | 10 |   | 2,277 |   |
| Operating income                                                                                                                    |       | 13,084                                |       | (137 | ) | 12,947 |   |
| Interest expense                                                                                                                    |       | (3,633                                | )          | — |   | (3,633 | ) |
| Other income, net                                                                                                                   |       | 881                                   |       | — |   | 881 |   |
| Income from continuing operations before  income taxes, minority interests and cumulative effect of change in  accounting principle |       | 10,332                                |       | (137 | ) | 10,195 |   |
| Income tax expense                                                                                                                  |       | (4,169                                | )          | 55 |   | (4,114 | ) |
| Minority interest in income of consolidated  subsidiaries                                                                           |       | (1,040                                | )          | 17 |   | (1,023 | ) |
| Income from continuing operations before  cumulative effect of change in accounting principle                                       |       | 5,123                                 |       | (65 | ) | 5,058 |   |
| Income from discontinued operations (net of  income tax expense $660)                                                               |       | 2,073                                 |       | — |   | 2,073 |   |
| Income before cumulative effect of change  in accounting principle                                                                  |       | 7,196                                 |       | (65 | ) | 7,131 |   |
| Cumulative effect of change in accounting  principle (net of tax benefit of $2,420)                                                 |       | (3,402                                | )          | — |   | (3,402 | ) |
| Net income                                                                                                                          |       | 3,794                                 |       | (65 | ) | 3,729 |   |
| Less preferred stock accretion                                                                                                      |       | (401                                  | )          | — |   | (401 | ) |
| Income available to common stockholders                                                                                             |       | $                                     | 3,393      |   | $ | (65 | ) | $ | 3,328 |   |
|                                                                                                                                |       |                                  |       |   |   |   |   |
| *Basic  earning per common share:*                                                                                                  |       |                                  |       |   |   |   |   |
| Earnings from continuing operations                                                                                                 |       | $                                     | 0.73       |   | $ | (0.01 | ) | $ | 0.72 |   |
| Earnings from discontinued operations                                                                                               |       | 0.32                                  |       | — |   | 0.32 |   |
| Cumulative effect of change in accounting  principle                                                                                |       | (0.52                                 | )          | — |   | (0.52 | ) |
| Basic earnings per common share available  to common stockholders                                                                   |       | $                                     | 0.53       |   | $ | (0.01 | ) | $ | 0.52 |   |
|                                                                                                                                |       |                                  |       |   |   |   |   |
| *Diluted  earnings per common share:*                                                                                               |       |                                  |       |   |   |   |   |
| Earnings from continuing operations                                                                                                 |       | $                                     | 0.66       |   | $ | — |   | $ | 0.66 |   |
| Earnings from discontinued operations                                                                                               |       | 0.29                                  |       | — |   | 0.29 |   |
| Cumulative effect of change in accounting  principle                                                                                |       | (0.48                                 | )          | — |   | (0.48 | ) |
| Diluted earnings per common share available  to common stockholders                                                                 |       | $                                     | 0.47       |   | $ | — |   | $ | 0.47 |   |

 

35

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| ** **                                                                                                                       | ** ** | **December 31, 2003**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                       | ** ** | **As  previously  reported** | ** ** | **Lease  adjustments** | ** ** | **As restated** | ** ** |
|                                                                                                                             |       |                         |       |   |   |   |   |
| **ASSETS**                                                                                                                       |       |                         |       |   |   |   |   |
| Current assets:                                                                                                                  |       |                         |       |   |   |   |   |
| Cash and cash equivalents                                                                                                        |       | $                            | 11,645     |   | $ | — |   | $ | 11,645 |   |
| Restricted cash                                                                                                                  |       | 117                          |       | — |   | 117 |   |
| Accounts receivable, net                                                                                                         |       | 15,496                       |       | — |   | 15,496 |   |
| Assignment and development costs, net                                                                                            |       | 972                          |       | — |   | 972 |   |
| Deferred income taxes                                                                                                            |       | 1,618                        |       | — |   | 1,618 |   |
| Other current assets                                                                                                             |       | 1,543                        |       | — |   | 1,543 |   |
| Current assets of discontinued operations                                                                                        |       | 4,425                        |       | — |   | 4,425 |   |
| Total current assets                                                                                                             |       | 35,816                       |       | — |   | 35,816 |   |
| Property and equipment, net                                                                                                      |       | 4,196                        |       | 87 |   | 4,283 |   |
| Goodwill, net                                                                                                                    |       | 59,284                       |       | — |   | 59,284 |   |
| Identified intangible assets, net                                                                                                |       | 13,271                       |       | — |   | 13,271 |   |
| Deferred income taxes                                                                                                            |       | 2,928                        |       | 209 |   | 3,137 |   |
| Long-lived assets of discontinued  operations                                                                                    |       | 7,044                        |       | — |   | 7,044 |   |
| Other assets                                                                                                                     |       | 1,015                        |       | — |   | 1,015 |   |
| Total assets                                                                                                                     |       | $                            | 123,554    |   | $ | 296 |   | $ | 123,850 |   |
|                                                                                                                             |       |                         |       |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                    |       |                         |       |   |   |   |   |
| Current liabilities:                                                                                                             |       |                         |       |   |   |   |   |
| Accounts payable                                                                                                                 |       | $                            | 2,859      |   | $ | — |   | $ | 2,859 |   |
| Accrued expenses and other liabilities                                                                                           |       | 10,288                       |       | — |   | 10,288 |   |
| Income taxes payable                                                                                                             |       | 8,229                        |       | — |   | 8,229 |   |
| Unearned revenue                                                                                                                 |       | 20,263                       |       | — |   | 20,263 |   |
| Current portion of long-term debt                                                                                                |       | 9,031                        |       | — |   | 9,031 |   |
| Current liabilities of discontinued  operations                                                                                  |       | 2,678                        |       | — |   | 2,678 |   |
| Total current liabilities                                                                                                        |       | 53,348                       |       | — |   | 53,348 |   |
| Long-term debt                                                                                                                   |       | 25,858                       |       | — |   | 25,858 |   |
| Other long-term obligations                                                                                                      |       | 662                          |       | 609 |   | 1,271 |   |
| Long-term liabilities of discontinued  operations                                                                                |       | 312                          |       | — |   | 312 |   |
| Losses in excess of investment in Possible  Dreams                                                                               |       | 1,401                        |       | — |   | 1,401 |   |
| Minority interests                                                                                                               |       | 4,644                        |       | (59 | ) | 4,585 |   |
| Redeemable convertible preferred stock                                                                                           |       | 3,725                        |       | — |   | 3,725 |   |
|                                                                                                                             |       |                         |       |   |   |   |   |
| Commitments and contingencies                                                                                                    |       |                         |       |   |   |   |   |
|                                                                                                                             |       |                         |       |   |   |   |   |
| Stockholders’ equity:                                                                                                       |       |                         |       |   |   |   |   |
| Common stock, $.01 par value, 7,500 shares  authorized; 380 shares issued and outstanding                                        |       | —                       |       | — |   | — |   |
| Class A common stock, $.01 par value,  10,000,000 shares authorized; 6,458,309 shares issued, 6,450,587 shares  outstanding |       | 65                           |       | — |   | 65 |   |
| Additional paid-in capital                                                                                                       |       | 65,670                       |       | — |   | 65,670 |   |
| Accumulated deficit                                                                                                              |       | (32,046                      | )          | (254 | ) | (32,300 | ) |
| Accumulated other comprehensive income                                                                                           |       | —                       |       | — |   | — |   |
| Less: treasury stock, at cost, 7,722 shares                                                                                      |       | (85                          | )          | — |   | (85 | ) |
| Total stockholders’ equity                                                                                                  |       | 33,604                       |       | (254 | ) | 33,350 |   |
| Total liabilities and stockholders’ equity                                                                                  |       | $                            | 123,554    |   | $ | 296 |   | $ | 123,850 |   |

 

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**3.****                                     ****Internal Independent Investigation Into Potential Related-PartyTransactions and Conflicts of Interest**

 

InJuly 2004, the Company discovered that CompManagement, Inc. (“CMI”)and CompManagement Health Systems, Inc. (“CHS”, and collectively with CMI,the “CMI Companies”), wholly owned subsidiaries of WC, may have engaged inpotential related-party transactions with an entity that was controlled bycertain officers of the CMI Companies (“CMI Management”).  Management of the Company (“SCC Management”)immediately notified the Company’s Audit Committee of these potential related-partytransactions and resulting conflicts of interest and launched a review of thematter by making additional inquiries and performing supplemental procedures (the“Supplemental Procedures”).  TheSupplemental Procedures, which were conducted through October 2004,revealed that certain members of CMI Management owned, operated and controlledtwo entities that had certain unauthorized and undisclosed transactional,operational and financial relationships with the CMI Companies.  The Supplemental Procedures also revealedthat the unauthorized and undisclosed transactional, operational and financialrelationships with the CMI Companies resulted in conflicts of interest, but nofraud or financial impropriety that would indicate the Company’s historicalfinancial statements were misstated.  CMIManagement had either previously divested its controlling interest or, as aresult of the Supplemental Procedures, divested its controlling interest ineach of these entities.

 

InNovember 2004, the Company’s Audit Committee initiated an internal independentinvestigation (the “Investigation”) into the above-described related-partytransactions and conflicts of interest designed to investigate those matterspreviously discovered by SCC Management, to search for other instances ofpotential related-party transactions or conflicts of interest and to determinethe impact, if any, of such matters on the Company’s previously issuedfinancial statements.  To assist in theInvestigation, the Audit Committee retained independent legal counsel andforensic accounting experts.

 

TheInvestigation uncovered a third entity controlled by CMI Management thatengaged in related-party transactions with the CMI Companies.  CMI Management had previously divested itscontrolling interest in this entity.  TheInvestigation also confirmed the findings of the Supplemental Procedures thatthere were no instances of fraud or financial impropriety that would indicatethe Company’s historical financial statements were misstated.  The Investigation did reveal, however, that,in some instances, these related-party entities used the personnel, officespace and equipment of the CMI Companies.

 

Asa result of the findings of the Investigation, and upon the recommendation ofthe Company’s Audit Committee, the CEO and CFO/General Counsel of the CMICompanies were terminated for cause.  TheCompany has implemented enhanced controls and procedures related to theidentification and reporting of related-party transactions and conflicts ofinterest.

 

TheInvestigation was completed in March 2005. The total cost of the Supplemental Procedures and Investigation was$3,000.  Approximately $900 of thesecosts was recorded in the fourth quarter of 2004.  The remaining costs were recorded in thefirst quarter of 2005.  Apart from thesecosts, we do not believe that the issues uncovered are material to ourfinancial condition, results of operations or cash flows.

 

**4.****                                      SignificantAccounting Policies**

 

*Consolidation*

 

The accompanying consolidated financial statements include the accountsof Security Capital and its subsidiaries and have been prepared in accordancewith U.S. generally accepted accounting principles (“GAAP”).  All intercompany balances have beeneliminated in consolidation.  Certainprior year amounts have been reclassified to conform to the current yearpresentation.

 

*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 allowance for doubtful accounts,allowance for uncollectible assignment development costs, bankruptcy accruals, reservesfor contingencies, the utilization of carry forward tax benefits, thedetermination of fair value and economic lives of intangible assets, theestimates and

 

37

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assumptions inherent in our goodwill impairment testing procedures andthe allocation of the purchase price of an acquisition to the fair value oftangible and intangible assets acquired and liabilities assumed.

 

*Revenue Recognition*

 

Revenues for the Employer Cost Containment andHealth Services segment are derived from third-party administrative services,self-insured plan administrator services, consulting services, group ratingservices and managed care administration services.  Revenues from third-party administrativeservices, self-insured plan administrator services, consulting services andgroup rating services are recorded based on the terms and duration of therelated contracts.  Cash received inadvance of services being provided is initially deferred and recognized asrevenue on a pro rata basis over the related contract periods, which typicallyranges between three and twelve months.  Revenuesfrom managed care administration services are recognized on a monthly basisbased on the contracted administrative fee with the Ohio Bureau of Workers’Compensation (“OBWC”).  In addition,certain contracts provide for an incentive or bonus award based on certaincriteria stipulated in the contracts.  Revenuesfrom incentive or bonus awards are recognized when they are earned andcollectibility is reasonably assured.

 

Revenuesfrom the Educational Services segment are composed of royalties, franchisingfees, assignment fees, transfer fees, real estate services fees, forfeiturefees and tuition fees.  Royalties arereceived from franchisees based on a percentage of the school’s monthly revenueand includes fees for corporate services provided to franchisees.  Royalty revenue is recorded in the monthearned and typically collected in the subsequent month.  Franchising fees are received when afranchise agreement is signed with a franchisee and recognized as revenue whenthe school receives its certificate of occupancy, which is generally concurrentwith the commencement of operations. Assignment fees are received for pre-development services, such as siteidentification and the preparation for the construction of the school,including applying for and obtaining all required building and zoning permits.  Assignment fees are recognized upon the sale ofthe property to the franchisee.  Realestate services fees are received for consulting services related toarchitectural and engineering design services provided to the franchisee duringthe construction of the school.  Thesefees are received when the franchise agreement is signed with a franchisee andrecognized when the school receives its certificate of occupancy.  Transfer fees are received and earned uponthe sale of an existing franchise to another franchisee.  Forfeiture fees include fees applicable tothe termination of franchise agreements or for the expiration of optionagreements.  Tuition fees are earned atthe Company-owned school and are generally billed weekly for services to beprovided in the following week.  All feesreceived in advance of the services being provided are initially deferred.

 

Primrosewill occasionally provide existing franchisees an option to purchase afranchise in a designated geographical area for a stated period of time (typicallysix to twelve months) for which Primrose receives a fee.  This fee is initially deferred whenreceived.  When the option is exercised,the option fee is credited against the amount of the franchise fee andrecognized as revenue when the school receives its certificate ofoccupancy.  If the option expires, thefee 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 when purchased to be cash equivalents.  All cash equivalents are carried at cost,which approximates fair value.

 

*Restricted Cash*

 

Restricted cash includes amounts collected from franchisees foradvertising and development costs.  Theagreements with franchisees allow Primrose to collect up to 2% of thefranchisees’ monthly gross revenue for advertising and development costs.  The amounts received are held in a restrictedaccount and Primrose is obligated to spend the funds in accordance with termsof the franchisee agreements.  A correspondingliability has been recorded in accrued expenses and other liabilities.

 

*Receivables*

 

Receivables are composed primarily of amounts due for contract servicesprovided by WC and royalty payments due to Primrose from franchisees.  We establish an allowance for doubtfulaccounts based on customer credit evaluations, collection history and otherpertinent information. Receivables are generally not collateralized.

 

38

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A summary of the changes in the allowance fordoubtful accounts for the years ended December 31, 2004, 2003 and 2002 isas follows:

 
| ** **                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |     |       |
| Balance at beginning of year |       | $        | 807        |     | $          | 458      |       | $ | 224 |   |
| Provisions                   |       | 602      |       | 610      |       | 244      |       |
| Deductions                   |       | (294     | )          | (261     | )          | (10      | )          |
| Balance at end of year       |       | $        | 1,115      |     | $          | 807      |       | $ | 458 |   |

 

*Assignment Development Costs*

 

Assignmentdevelopment costs are recoverable costs incurred on behalf of futurefranchisees that have executed assignment agreements with Primrose forpre-development services, such as site identification and the preparation forthe construction of the school, including applying for and obtaining allrequired building and zoning permits. These costs are reimbursed by the franchisee upon the purchase of the propertyby the franchisee.  A reserve isestablished for potentially uncollectible assignment development costs based onfranchisee credit evaluations, historical experience and other pertinentinformation.

 

A summary of the changes in the allowance for uncollectible assignmentdevelopment costs for the years ended December 31, 2004, 2003 and 2002 isas follows:

 
| ** **                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |     |       |
| Balance at beginning of year |       | $        | 192        |     | $          | 200      |       | $ | 64 |   |
| Provisions                   |       | 198      |       | 103      |       | 237      |       |
| Deductions                   |       | (54      | )          | (111     | )          | (101     | )          |
| Balance at end of year       |       | $        | 336        |     | $          | 192      |       | $ | 200 |   |

 

*Property and Equipment*

 

Property and equipment are stated at cost,less accumulated depreciation and are depreciated using the straight-linemethod over their estimated useful lives. Computer equipment and software are generally depreciated over three tofive years, machinery and equipment are generally depreciated over three toseven years and furniture and fixtures are generally depreciated over three toseven years.  Leasehold improvements aredepreciated over the shorter of the estimated life of the improvement or thelease term, which ranges from five to 15 years.  Property and equipment, net of accumulateddepreciation, at December 31, 2004 and 2003 was as follows:

 
| ** **                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |
| Buildings and improvements      |       | $        | 1,391      |     | $          | 814 |   |
| Computer equipment and software |       | 7,866    |       | 6,547    |       |
| Machinery and equipment         |       | 423      |       | 192      |       |
| Furniture and fixtures          |       | 3,058    |       | 1,720    |       |
| Gross cost                      |       | 12,738   |       | 9,273    |       |
| Less accumulated depreciation   |       | (6,702   | )          | (4,990   | )          |
| Net cost                        |       | $        | 6,036      |     | $          | 4,283 |   |

 

*Goodwill and Identified Intangible Assets*

 

Acquisitions are accounted for under the “purchase method” wherebyacquired tangible and intangible assets and assumed liabilities are recorded atfair value.  Identified intangible assetsare amortized over their estimated useful lives.  Goodwill is not amortized; however, it issubject to annual impairment testing.

 

To test goodwill for impairment, the carrying amount of the net assetsof each “reporting unit” is compared to the fair value of the reportingunit.  If the fair value of the reportingunit is greater than the carrying amount, no additional testing isrequired.  However, if the fair value ofthe reporting unit is less than its carrying amount, then the fair value of the

 

39

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reporting unit is allocated to the assets and liabilities of thereporting unit, including an amount for any “implied” goodwill.  If implied goodwill exceeds the net carryingamount of goodwill, no impairment loss is recorded.  Otherwise, an impairment loss is recognizedfor the difference.

 

We determine fair value of the reporting unit using a discounted cashflow approach, which requires management to make assumptions and estimates offuture cash flows of the reporting unit, the appropriate discount rate and aterminal value of the reporting unit. The discount rate used for each reporting unit is determined byassessing the appropriate risk level of the cash flows of the respectivereporting units and adjusting the risk-free rate by a factor dependent uponthis risk assessment.  The terminalperiod cash flow of the respective reporting units is based upon assigning amultiple of earnings before income taxes, depreciation and amortization (“EBITDA”)consistent with companies of similar size and industry in which each of theunits operates.  With the exception ofthe impairment charge recorded in connection with the transitional test forgoodwill impairment in 2002, no impairment charges have been recognized duringthe years ended December 31, 2004, 2003 and 2002.

 

*Impairment of Long-lived Assets, Other ThanGoodwill*

 

We review long-lived assets, including identified intangible assets,for impairment in accordance with the provisions of Statement of FinancialAccounting Standards No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* (“SFAS 144”).  SFAS 144 requires companies to testlong-lived assets when events or circumstances lead management to believe thatthe carrying value of an asset may not be recoverable.  Recoverability is assessed based on thecarrying value of an asset and its fair value, which is generally determined bythe sum of the estimated undiscounted cash flows expected to result from theuse and eventual disposal of the asset in question.  If the fair value is less than the asset’scarrying value, an impairment loss is recognized based on the excess of thecarrying amount of the asset over its fair value.  We have not recognized any impairment losseson long-lived assets, including identified intangible assets, during each ofthe three years ended December 31, 2004, 2003 and 2002.

 

*Fair Value of Financial Instruments, OtherThan Derivative Financial Instruments*

 

Financial instruments include cash and cash equivalents, restrictedcash, accounts receivable, assignment development costs, accounts payable,accrued expenses, unearned revenue and long-term debt.  The carrying values of cash and cashequivalents, restricted cash, accounts receivable, assignment developmentcosts, accounts payable, accrued expenses and unearned revenue approximatesfair value due to the short-term nature of these items.  Long-term debt bears interest at currentmarket rates and, accordingly, its carrying values approximate fair value.

 

*Derivative Financial Instruments*

 

Our use of derivative financial instruments is currently limited tointerest rate swap agreements utilitized to mitigate exposure to changes ininterest rates on variable rate debt.  Wedo not use derivatives for trading or speculative purposes.  All derivative instruments are recorded atfair value, which is obtained from a major financial institution based oncurrent market prices of similar instruments. For those instruments designated as hedges, to the extent the derivativefinancial instrument provides an effective hedge, changes in the fair marketvalue are recorded in the consolidated balance sheets as other comprehensiveincome or loss, a component of stockholders’ equity.  Any ineffectiveness is recorded in theconsolidated statements of income as other income or expense.  Changes in fair market value of thoseinstruments not designated as hedges are recorded in the consolidatedstatements of income as other income or expense. The fair value of derivativesat December 31, 2004 and December 31, 2003 is $137 and $662,respectively, and is recorded as other long-term obligations in theconsolidated balance sheets.

 

*Advertising Costs*

 

Advertising costs are expensed when incurred and were $172, $211 and$290 for the years ended December 31, 2004, 2003 and 2002, respectively.

 

*Stock Options*

 

The Company measures compensation cost for stock options issued toemployees using the intrinsic value method of accounting for stock-basedcompensation under Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(“APB 25”).  Under APB 25, when the exercise price ofthe Company’s stock options equals the market

 

40

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value of the underlying stock on the date of the grant, no compensationexpense is recognized.  The Company hasadopted the disclosure only provisions of Statement of Financial Accounting StandardsNo. 123, *Accounting for Stock-BasedCompensation* (“SFAS 123”), as amended by Statement of FinancialAccounting Standards No. 148, *Accountingfor Stock-Based Compensation - Transitions and Disclosure, an amendment to FASBStatement No. 123*(“SFAS 148”).

 

The following table is presented in accordance with SFAS 148 andillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS 123.

 
| ** **                                                                                                                                   | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                   | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                                                   | ** ** | ** **                       | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| ** **                                                                                                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income, as reported                                                                                                                      |       | $                                | 3,233      |   | $ | 3,289 |   | $ | 3,729 |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effects and  minority interest           |       | —                           |       | — |   | — |   |
| Deduct: Stock-based employee compensation  expense determined under the fair value method, net of related tax effects  and minority interest |       | (590                             | )          | (860 | ) | (787 | ) |
|                                                                                                                                         |       |                             |       |   |   |   |   |
| Pro forma net income                                                                                                                         |       | $                                | 2,643      |   | $ | 2,429 |   | $ | 2,942 |   |
| Preferred stock accretion                                                                                                                    |       | (1,275                           | )          | (457 | ) | (401 | ) |
| Pro forma income available to common  stockholders                                                                                           |       | $                                | 1,368      |   | $ | 1,972 |   | $ | 2,541 |   |
|                                                                                                                                         |       |                             |       |   |   |   |   |
| Basic earnings per common share available  to common stockholders:                                                                           |       |                             |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                                | 0.30       |   | $ | 0.43 |   | $ | 0.52 |   |
| Pro forma                                                                                                                                    |       | $                                | 0.21       |   | $ | 0.31 |   | $ | 0.39 |   |
|                                                                                                                                         |       |                             |       |   |   |   |   |
| Diluted earnings per common share available  to common stockholders:                                                                         |       |                             |       |   |   |   |   |
| As reported                                                                                                                                  |       | $                                | 0.26       |   | $ | 0.37 |   | $ | 0.47 |   |
| Pro forma                                                                                                                                    |       | $                                | 0.17       |   | $ | 0.25 |   | $ | 0.37 |   |

 

Thefair value of options was estimated at the date of grant using a Black-Scholesoption pricing model with the following weighted average assumptions:

 
| ** **              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free interest rate |       | 4.2      | %          | 3.7      | %          | 4.9      | %          |
| Dividend yield          |       | 0        | %          | 0        | %          | 0        | %          |
| Volatility              |       | 39.5     | %          | 22.8     | %          | 20.7     | %          |
| Expected life           |       | 5.0      |       | 4.3      |       | 7.5      |       |

 

The Black-Scholes option pricing model was developed for use inestimating the fair value of traded options which have no vesting restrictionsand are fully transferable. In addition, option pricing models require theinput of highly subjective assumptions, including the expected stock pricevolatility. Because the Company’s employee stock options have characteristicssignificantly different from those of traded options, and because changes inthe subjective input assumptions can materially affect the fair value estimate,in management’s opinion the existing models do not necessarily provide areliable single measure of the fair value of the Company’s employee stockoptions.

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123R”).  Under SFAS 123R, share-based payment awardsresult in a cost that should be measured at fair value on the awards’ grantdates, based on the estimated number of awards expected to vest.  SFAS 123R requires this cost to be recognizedthrough earnings over that expected vesting period.  The provisions of SFAS 123R will become effectivefor the Company beginning January 1, 2006. SFAS 123R allows public companies to select from two alternativetransition methods when adopting SFAS 123R, the modified prospectiveapplication or the modified retrospective application.  Under the modified prospective application,the provisions of SFAS 123R are applied to new awards and awards modified,repurchased, or cancelled after the effective date.  Under the modified retrospective application,the provisions of SFAS 123R may be applied to (i) all awards granted,modified or settled in cash in fiscal years in which SFAS 123 was effective(years beginning after December 15, 1994) or (ii) only interimperiods in the year of adoption unless the effective date of SFAS 123Rcoincides with a

 

41

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company’sfiscal year.   At this time, we have notdetermined the impact of SFAS 123R on our financial statements, nor have wedecided which transition method to use.

 

*Income Taxes*

 

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.  A valuation allowance is recorded when it ismore likely than not that the asset will not be realized.

 

*Earnings Per Common Share*

 

Basicearnings per common share (“EPS”) are derived by dividing income available tocommon stockholders by the weighted average shares outstanding.  Diluted EPS assumes the potential dilutionfrom the exercise of employee stock options in Company stock and in stock of subsidiarycompanies.  The assumed exercise of stockoptions of subsidiary companies has the effect of reducing our earnings (“dilutedearnings”) as our overall ownership interest in the subsidiary companies, andthus our share of the net income of the subsidiaries, would be reduced.  Diluted EPS are derived by dividing theapplicable diluted earnings by the weighted average shares outstanding plus thedilutive effect, if any, of outstanding stock options and the Preferred Stock.  Weightedaverage shares outstanding include the weighted average number of Common and Class ACommon shares outstanding because the two classes are identical except forcertain transfer restrictions.

 

**5.****                                      Acquisitions**

 

Duringthe first quarter of 2004, WC acquired 100% of the stock of KRAMMCO, Inc.,an Ohio corporation, for $984 (including acquisition costs of $9).  KRAMMCO, Inc. is a management companywhose sole asset is a management contract with the North American Employer’sCouncil, Inc. (“NAEC”), an Ohio not-for-profit corporation.  NAEC is an Ohio association that providesassociation members with, among other value-added services, an Ohio grouprating sponsor.  The entire purchaseprice was allocated to customer lists and is being amortized over seven years.  Additionally, a deferred tax liability forthe difference between the book basis and tax basis of the customer list of$406 was recognized with the offset recorded to goodwill.

 

During the second quarter of 2004, WC acquired 100%of the stock of Integrated Claims Strategies (“ICS”) for $800 plus acquisitioncosts of $17 and assumed $180 of net liabilities.  ICS provides insurance claims processing andadministration services in the Tampa, Florida area.  The preliminary allocation of the purchaseprice is as follows:

 
| Accounts receivable acquired |   | $    | 95     |   |
|------------------------------|--------|------|--------|--------|
| Goodwill                     |   | 997  |   |
| Current liabilities assumed  |   | (275 | )      |
| Cash payment                 |   | $    | 817    |   |

 

In October 2003, WC, through its subsidiary, CMI, acquired all ofthe outstanding shares of Octagon Risk Services, Inc. (“Octagon”) for$30,000.  Octagon, based in Oakland,California, provides workers’ compensation and professional liability claimsadministration and consulting services primarily in the western United States,including California.  The Octagonacquisition was intended to expand the Company’s geographical presence in the UnitedStates.

 

The acquisition was accounted for as a purchase, and the purchase priceof $30,000, plus $914 of acquisition costs, was allocated to the fair values ofassets acquired and liabilities assumed at the date of acquisition.  During 2004, we obtained additionalinformation with respect to the fair value of certain assets acquired andliabilities assumed that resulted in changes to the preliminary purchase priceallocation.  None of the changes to thepurchase price allocation was recorded through earnings.  The final purchase price allocation is asfollows:

 

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| 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 pro forma financial information presents thecombined results from continuing operations of the Company and Octagon as ifthe Octagon acquisition had taken place on January 1, 2002.  The pro forma amounts give effect to certainadjustments, including the amortization of intangibles, increased interestexpense and income tax effects.  This proforma information does not necessarily reflect the results of operations asthey would have been if the business had been managed by the Company duringthese periods and is not indicative of results that may be obtained in thefuture.

 
| ** **                                                          | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **2003**                     | ** ** | **2002** | ** ** |
| ** **                                                          | ** ** | **(as restated)**            | ** ** | **(as restated)** | ** ** |
|                                                                |       |                         |       |   |   |
| Revenues                                                            |       | $                            | 120,811    |   | $ | 102,908 |   |
| Income from continuing operations                                   |       | 4,563                        |       | 3,904 |   |
| Net income                                                          |       | 2,594                        |       | 2,575 |   |
| Income available to common stockholders                             |       | 2,137                        |       | 2,174 |   |
|                                                                |       |                         |       |   |   |
| Basic earnings per common share from  continuing operations         |       | $                            | 0.63       |   | $ | 0.54 |   |
| Basic earnings per common share available  to common stockholders   |       | $                            | 0.33       |   | $ | 0.34 |   |
|                                                                |       |                         |       |   |   |
| Diluted earnings per common share from  continuing operations       |       | $                            | 0.58       |   | $ | 0.48 |   |
| Diluted earnings per common share available  to common stockholders |       | $                            | 0.27       |   | $ | 0.31 |   |

 

The results of operations for all acquisitions are included in ourconsolidated financial statements from the acquisition date.

 

**6.****                                      Goodwilland Identified Intangible Assets**

 

The changes in the carrying amount of goodwill for 2004 were as follows:

 
| ** **                        | ** ** | **Employer Cost  Containment  and Health  Services** | ** ** | **Educational  Services** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|---------------------------|------------|-----------|------------|
|                              |       |                                                 |       |                      |       |      |       |
| Balance at December 31, 2003 |       | $                                                    | 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 to goodwill in 2004 include $406from the acquisition of KRAMMCO, Inc., $997 from the acquisition of ICSand a purchase price adjustment of $364 relating to the 2002 acquisition ofBarron Risk Management Services. Deductions represent net purchase price adjustments related to the 2003acquisition of Octagon.

 

The Company’s identified intangible assets include franchiseagreements, customer lists, proprietary curriculum and trademarks.  Franchise agreements represent the valueallocated to the franchise agreements in effect at the time we acquiredPrimrose.  This amount is being amortizedon a straight-line basis over 21 years.  Customerlists are being amortized on a straight-line basis over five to sevenyears.  Proprietary curriculum is beingamortized on a straight-line basis over 10 years,

 

43

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and trademarks are amortized on a straight-line basis over 15years.  The following table displays thedetails of identified intangible assets:

 
| ** **                         | ** ** | **Franchise  Agreements** | ** ** | **Customer  Lists** | ** ** | **Proprietary  Curriculum** | ** ** | **Trademarks** | ** ** | **Total** | ** ** |
|------------------------------------|------------|---------------------------|------------|---------------------|------------|-----------------------------|------------|----------------|------------|-----------|------------|
| **Gross Cost**                     |       |                      |       |                |       |                        |       |           |       |      |       |
| Balance at beginning of year       |       | $                         | 8,750      |                | $          | 6,678                       |       | $              | 313        |      | $          | 76 |   | $ | 15,817 |   |
| Additions                          |       | —                    |       | 984                 |       | 76                          |       | 6              |       | 1,066     |       |
| Balance at end of period           |       | 8,750                     |       | 7,662               |       | 389                         |       | 82             |       | 16,883    |       |
|                               |       |                      |       |                |       |                        |       |           |       |      |       |
| **Accumulated Amortization**       |       |                      |       |                |       |                        |       |           |       |      |       |
| Balance at beginning of year       |       | (1,970                    | )          | (429                | )          | (121                        | )          | (26            | )          | (2,546    | )          |
| Amortization                       |       | (416                      | )          | (1,312              | )          | (39                         | )          | (7             | )          | (1,774    | )          |
| Balance at end of period           |       | (2,386                    | )          | (1,741              | )          | (160                        | )          | (33            | )          | (4,320    | )          |
|                               |       |                      |       |                |       |                        |       |           |       |      |       |
| Net cost at December 31, 2004 |       | $                         | 6,364      |                | $          | 5,921                       |       | $              | 229        |      | $          | 49 |   | $ | 12,563 |   |

 

Estimatedamortization expense for each of the years 2005 – 2009 is $1,960, $1,924,$1,759, $1,482 and $1,111, respectively.

 

**7.****                                      DiscontinuedOperations**

 

Discontinued operations are composed of theresults of operations of Pumpkin and Possible Dreams as follows:

 
| ** **                                        | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                        | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                              |       |                                     |       |   |   |   |   |
| Pumpkin                                           |       | $                                        | (2,746     | ) | $ | 1,143 |   | $ | 1,761 |   |
| Possible Dreams                                   |       | 1,516                                    |       | (3,112 | ) | 312 |   |
| Total (loss) income from discontinued  operations |       | $                                        | (1,230     | ) | $ | (1,969 | ) | $ | 2,073 |   |

 

OnOctober 25, 2004, Pumpkin Ltd., our wholly owned subsidiary and the parentcompany of Pumpkin, consummated the sale of substantially all of the assets ofPumpkin to Rauch Industries, Inc. (“Rauch”) for $7,000, subject to aworking capital adjustment.  The workingcapital adjustment has been finalized resulting in the Company receiving anadditional payment from Rauch of $1,741. The net loss from Pumpkin is composed of net income from operations of$1,182 and a net loss on the sale of $3,928.

 

In July 2003, we sold a 25% interest in Possible Dreams fornominal consideration to the newly-named CEO of Possible Dreams.  A net charge of $2,420 was recognized towriteoff a deferred tax asset which could no longer be utilized as a result ofthe sale of the 25% interest.  Inaddition, because the Company’s investment in this subsidiary was negative, thesale of a minority interest generated a gain which was deferred at the time ofsale because the minority interest shareholder had no legal obligation to fundhis share of Possible Dreams’ net deficit.

 

OnNovember 5, 2004, we entered into an agreement with the bankruptcy trusteeto liquidate all outstanding claims against the Company for $442.  As a result, an after-tax gain of $1,516,which included the deferred gain from the sale of a minority interest describedabove, was recognized during 2004.

 

Revenues from discontinued operations were $10,500, $21,600 and $29,700for the years ended December 31, 2004, 2003 and 2002, respectively, andthe assets and liabilities of discontinued operations at December 31, 2003consisted of the following:

 
| Cash                                              |   | $      | 534    |   |
|---------------------------------------------------|--------|--------|--------|--------|
| Accounts receivable, net                          |   | 2,584  |   |
| Inventory                                         |   | 1,076  |   |
| Other assets                                      |   | 231    |   |
| Current assets of discontinued operations         |   | $      | 4,425  |   |
|                                              |   |   |   |   |
| Property, plant and equipment, net                |   | $      | 388    |   |
| Intangible assets, net                            |   | 6,656  |   |
| Long-lived assets of discontinued  operations     |   | $      | 7,044  |   |
|                                              |   |   |   |
| Notes payable                                     |   | $      | 1,812  |   |
| Accounts payable and accrued expenses             |   | 866    |   |
| Current liabilities of discontinued  operations   |   | $      | 2,678  |   |
|                                              |   |   |   |
| Long-term liabilities of discontinued  operations |   | $      | 312    |   |

 

44

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**8.****                                      Debt**

 

AtDecember 31, 2004 and 2003, debt consisted of the following:

 
| ** **                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |
| WC Holdings Senior Term Loan |       | $        | 24,929     |     | $          | 31,480 |   |
| Primrose Term Loan           |       | —   |       | 2,928    |       |
| WC Holdings Note Payable     |       | —   |       | 481      |       |
| Total debt                   |       | 24,929   |       | 34,889   |       |
| Less: current portion        |       | 5,970    |       | 9,031    |       |
| Long-term debt               |       | $        | 18,959     |     | $          | 25,858 |   |

 

WCHoldings Senior Term Loan (“WC Term Debt”) bears interest at Prime minus 0.5%or one-month LIBOR plus 1.75%, at our option. Principal and interest payments were payable monthly through 2008;however, in March 2005, the WC Term Debt was refinanced (see below forfurther details).

 

ThePrimrose Term Loan was payable in quarterly installments through December 31,2004 and bore interest at LIBOR plus2.5% or Prime plus 0.5%, at our option. This loan was repaid in full in 2004.

 

TheWC Holdings Note Payable was due in annual installments of principal andinterest through May 31, 2004 with interest imputed at 8%.  This note was repaid in full in 2004.

 

Scheduled maturities at December 31, 2004 of long-term debt forthe next five years were as follows:

 
| 2005 |   | $      | 5,970  |   |
|------|--------|--------|--------|--------|
| 2006 |   | 6,338  |   |
| 2007 |   | 6,729  |   |
| 2008 |   | 5,892  |   |
| 2009 |   | — |   |

 

AtDecember 31, 2004, WC maintained an $8,000 revolving line of credit (the “WCRevolver”), and Primrose maintained a $1,000 revolving line of credit (the “PrimroseRevolver”).  There were no borrowingsunder the WC Revolver or the Primrose Revolver at December 31, 2004.  Borrowingsunder the WC Revolver bore interest at LIBOR plus 1.75% and the WC Revolver wasscheduled to expire in December 2006. Borrowings under the Primrose Revolver bear interest at LIBOR plus 2.0%or Prime, at our option, and the Primrose Revolver expires in December 2005.

 

TheWC Term Debt, WC Revolver, and Primrose Revolver each contain restrictivecovenants that prohibit or limit certain actions, including specified levels ofcapital expenditures, investments and incurrence of additional debt, andrequire the maintenance of a minimum fixed charge ratio.  Most borrowings are secured by a pledge ofsubstantially all assets at the subsidiary level, as well as a pledge of theCompany’s ownership in the subsidiary.  Asa result of the transactional, financial and operational relationships betweenthe CMI Companies and certain members of CMI Management, as previously describedabove, and the failure to obtain the lender’s prior written consent for certainacquisitions and other actions taken during 2004, WC was in default of certaincovenants under the WC Revolver and the WC Term Debt.  WC had obtained a waiver from the lender forthese events of default prior to the filing of its Form 10-Q

 

45

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forthe quarter ended September 30, 2004.

 

**9.****                                      DerivativeFinancial Instruments**

 

Wehave an interest rate swap agreement with a notional value of $8,500, whicheffectively converts $8,500 of variable rate debt to fixed rate debt.  Under the terms of the swap, we pay a fixedrate of 5.85% and receive a variable rate based on one-month LIBOR.  The swap has not been designated as a hedge forfinancial accounting purposes, therefore changes in its fair value are recordedthrough earnings.  Changes in the fairvalue of the interest rate swap resulted in a gain of $401 and $245 for theyears ended December 31, 2004 and 2003, respectively, and a loss of $378for the year ended December 31, 2002. This interest rate swap agreement is with a major financial institution,which we expect to fully perform under the terms thereof.  The interest rate swap expires in December 2005.

 

Duringthe first quarter of 2004, we entered into an interest rate swap with anotional value of $10,000, which effectively converts $10,000 of variable ratedebt to fixed rate debt.  Under the termsof this swap agreement, we pay a fixed rate of 3.44% and receive a variable ratebased on one-month LIBOR.  This swap hasbeen designated as a cash flow hedge for financial accounting purposes and, tothe extent the swap provides an effective hedge, changes in the fair value ofthe swap are recorded in other comprehensive income, a component ofstockholders’ equity.  Ineffectiveness isrecorded through earnings.  There was noineffectiveness recorded through earnings for the twelve months ended December 31,2004.  This interest rate swap agreementis with a major financial institution, which we expect to fully perform underthe terms thereof.  The interest rateswap expires in 2009.

 

The changes in the fair value of the interest rate swaps were asfollows:

 
| ** **                                                       | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **2004**                         | ** ** | **2003** | ** ** |
|                                                             |       |                             |       |   |   |
| Fair market value at beginning of the year                       |       | $                                | (662       | ) | $ | (907 | ) |
| Gain recorded through earnings                                   |       | 401                              |       | 245 |   |
| Change in fair value recorded through  stockholders’ equity |       | 124                              |       | — |   |
| Fair market value at end of the year                             |       | $                                | (137       | ) | $ | (662 | ) |

 

**10.****                               RedeemableConvertible Preferred Stock**

 

The Company had issued 500,000 shares of zerocoupon, redeemable convertible preferred stock (“Preferred Stock”) that had astated 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 at the greater of liquidation valuein the event of a liquidation or upon the earlier of (1) the date Primrose’sEBITDA exceeded $8,500 on a latest twelve month basis on or after April 2002,(2) on April 6, 2004 at a ratio of actual EBITDA for the mostrecently completed fiscal year over $8,500 multiplied by $5,000 or (3) on April 6,2006.  The Preferred Stock had aliquidation preference of $10 per share paid before the common stockholders inthe event of a liquidation or change of control.  The difference between the carrying value ofthe Preferred Stock and the redemption value was accreted using the interestmethod over the remaining estimated period to redemption by charges toadditional paid-in capital.  On November 10,2004, we redeemed all shares of Preferred Stock at a redemption price of $10per share.  For 2004, the consolidatedstatements of operations reflect Preferred Stock accretion of $1,275 to accretethe carrying value of the Preferred Stock to its redemption value.

 

**11.****                               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 transfer of shares of the Class ACommon stock is prohibited to a person who is, or would thereby become, aholder of 4.75% or more of the fair market value of the Common Stock and the Class ACommon Stock.

 

The Company has not paid any dividends to common stockholders duringthe last five years.  In January 2004,our Board of Directors formed a Special Committee to evaluate various strategicalternatives, one of which included the payment of an extraordinary cashdividend to stockholders.  No suchextraordinary dividend was paid during 2004, or is contemplated at thistime.  Certain financing arrangementslimit the ability of our subsidiaries’ to pay dividends to Security Capital,thus limiting our ability to pay dividends to our stockholders.

 

46

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**12.****                               MinorityOwnership**

 

The owners of the minority interests in WC (20.0%) and Primrose (1.5%)have entered into agreements with the Company providing for restrictions on thetransfer of such shares, and other related share restrictions.

 

**13.****                               EmployeeBenefit Plans**

 

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 elect tomake pre-tax contributions of up to 15% of their eligible earnings.  The subsidiary companies also make matchingcontributions.  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 1.5% of eligible compensation.  Effective January 1, 2005, Primrose’smatching contribution was increased to equal 50% of each participant’scontribution up to 3% of eligible compensation. The aggregate matching contributions were $1,162, $750 and $565 for theyears ended December 31, 2004, 2003 and 2002, respectively.

 

**14.****                               Long-TermIncentive Plan**

 

Wemaintain a stockholder-approved stock incentive plan (the “Incentive Plan”), wherebycertain employees and non-employee directors are eligible to receive stockoptions, stock appreciation rights, limited stock appreciation rights in tandemwith stock options, restricted stock, deferred stock and stock granted as abonus or in lieu of other awards (collectively, “Awards”).  The Board of Directors administers the IncentivePlan and has full authority, among other things, to select participants to whomAwards will be granted, determine the type and number of Awards to be granted,the exercise price of the Award and all other relevant provisions, including,but not limited to forfeiture, vesting, restrictions on exercises, andtransferability of the Award.  Awards aretypically granted at the fair market value of our Class A Common Stock onthe date of the grant and expire 10 years from the date of grant.  Non-employee directors receive options topurchase 24,000 shares upon election to the Board of Directors. AtDecember 31, 2004, the Company had reserved 123,346 shares of Class A CommonStock for future Awards.

 

A summary of stock option activity for the years ended December 31,2004, 2003 and 2002 is as follows:

 
| ** **                                 | ** ** | **Shares** | ** ** | **Weighted  average  exercise price** | ** ** |
|--------------------------------------------|------------|------------|------------|---------------------------------------|------------|
|                                       |       |       |       |                                  |       |
| Awards outstanding, January 1, 2002   |       | 810,000    |       | $                                     | 7.83       |   |
| Granted                                    |       | 24,000     |       | 9.65                                  |       |
| Exercised                                  |       | —     |       | —                                |       |
| Forfeited                                  |       | —     |       | —                                |       |
| Awards outstanding, January 1, 2003   |       | 834,000    |       | 7.88                                  |       |
| Granted                                    |       | 15,000     |       | 8.00                                  |       |
| Exercised                                  |       | —     |       | —                                |       |
| Forfeited                                  |       | —     |       | —                                |       |
| Awards outstanding, January 1, 2004   |       | 849,000    |       | 7.88                                  |       |
| Granted                                    |       | 24,000     |       | 10.00                                 |       |
| Exercised                                  |       | —     |       | —                                |       |
| Forfeited                                  |       | (30,000    | )          | 9.43                                  |       |
| Awards outstanding, December 31, 2004 |       | 843,000    |       | $                                     | 7.89       |   |

 

47

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The following table summarizes information about stock optionsoutstanding and exercisable at December 31, 2004:

 
| ** **                 | ** ** | **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              |       | 525,000                       |       | 5.5                                                            |       | $ | 6.13 |   | 424,800 |   | $ | 6.13 |   |
| $9.65 - $10.31             |       | 72,000                        |       | 7.8                                                            |       | 9.99 |   | 56,000 |   | 9.98 |   |
| $10.85 - $12.69            |       | 246,000                       |       | 6.6                                                            |       | 11.03 |   | 157,200 |   | 11.13 |   |
| Total                      |       | 843,000                       |       | 6.0                                                            |       | $ | 7.89 |   | 638,000 |   | $ | 7.70 |   |

 

The weighted average fair value of stock options granted in 2004, 2003and 2002 was $4.11, $3.20 and $4.32, respectively.

 

At December 31, 2004, we had issued stock options to employees ofWC to acquire 921 shares of WC at an exercise price of $694.00 per share and stockoptions to acquire 100 shares at an exercise price of $1,626.00 per share.  These options were granted at the fair marketvalue of a share of stock in WC, as determined by the Company and approved bythe Board.  The options vest betweenthree and five years and expire on the tenth anniversary of the grant date.  The option grant for 100 shares at an exerciseprice of $1,626.00 per share vests over eight years but provides foraccelerated vesting if certain goals and objectives are obtained.  At December 31, 2004, options to acquire866 shares of stock in WC were exercisable at a weighted average exercise priceof $721.00, and there were 422 shares available for future issuance. Theoptions may be settled in either Security Capital stock or cash, at the optionof the Company.  If all such outstandingoptions had been vested and exercised for WC stock at December 31, 2004, ourownership share of WC would have been 74.7%.  On January 3, 2005, an additional 206options to acquire WC stock at a price of $694 were canceled and available forfuture issuance.

 

We have issued stock options to employees of Primrose to acquire1,675.56 common shares of Primrose at an exercise price of $500.00 per shareand options to acquire 585 shares at an exercise price of $701.51.  These options were granted at the fair marketvalue of a share of stock in Primrose on the date of grant, as determined bythe Company, and approved by the Board. The options vest between three and five years and expire on the tenthanniversary of the grant date.  At December 31,2004, options to acquire 2,026.56 shares of stock in Primrose were exercisableat a weighted average exercise price of $534.90 per share, and there were 339.44shares available for future issuance.  Theoptions may be settled in either Security Capital stock or cash, at the optionof the Company.  If all outstandingoptions had been vested and exercised for Primrose stock at December 31,2004, our ownership share of Primrose would have been 90.6%.

 

In 2004, we established a deferred compensation plan (the “Octagon Plan”)for key employees of Octagon.  AnAdministrative Committee has been appointed to administer the Octagon Plan and theCommittee has the authority, among other things, to determine those employeeswho will participate in the Octagon Plan, approve the performance goals thateach participant will be measured against, determine whether those goals wereachieved, and the amount to be awarded to each participant.  The amount each participant can be awarded isbased on a percentage of their eligible compensation (as defined), but thetotal amount awarded to all participants cannot exceed 10% of OctagonEBITDA.  The amounts awarded toparticipants vest 50% after five years and 100% after 10 years.  The Octagon Plan is not required to be funded.  For the year ended December 31, 2004, werecognized expense of $322 related to the Octagon Plan.

 

48

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**15.****                               IncomeTaxes**

 

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

 
| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current:           |       |                             |       |   |   |   |   |
| Federal            |       | $                                | 2,972      |   | $ | 3,118 |   | $ | 3,331 |   |
| State              |       | 1,494                            |       | 1,069 |   | 675 |   |
|               |       | 4,466                            |       | 4,187 |   | 4,006 |   |
| Deferred:          |       |                             |       |   |   |   |   |
| Federal            |       | 600                              |       | 320 |   | 217 |   |
| State              |       | 179                              |       | 110 |   | (109 | ) |
|               |       | 779                              |       | 430 |   | 108 |   |
|               |       |                             |       |   |   |   |   |
| Income tax expense |       | $                                | 5,245      |   | $ | 4,617 |   | $ | 4,114 |   |

 

The items comprising the Company’s net deferred tax assets are asfollows:

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                    |       |                  |       |   |   |
| Deferred tax assets (liabilities):      |       |                  |       |   |   |
| Allowance for doubtful accounts         |       | $                     | 586        |   | $ | 1,394 |   |
| Net operating loss carry-forwards       |       | 4,591                 |       | 3,333 |   |
| Accelerated depreciation and other      |       | (667                  | )          | 28 |   |
| Gross deferred tax assets               |       | 4,510                 |       | 4,755 |   |
| Valuation allowance                     |       | (471                  | )          | — |   |
| Net deferred tax asset                  |       | $                     | 4,039      |   | $ | 4,755 |   |
|                                    |       |                  |       |   |   |
| Reconciliation to financial statements: |       |                  |       |   |   |
| Current deferred tax asset              |       | $                     | 2,681      |   | $ | 1,618 |   |
| Long-term deferred tax asset            |       | 1,358                 |       | 3,137 |   |
| Net deferred tax asset                  |       | $                     | 4,039      |   | $ | 4,755 |   |

 

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

 

A reconciliation of the tax provision at the Federal statutory rate of34% to the reported tax provision is as follows:

 
| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                              |       |                             |       |   |   |   |   |
| Federal income taxes based on 34% statutory  rate |       | $                                | 3,790      |   | $ | 3,727 |   | $ | 3,466 |   |
| State income taxes, net of federal benefit        |       | 792                              |       | 756 |   | 520 |   |
| Valuation allowance                               |       | 310                              |       | — |   | — |   |
| Other                                             |       | 353                              |       | 134 |   | 128 |   |
| Income tax expense                                |       | $                                | 5,245      |   | $ | 4,617 |   | $ | 4,114 |   |

 

AtDecember 31, 2004, the Company had NOL carryforwards for federal incometax purposes of approximately $12,118. The use of the NOL carryforwards is subject to certain limitations underInternal Revenue Code Section 382. The NOL carryforwards are set to expire between 2018 and 2022.

 

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 theseitems.  We have tax reserves of $6,910 atDecember 31, 2004.  While it isdifficult to determine the final outcome if certain positions were to bechallenged, we believe that the tax reserve at December 31, 2004 reflectsthe maximum exposure.  None of theCompany’s consolidated tax returns is currently under examination.

 

49

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**16.****                               EarningsPer Common Share**

 

The following shows the calculation of basicand diluted EPS from continuing and discontinued operations for the years endedDecember 31, 2004 and 2003 and basic and diluted EPS from continuingoperations, discontinued operations and the cumulative effect of a change inaccounting principle for the year ended December 31, 2002:

 

 
| **2004**                                                                            | ** ** | **Continuing  Operations** | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------|------------|-----------|------------|
| *Basic Earnings per Common Share*                                                   |       |                       |       |                         |       |      |       |
| Net income                                                                          |       | $                          | 4,463      |                         | $          | (1,230    | )          | $ | 3,233 |   |
| Less preferred stock accretion                                                      |       | (1,275                     | )          | —                       |       | (1,275    | )          |
| Income available to common stockholders  — numerator for basic EPS             |       | $                          | 3,188      |                         | $          | (1,230    | )          | $ | 1,958 |   |
| Basic weighted average shares outstanding —  denominator for basic EPS         |       | 6,451                      |       | 6,451                        |       | 6,451     |       |
|                                                                                |       |                       |       |                         |       |      |       |
| Basic EPS available to common stockholders                                          |       | $                          | 0.49       |                         | $          | (0.19     | )          | $ | 0.30 |   |
|                                                                                |       |                       |       |                         |       |      |       |
| *Diluted  Earnings per Common Share*                                                |       |                       |       |                         |       |      |       |
| Income available to common stockholders                                             |       | $                          | 3,188      |                         | $          | (1,230    | )          | $ | 1,958 |   |
| Effect on income assuming exercise of  subsidiary stock options                     |       | (373                       | )          | 104                          |       | (269      | )          |
| Diluted earnings available to common  stockholders — numerator for diluted EPS |       | 2,815                      |       | $                            | (1,126     | )         | $          | 1,689 |   |
|                                                                                |       |                       |       |                         |       |      |       |
| Basic weighted average shares outstanding                                           |       | 6,451                      |       | 6,451                        |       | 6,451     |       |
| Dilutive effect of stock options                                                    |       | 147                        |       | 147                          |       | 147       |       |
| Diluted weighted average shares outstanding  — denominator for diluted EPS     |       | 6,598                      |       | 6,598                        |       | 6,598     |       |
| Diluted EPS available to common  stockholders                                       |       | $                          | 0.43       |                         | $          | (0.17     | )          | $ | 0.26 |   |

 
| **2003**                                                                            | ** ** | **Continuing  Operations** | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------|------------|-----------|------------|
| *Basic Earnings per Common Share*                                                   |       |                       |       |                         |       |      |       |
| Net income – as restated                                                       |       | $                          | 5,258      |                         | $          | (1,969    | )          | $ | 3,289 |   |
| Less preferred stock accretion                                                      |       | (457                       | )          | —                       |       | (457      | )          |
| Income available to common stockholders —  numerator for basic EPS             |       | $                          | 4,801      |                         | $          | (1,969    | )          | $ | 2,832 |   |
| Basic weighted average shares outstanding —  denominator for basic EPS         |       | 6,451                      |       | 6,451                        |       | 6,451     |       |
| Basic EPS available to common stockholders                                          |       | $                          | 0.74       |                         | $          | (0.31     | )          | $ | 0.43 |   |
|                                                                                |       |                       |       |                         |       |      |       |
| *Diluted  Earnings per Common Share*                                                |       |                       |       |                         |       |      |       |
| Income available to common stockholders                                             |       | $                          | 4,801      |                         | $          | (1,969    | )          | $ | 2,832 |   |
| Effect on income assuming exercise of  subsidiary stock options                     |       | (355                       | )          | (40                          | )          | (395      | )          |
| Diluted earnings available to common  stockholders — numerator for diluted EPS |       | $                          | 4,446      |                         | $          | (2,009    | )          | $ | 2,437 |   |
|                                                                                |       |                       |       |                         |       |      |       |
| Basic weighted average shares outstanding                                           |       | 6,451                      |       | 6,451                        |       | 6,451     |       |
| Dilutive effect of stock options                                                    |       | 85                         |       | 85                           |       | 85        |       |
| Diluted weighted average shares outstanding  — denominator for diluted EPS     |       | 6,536                      |       | 6,536                        |       | 6,536     |       |
| Diluted EPS available to common  stockholders                                       |       | $                          | 0.68       |                         | $          | (0.31     | )          | $ | 0.37 |   |

 

50

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| **2002**                                                                            | ** ** | **Continuing  Operations** | ** ** | **Discontinued  Operations** | ** ** | **Cumulative  effect of change  in accounting  principle** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------|------------|------------------------------------------------------------|------------|-----------|------------|
| *Basic Earnings per Share*                                                          |       |                       |       |                         |       |                                                       |       |      |       |
| Net income – as restated                                                       |       | $                          | 5,058      |                         | $          | 2,073                                                      |       | $         | (3,402     | ) | $ | 3,729 |   |
| Less preferred stock accretion                                                      |       | (401                       | )          | —                       |       |                                                       |       | (401      | )          |
| Income available to common stockholders —  numerator for basic EPS             |       | $                          | 4,657      |                         | $          | 2,073                                                      |       | $         | (3,402     | ) | $ | 3,328 |   |
| Basic weighted average shares outstanding —  denominator for basic EPS         |       | 6,451                      |       | 6,451                        |       | 6,451                                                      |       | 6,451     |       |
| Basic EPS available to common stockholders                                          |       | $                          | 0.72       |                         | $          | 0.32                                                       |       | $         | (0.52      | ) | $ | 0.52 |   |
|                                                                                |       |                       |       |                         |       |                                                       |       |      |       |
| *Diluted  Earnings per Share*                                                       |       |                       |       |                         |       |                                                       |       |      |       |
| Income available to common stockholders                                             |       | $                          | 4,657      |                         | $          | 2,073                                                      |       | $         | (3,402     | ) | $ | 3,328 |   |
| Effect on income assuming exercise of  subsidiary stock options                     |       | (335                       | )          | (72                          | )          | —                                                     |       | (407      | )          |
| Add back preferred stock accretion                                                  |       | 401                        |       |                         |       |                                                       |       | 401       |       |
| Diluted earnings available to common  stockholders — numerator for diluted EPS |       | $                          | 4,723      |                         | $          | 2,001                                                      |       | $         | (3,402     | ) | $ | 3,322 |   |
|                                                                                |       |                       |       |                         |       |                                                       |       |      |       |   |   |   |   |
| Basic weighted average shares outstanding                                           |       | 6,451                      |       | 6,451                        |       | 6,451                                                      |       | 6,451     |       |
| Dilutive effect of stock options                                                    |       | 182                        |       | 182                          |       | 182                                                        |       | 182       |       |
| Preferred Stock                                                                     |       | 500                        |       | 500                          |       | 500                                                        |       | 500       |       |
| Diluted weighted average shares outstanding  — denominator for diluted EPS     |       | 7,133                      |       | 7,133                        |       | 7,133                                                      |       | 7,133     |       |
| Diluted EPS available to common  stockholders                                       |       | $                          | 0.66       |                         | $          | 0.29                                                       |       | $         | (0.48      | ) | $ | 0.47 |   |

 

----

*                 Basic and diluted EPS are based on unroundedamounts and therefore may not equal the sum of EPS from continuing operationsand discontinued operations.

 

For the year ended December 31, 2004 and 2003, 500,000shares of Preferred Stock, which were convertible into 500,000 shares of Class ACommon Stock, and stock options to acquire 318,000, 324,000 and 309,000shares of Class A Common Stockin 2004, 2003 and 2002, respectively, were excluded from the computation ofdiluted EPS because the effect of their assumed conversion was antidilutive.

 

OnFebruary 23, 2005, 320,000 Class A Common Stock shares were issued asa result of an employee exercise of stock options.  As a result of this exercise, the number ofshares outstanding increased to 6,770,967.

 

**17.****                               Related-PartyTransactions**

 

The Company has a Management Advisory Service Agreement (the “MAS Agreement”)with Capital Partners, Inc. (“Capital Partners”), the controllingstockholder of the Company, whereby Capital Partners provides certainmanagement advisory services related to investments, general administration(including payroll and rent), corporate development, strategic planning,stockholder relations, financial matters and general business policy.  The MAS Agreement is approved by our Board ofDirectors and is effective for the calendar year.  The MAS Agreement can be terminated by eitherCapital Partners or the Company upon at least 60 days’ prior writtennotice to the other.  Fees paid to CapitalPartners for management advisory services were $1,550, $1,400, and $1,273 inthe years ended December 31, 2004, 2003 and 2002, respectively.

 

In addition, the Company has agreed to pay fees to Capital Partners foracquisition opportunities presented to the Company at usual and customary ratesfor investment banking fees for transactions of similar size and complexity.  Capital Partners is under no obligation topresent to the Company any or all acquisition candidates of which it becomesaware.  Furthermore, the Company is underno obligation to utilize Capital Partners for investment banking services.  The payment of an investment banking fee to CapitalPartners is subject to full Board approval. In 2003, the Company paid a one-time investment banking fee of $150 to CapitalPartners as compensation for the

 

51

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services it performed relative to the Octagon acquisition.

 

Amounts due to Capital Partners were $16 and $293 at December 31,2004 and 2003, respectively.  Fees paidto Capital Partners are generally subordinate to the rights of the lenders tothe Company.

 

In connection with a refinancing of debt at Primrose in April 2002,the Chairman of the Company issued a personal guarantee for $4,000, for whichhe received a guarantee fee of 8% per annum of the declining average quarterlybalance of his guarantee.  On December 31,2002, this guarantee was terminated. Fees incurred by Primrose for this guarantee were $170 for the yearended December 31, 2002 and are included in interest expense in theConsolidated Statement of Income.

 

**18.****                               Commitmentsand Contingencies**

 

We lease office space and certain equipment under noncancelableoperating lease agreements that expire at various dates through 2017.  Certain leases include renewal provisions andrequire us to pay for certain operating and maintenance costs.  Future minimum operating lease payments and minimumsublease rental income at December 31, 2004 for each of the followingyears are as follows:

 

| ** ** | ** ** | **Operating  Leases** | ** ** | **Sublease  Rental  Income** | ** ** |
|------------|------------|-----------------------|------------|------------------------------|------------|
| 2005       |       | $                     | 6,527      |                         | $          | (218 | ) |
| 2006       |       | 6,006                 |       | (222                         | )          |
| 2007       |       | 5,285                 |       | (74                          | )          |
| 2008       |       | 3,554                 |       | —                       |       |
| 2009       |       | 2,340                 |       | —                       |       |
| Thereafter |       | 9,112                 |       | —                       |       |
| Total      |       | $                     | 32,824     |                         | $          | (514 | ) |

 

Net rent expense for the years ended December 31, 2004, 2003 and2002 was as follows:

 
| ** **       | ** ** | **2004**   | ** ** | **2003**          | ** ** | **2002**          | ** ** |
|------------------|------------|------------|------------|-------------------|------------|-------------------|------------|
| ** **       | ** ** | ** ** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
|             |       |       |       |              |       |              |       |
| Rent expense     |       | $          | 6,799      |              | $          | 4,280             |       | $ | 4,168 |   |
| Rent income      |       | (205       | )          | —            |       | —            |       |
| Net rent expense |       | $          | 6,594      |              | $          | 4,280             |       | $ | 4,168 |   |

 

CMI was party to a lawsuit brought by the Cleveland Bar Associationthat alleged that certain practices by CMI and its hearing representatives inOhio constituted the unauthorized practice of law.  CMI believes that its practices do not differfrom any other Ohio workers’ compensation third-party administrator and do notconstitute the practice of law.  On May 15,2004, the Board of Commissioners on the Unauthorized Practice of Law (the “UPL Board”)found that the activities of CMI and its hearing representatives did constitutethe unauthorized practice of law; CMI appealed these findings to the Ohio StateSupreme Court (the “Supreme Court”).  On December 15,2004, the Supreme Court ruled that the activities engaged in by CMI did notconstitute the unauthorized practice of law. However, in its decision, the Supreme Court remanded the matter back tothe UPL Board to consider whether those activities which were the subject ofthe original suit were in violation of a recently enacted Industrial Commissionresolution.  Oral arguments on this issueare scheduled for July 6, 2005.  Atthis time, we are unable to evaluate the outcome of this matter.

 

In connection with a written offer made by Mr. Brian Fitzgerald, our Chairman ofthe Board, President and Chief Executive Officer and, through Capital Partners,the controlling person of our majority stockholder, CP Acquisition, L.P. No. 1(“CPI”), to acquire by merger all of the outstanding Class A Common Stock,and Common Stock of Security Capital, other than shares held by Mr. Fitzgerald,Capital Partners, CPI and certain other persons, at a price of $9.00 per share(the “Initial Capital Partners 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 of ourBoard of Directors and CPI as defendants. Each of the complaints alleges that the defendants breached theirfiduciary duties to the putative class and that the then-proposed InitialCapital Partners Offer was unfair, inadequate and not the result of arm’s-lengthnegotiations.  Each complaint sought an injunction against the proposed merger or, ifthe merger was consummated, the rescission of the merger, as well as moneydamages, attorneys’ fees, expenses and other relief.  The Court has issued an

 

52

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order of consolidation, consolidating the threecomplaints into one class action. Plaintiffs have submitted their first request for the production ofdocuments.  Since the announcement of theInitial Capital Partners Offer, Mr. Fitzgerald and Capital Partners haveincreased their offer to $10.60 per share, and offers to acquire the entireCompany for $11.00 and $13.00 per share have been submitted by others.  In addition, on June 7, 2005, theCompany announced that is has retained UBS Securities LLC to conduct a formal sale process for the Company,and that Mr. Fitzgerald and Capital Partners have declared their fullsupport for that sale process and committed to sell the shares they control ifappropriate value is achieved in the transaction (see Note 21). At this time, we are unable to evaluate thepossible outcome of the class action.

 

Weare party to several legal actions arising in the ordinary course ofbusiness.  It is management’s opinionthat we have adequate legal defenses to these actions and that the resolutionof such matters will not have a material adverse effect on our financialcondition, results of operations or cash flows.

 

**19.****                               SegmentDisclosure**

 

Management evaluates the performance of itssegments based upon segment income, defined as earnings before interest, taxes,depreciation, amortization, minority interests, corporate expenses andmanagement fees, discontinued operations and other income or expense.  Segment income is used to evaluateperformance because management believes this is the best financial indicator ofvalue, of our ability to incur and service debt and to generate operating cashflows.  It is also one method by which weevaluate and value potential acquisition opportunities and by which we valueour current subsidiaries.  Segment incomeis not a substitute for operating income or cash flows from operatingactivities determined in accordance with GAAP. All prior period segment information has been reclassified to conform tothe current presentation.

 
| ** **                                           | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                           | ** ** | ** **                        | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Revenues from external customers:                    |       |                              |       |   |   |   |   |
| Employer cost containment and health  services       |       | $                                 | 121,335    |   | $ | 84,598 |   | $ | 64,460 |   |
| Educational services                                 |       | 11,605                            |       | 9,834 |   | 8,243 |   |
| Total revenues                                       |       | $                                 | 132,940    |   | $ | 94,432 |   | $ | 72,703 |   |
|                                                 |       |                              |       |   |   |   |   |
| Segment income:                                      |       |                              |       |   |   |   |   |
| Employer cost containment and health  services       |       | $                                 | 17,327     |   | $ | 12,891 |   | $ | 12,860 |   |
| Educational services                                 |       | 5,625                             |       | 4,566 |   | 4,217 |   |
| Total segment income                                 |       | 22,952                            |       | 17,457 |   | 17,077 |   |
|                                                 |       |                              |       |   |   |   |   |
| Reconciliation of segment income to net  income:     |       |                              |       |   |   |   |   |
| Amortization and depreciation                        |       | (3,780                            | )          | (2,451 | ) | (2,277 | ) |
| Interest expense                                     |       | (4,351                            | )          | (1,565 | ) | (3,633 | ) |
| Income tax expense                                   |       | (5,245                            | )          | (4,617 | ) | (4,114 | ) |
| Minority interests                                   |       | (1,438                            | )          | (1,087 | ) | (1,023 | ) |
| Corporate, management fee and other  expenses        |       | (4,327                            | )          | (2,662 | ) | (1,853 | ) |
| Other income                                         |       | 652                               |       | 185 |   | 881 |   |
| (Loss)  income from discontinued operations          |       | (1,230                            | )          | (1,969 | ) | 2,073 |   |
| Cumulative  effect of change in accounting principle |       | —                            |       | — |   | (3,402 | ) |
| Net income                                           |       | $                                 | 3,233      |   | $ | 3,289 |   | $ | 3,729 |   |

 

53

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| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                     | ** ** | ** **            | ** ** | **(as restated)** | ** ** |
| Segment assets:                                |       |                  |       |   |   |
| Employer cost containment and health  services |       | $                     | 84,486     |   | $ | 81,585 |   |
| Educational services                           |       | 28,458                |       | 28,480 |   |
| Total segment amounts                          |       | 112,944               |       | 110,065 |   |
| Corporate and other                            |       | 3,691                 |       | 2,316 |   |
| Discontinued operations                        |       | —                |       | 11,469 |   |
| Total assets                                   |       | $                     | 116,635    |   | $ | 123,850 |   |

 

**20.**                               **Concentrations**

 

Our employer cost containment and health services segmenthas two customers that individually account for more than 10% of consolidatedrevenue.  One customer accounted for approximately22%, 29%, and 39% of total consolidated revenue for 2004, 2003 and 2002,respectively.  The other customer accountedfor approximately 12% of consolidated revenues for 2004 (this contract wasacquired in late 2003 and was not significant to 2003 consolidated revenues). Thiscontract expires on June 30, 2005. We are currently negotiating the renewal of such contract, and while weexpect to renew this contract, no assurances can be given.  The loss of either of these contracts couldhave a material adverse effect on the financial condition, results ofoperations, and cash flows of ouremployer cost containment and health services segment and the Company.

 

**21.****                              ****Proposed Sale of the Company**

 

OnJune 7, 2005, we announced that the Special Committee recommended, and theBoard of Directors had approved, a formal sale process for the Company and theretention of UBS Securities LLC (“UBS”) to conduct the process.  For the past year and one-half, the SpecialCommittee has evaluated various strategic alternatives to maximize stockholdervalue, including the offers described below, and now supports the switch to aformal sale process.  Management fullysupports the recommendation of the Special Committee and the actions of the fullBoard of Directors and believes that a formal sale process represents the bestpossibility of achieving the highest price reasonably obtainable for thestockholders of the Company.

 

Priorto the announcement of the formal sale process, Mr. Fitzgerald, ourChairman of the Board, President and Chief Executive Officer and, throughCapital Partners, the controlling person of CPI, had submitted an offer toacquire the stock that he and Capital Partners did not control at a price of$10.60 per share.  However, Mr. Fitzgeraldand Capital Partners, who control approximately 81% of the stock, have declaredtheir support for the formal sale process and has committed to sell the shares theycontrol if appropriate value is achieved in the transaction.  As a declared seller in the formal saleprocess, Mr. Fitzgerald and Capital Partners have stated that they wouldnot participate as a bidder in such process. Two other offers to acquire the entire Company for $11.00 per share and$13.00 per share were submitted to the Special Committee.  The Special Committee has informed thebidders that their offers were being referred to UBS for consideration in theformal sales process.

 

**22.****                               SubsequentEvents**

 

OnMarch 31, 2005, our indirect, majority owned subsidiary, Octagon, acquired100% of the outstanding capital stock of Managed Care Holdings Corporation, andits wholly owned subsidiary, Caronia Corporation (collectively, “Caronia”), for$16,000 in cash.  The purchase price issubject to adjustment based upon the working capital of Caronia as of theclosing date.  Such acquisition wasconsummated pursuant to the terms of a stock purchase agreement, dated March 17,2005, between Octagon and Continental Casualty Company.

 

Caroniaprovides third-party professional medical liability claims administration andrisk management services to hospitals and healthcare systems, physician andparaprofessional groups, nursing homes, rehabilitation centers andclinics.  Its business is based inMelville, New York, and it services clients through 40 locationsnationwide.  After the consummation ofthe transaction, Managed Care Holdings and Caronia Corp. became part of theemployer cost containment and health services operating segment.

 

54

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OnMarch 31, 2005, in connection with the acquisition of Caronia, WC enteredinto a Second Amended and Restated Loan Agreement (the “Credit Agreement”).  The Credit Agreement provided WC with a$40,500 five-year, fully-amortizing term loan (the “Term Loan”) and an $8,000revolving credit facility (“Amended WC Revolver”).  The Term Loan bears interest at LIBOR plus2.5% or Prime, at the Company’s option.  Borrowings under the Amended WC Revolver bearinterest at LIBOR plus 2% or Prime minus 0.5%, at the Company’s option, andthere is an annual commitment fee equal to 0.5% of the unused commitment.  The Amended WC Revolver replaced the WCRevolver.  Principal payments of $675 aredue monthly beginning May 1, 2005 under the Term Loan.  The proceeds of the Term Loan were used tofund the Caronia acquisition and repay amounts outstanding under the WC TermDebt.

 

TheTerm Loan and Amended WC Revolver contain restrictive covenants that prohibitor limit certain actions, including specified levels of capital expenditures,investments and incurrence of additional debt, and require the maintenance of aminimum 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 Credit Agreement contains provisions thatrequired WC to deliver audited financial statements for 2004 to the lender bythe end of April and require WC to deliver monthly financial statementsbeginning April 2005.  WC has obtained awaiver from the lender until June 30, 2005 to deliver audited financialstatements for 2004 and until August 31, 2005 to begin delivering monthlyfinancial statements.  WC anticipatesthat it will provide the lender with its audited financial statements prior toJune 30, 2005.

 

DuringApril 2005, we received notification from certain employees of WC (“WCShareholders”) that they wished to sell or convert to Company stock theirminority shares in WC (“Shares”) and exercise their vested options (“VestedOptions”) to purchase shares of WC stock and sell or convert them to Companystock.  Under the terms of the agreementgoverning these options, the per share value of WC stock is determined based ona formula stipulated in the agreement and the Company may settle these optionsin Company shares or cash, at its discretion. The Company has provided the WC Shareholders with the per share valuecalculation and notified them that it intends to settle the Shares and VestedOptions for cash.  The WC Shareholdershave notified the Company that they do not agree with the per share valuecalculation.  In addition, with therecent announcement that the Board of Directors has approved a formal saleprocess of the Company, the WC Shareholders have notified us that they areconsidering amending or revoking their request to convert their Shares andVested Options.  If we were to settle theShares and Vested Options at the fair value per share determined by theCompany, we would pay approximately $4,200 to $4,300 to the WC Shareholders.

 

55

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**Schedule I****—Condensed Financial Information of Registrant**

 

**Security Capital Corporation (Parent Company)**

**Condensed Balance Sheets**

 
| ** **                                                                                                                       | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(in  thousands, except share and per share amounts)**                                                                          | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                                                                                                       | ** ** | ** **            | ** ** | **(as restated)** | ** ** |
| *Assets*                                                                                                                         |       |                  |       |   |   |
| Current assets:                                                                                                                  |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                        |       | $                     | 3,260      |   | $ | 6,171 |   |
| Accounts receivable from subsidiaries                                                                                            |       | 382                   |       | 77 |   |
| Deferred tax assets                                                                                                              |       | —                |       | 29 |   |
| Other current assets                                                                                                             |       | 120                   |       | 34 |   |
| Total current assets                                                                                                             |       | 3,762                 |       | 6,311 |   |
| Investments in subsidiaries                                                                                                      |       | 39,386                |       | 37,103 |   |
| Notes receivable from subsidiaries                                                                                               |       | 767                   |       | 1,824 |   |
| Property and equipment, net                                                                                                      |       | 208                   |       | — |   |
| Deferred tax assets                                                                                                              |       | 28                    |       | 11 |   |
| Other assets                                                                                                                     |       | 192                   |       | — |   |
| Total assets                                                                                                                     |       | $                     | 44,343     |   | $ | 45,249 |   |
|                                                                                                                             |       |                  |       |   |   |
| *Liabilities and Stockholders’ Equity*                                                                                      |       |                  |       |   |   |
| Current liabilities:                                                                                                             |       |                  |       |   |   |
| Accounts payable to subsidiaries                                                                                                 |       | $                     | —     |   | $ | 28 |   |
| Accounts payable to Capital  Partners, Inc.                                                                                 |       | 16                    |       | 293 |   |
| Income tax payable                                                                                                               |       | 7,136                 |       | 6,791 |   |
| Accrued expenses and other liabilities                                                                                           |       | 1,573                 |       | 1,035 |   |
| Total current liabilities                                                                                                        |       | 8,725                 |       | 8,147 |   |
|                                                                                                                             |       |                  |       |   |   |
| Long-term liabilities                                                                                                            |       | 251                   |       | 27 |   |
|                                                                                                                             |       |                  |       |   |   |
| Redeemable convertible preferred stock;  $.01 par value, 2,500,000 shares authorized; 500,000 shares issued and  outstanding     |       | —                |       | 3,725 |   |
| Stockholders’ equity:                                                                                                       |       |                  |       |   |   |
| Common stock, $.01 par value, 7,500 shares  authorized, 380 shares issued and outstanding                                        |       | —                |       | — |   |
| Class A common stock, $.01 par value,  10,000,000 shares authorized, 6,458,309 shares issued, 6,450,587 shares  outstanding |       | 65                    |       | 65 |   |
| Additional paid-in capital                                                                                                       |       | 64,395                |       | 65,670 |   |
| Accumulated deficit                                                                                                              |       | (29,067               | )          | (32,300 | ) |
| Accumulated other comprehensive income                                                                                           |       | 59                    |       | — |   |
| Less: treasury stock, at cost, 7,722 shares                                                                                      |       | (85                   | )          | (85 | ) |
| Total stockholders’ equity                                                                                                  |       | 35,367                |       | 33,350 |   |
| Total liabilities and stockholders’ equity                                                                                  |       | $                     | 44,343     |   | $ | 45,249 |   |

 

The accompanying notes are an integral partof these condensed financial statements.

 

56

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**Security Capital Corporation (Parent Company)**

**Condensed Statements of Income**

 

 
| ** **                                                                                                          | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(in  thousands)**                                                                                                 | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                          | ** ** | ** **                               | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Income:                                                                                                             |       |                                     |       |   |   |   |   |
| Management fee income from subsidiaries                                                                             |       | $                                        | 1,214      |   | $ | 1,226 |   | $ | 1,123 |   |
| Interest and dividends                                                                                              |       | 209                                      |       | 41 |   | 21 |   |
| Interest income from subsidiaries                                                                                   |       | 39                                       |       | 388 |   | 457 |   |
| Gain on sale of Texas land (net of  expenses)                                                                       |       | —                                   |       | 107 |   | — |   |
| Total income                                                                                                        |       | 1,462                                    |       | 1,762 |   | 1,601 |   |
| Expenses:                                                                                                           |       |                                     |       |   |   |   |   |
| Unallocated corporate administrative  expense                                                                       |       | 2,778                                    |       | 1,263 |   | 580 |   |
| Management fee expense to Capital  Partners, Inc.                                                              |       | 1,550                                    |       | 1,550 |   | 1,273 |   |
| Depreciation expense                                                                                                |       | 29                                       |       | — |   | — |   |
| Interest expense                                                                                                    |       | 2,423                                    |       | — |   | 170 |   |
| Total expenses                                                                                                      |       | 6,780                                    |       | 2,813 |   | 2,023 |   |
| Loss before income taxes, equity in income  of subsidiaries and cumulative effect of change in accounting principle |       | (5,318                                   | )          | (1,051 | ) | (422 | ) |
| Income tax benefit (expense)                                                                                        |       | 1,808                                    |       | (2,140 | ) | (362 | ) |
| Equity in income of subsidiaries                                                                                    |       | 6,743                                    |       | 6,480 |   | 1,933 |   |
| Income before cumulative effect of change  in accounting principle                                                  |       | 3,233                                    |       | 3,289 |   | 1,149 |   |
| Cumulative effect of change in accounting  principle                                                                |       | —                                   |       | — |   | 2,580 |   |
| Net income                                                                                                          |       | 3,233                                    |       | 3,289 |   | 3,729 |   |
| Less Preferred Stock accretion                                                                                      |       | (1,275                                   | )          | (457 | ) | (401 | ) |
| Net income available to common stockholders                                                                         |       | $                                        | 1,958      |   | $ | 2,832 |   | $ | 3,328 |   |

 

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

 

57

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**Security Capital Corporation (Parent Company)**

**Condensed Statements of Cash Flows**

 
| ** **                                                          | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(in thousands)**                                                  | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                |       |                                     |       |   |   |   |   |
| Cash (used in) provided by operating  activities                    |       | $                                        | (1,488     | ) | $ | 3,335 |   | $ | 2,383 |   |
|                                                                |       |                                     |       |   |   |   |   |
| Cash provided by investing activities:                              |       |                                     |       |   |   |   |   |
| Purchase of fixed assets                                            |       | (236                                     | )          | — |   | — |   |
| Proceeds on sale of Texas land                                      |       | —                                   |       | 107 |   | — |   |
| Net cash received from discontinued  operations                     |       | 4,524                                    |       | — |   | — |   |
| Net cash provided by investing activities                           |       | 4,288                                    |       | 107 |   | — |   |
|                                                                |       |                                     |       |   |   |   |   |
| Cash used in financing activities:                                  |       |                                     |       |   |   |   |   |
| 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 used in financing activities                               |       | (5,711                                   | )          | — |   | — |   |
|                                                                |       |                                     |       |   |   |   |   |
| (Decrease) increase in cash and cash  equivalents                   |       | (2,911                                   | )          | 3,442 |   | 2,383 |   |
| Cash and cash equivalents, beginning of  period                     |       | 6,171                                    |       | 2,729 |   | 346 |   |
| Cash and cash equivalents, end of period                            |       | $                                        | 3,260      |   | $ | 6,171 |   | $ | 2,729 |   |

 

The accompanying notes are an integral partof these condensed financial statements.

 

58

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**Security Capital Corporation (Parent Company)**

**Notes to Condensed Financial Statements**

 

**1.****                                      Basisof Presentation**

 

In the parent company’s financial statements, the Company’s investmentin subsidiaries is stated at cost plus equity in undistributed earnings of thesubsidiaries.  Certain prior year amountshave been reclassified to conform to current year presentation.  See the Notes to the Consolidated FinancialStatements for additional information.

 

**2.****                                     ****Restatement of FinancialStatements for Accounting for Leases and Leasehold Improvements**

 

Wehave restated our previously issued financial statements for the years ended December 31,2003 and 2002 to reflect a correction in our accounting practices for leasesand leasehold improvements.  Accordingly,the condensed statements of income have been restated for the years ended December 31,2003 and 2002 and our condensed balance sheet at December 31, 2003 hasalso been restated.  The restatement hadno impact on net revenues or net cash flows.

 

Therestatement resulted in a decrease in condensed net income of $94 for the yearended December 31, 2003.  There wasno impact on condensed net income for the year ended December 31, 2002.

 

**3.****                                      Saleof Subsidiary**

 

OnOctober 25, 2004, we consummated the sale of substantially all of theassets of Pumpkin to Rauch for $7,000, subject to a working capitaladjustment.  The working capitaladjustment has been finalized, resulting in the Company receiving an additionalpayment from Rauch of $1,741.  Anafter-tax loss of $3,928 was incurred on the sale.

 

**4.****                                      PossibleDreams Bankruptcy Settlement**

 

OnNovember 5, 2004, we entered into an agreement with the bankruptcy trusteeto resolve all outstanding claims against the Company in connection with thePossible Dreams bankruptcy for $442.  Asa result, an after-tax gain of $1,516 was recognized during 2004.

 

**5.**                                      **Redeemable Convertible Preferred Stock**

 

The Company had issued 500,000 shares ofPreferred Stock that had a stated redemption value of $10 per share.  Such Preferred Stock was convertible into Class ACommon Stock on a 1:1 basis.  ThePreferred Stock was redeemable at the option of the shareholder upon theattainment of certain financial targets, but no later than April 6,2006.  Differences between the carryingvalue of the Preferred Stock and the redemption value were accreted using theinterest method over the remaining estimated period to redemption by charges toadditional paid-in capital.  On November 10,2004, the Company redeemed all shares of Preferred Stock at a redemption priceof $10 per share, or $5,000.  Thecondensed statements of operations reflect accelerated preferred stockaccretion of $1,275 to accrete the carrying value of the Preferred Stock to itsredemption value.

 

**6.****                                      Debt**

 

OnJanuary 14, 2004, we issued a $30,000 Senior Subordinated Promissory Note(the “Note”), due September 30, 2008, to a mezzanine lender to provide uswith immediately available funds while we reviewed and analyzed variousalternative uses for the proceeds.  Theproceeds were held in a collateral account and would be released once a use ofthe proceeds was approved by the lender. The interest rate was initially 10% per annum, with interest payablequarterly beginning March 31, 2004, and would increase to 16% on September 30,2004.  Due to the then-outstanding offersto acquire the Company, management determined that any use of the proceedswould not occur prior to September 30, 2004.  Accordingly, because of the significantincrease in the cost of the debt at September 30, 2004, and theavailability of less expensive financing alternatives, we prepaid the Notewithout penalty prior to September 30, 2004.

 

59

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**ITEM 9****. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not Applicable.

 

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

 

*Evaluation of Disclosure Controls and Procedures.*  The Company’s management, with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, evaluated the effectiveness of the Company’s disclosure controls andprocedures as of the end of the period covered by this report. Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures as of the end of theperiod covered by this report were not effective to provide reasonableassurance that the information required to be disclosed by the Company inreports filed under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms. The Company believes that no system of disclosure controls, no matterhow well designed and operated, can provide absolute assurance that theobjectives of the system are met, and no such controls can provide absoluteassurance that all control issues and instances of fraud, if any, within acompany have been detected.

 

During the fourth quarter of 2004, the Company confronted a number ofunique challenges that, taken together, put extraordinary and unforeseendemands on management and the Company’s system of disclosure controls and procedures,straining the Company’s disclosure, accounting, and financial reportingresources at both WC and the corporate level. Even though the Company’s Board of Directors, Special Committee, andAudit Committee provided significant additional resources, at the cost ofmillions of dollars to the Company and its stockholders, to meet thesechallenges, the extraordinary nature of the demands put on our control systemsmade it extremely difficult to record, process, summarize and report requiredinformation within the time periods specified in the SEC’s rules andforms.

 

In addition to conducting normal operations, implementing a newoperating system at WC, integrating recent acquisitions, resolving outstandingmatters with respect to the Possible Dreams bankruptcy, redeeming the PreferredStock, and selling Pumpkin during the fourth quarter of 2004, the Company’sdisclosure controls and procedures had to deal with the ongoing work of theSpecial Committee, and the offers received by the Committee for the Company;the completion in October 2004 of management’s Supplemental Proceduresinto various matters regarding related-party transactions and resultingconflicts of interest involving CMI Management; and the Investigation initiatedby the Audit Committee in November 2004 into those CMI Managementissues.  In carrying on the work of theSpecial Committee, the Committee was assisted by independent financial andlegal advisors; in performing the Supplemental Procedures, management wasassisted by outside counsel and an independent consulting firm; and inconducting the Investigation, the Audit Committee was assisted by independentcounsel and forensic accountants. Nevertheless, each of those endeavors required considerable time andattention from the Company’s CEO, CFO and accounting and financial reportingstaff at both WC and corporate, as well as from the Company’s independentdirectors on the Special Committee and Audit Committee.  In addition, during the fourth quarter of2004, the Company put CMI’s CFO/General Counsel on a paid leave of absence as aresult of the initial findings of the Investigation, the Company’s CFO took onthe additional duties of interim CFO at CMI, and management sought to increaseits accounting and financial reporting staff at WC and corporate through thehiring of additional permanent and temporary personnel.  Finally, the Company’s independent registeredpublic accounting firm expended hundreds of hours in monitoring andcoordinating with the Audit Committee, and the independent counsel and forensicaccountants retained by the Audit Committee with respect to the Investigationbeyond the firm’s regular audit and review procedures.

 

The Investigation was completed in March 2005, confirming thefindings of management’s Supplemental Procedures that, while CMI Management hadused the personnel, office space and equipment of the CMI Companies to furtherthe interests of their separate controlled entities, there were no instances offraud or financial impropriety that would indicate that the Company’shistorical financial statements were misstated. The Company filed its Form 10-Q for the quarter ended September 30,2004 on March 11, 2005.

 

In addition, when the Company’s management became aware of the SECstaff letter stating its views regarding the proper application of GAAP toaccounting for leases and leasehold improvements, management conducted an in-depthreview of the Company’s lease accounting practices, and concluded to restatethe Company’s prior financial statements. Like hundreds of other companies, the Company had not put sufficientemphasis on these lease accounting issues until the SEC staff issued itsletter.

 

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In the first quarter of 2005, the Company alsosuccessfully negotiated the acquisition of Caronia, which closed on March 31,2005.  Lastly, management renegotiated WC’scredit facilities, also closing the new agreements on March 31, 2005.

 

The Company is not yet subject to the provisions of Section 404 ofthe Sarbanes-Oxley Act of 2002, requiring a management report and auditorattestation and a report on the Company’s internal control over financialreporting.  The Company has neverthelessbegun to plan for that process.  Inaddition, the Company is retaining a new principal accounting firm now thatthis Form 10-K has been filed.

 

Management believes that the Company responded appropriately to theunique control challenges faced by the Company over the last severalmonths.  In management’s view, no systemof controls can be designed and implemented with sufficient capacity andresilience to accommodate an extraordinary and overwhelming confluence ofevents, such as those recently experienced by the Company, its management, andits directors.

 

The Company has taken significant steps during this period to increaseand improve internal staffing and controls, especially as to related-partytransactions and conflicts of interest; to perform internal supplementalprocedures and investigations, with outside assistance, where appropriate; andto draw upon the help, guidance, and expertise of its dedicated independentdirectors, most notably the Chairman of its Audit Committee, to get through thisvery difficult period.  Management willcontinue to strive to enhance further its disclosure controls and proceduresand to address its internal control over financial reporting systems for the Section 404process ahead.

 

*Change in Internal Control Over Financial Reporting.*No change in the Company’s internal control over financial reporting occurredduring the fourth quarter of the Company’s most recent fiscal year hasmaterially affected, or is reasonable likely to materially effect, the Company’sinternal control over financial reporting.

 

**ITEM 9B****.  OTHERINFORMATION**

 

Not Applicable.

 

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**PART III**

 

All dollar amounts disclosed isthis Part III are whole numbers, except for amounts disclosed in Item 13.“Certain Relationships and Related Transactions” and Item 14. “PrincipalAccountant Fees and Services”, which are in thousands.

 

**ITEM 10****. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The directors of the Company are as follows:

 
| **Name**                           | ** ** | **Age** | ** ** | **Director  Since** | ** ** | **Principal Occupation During Last Five Years; Other Directorships**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** |
|------------------------------------|------------|---------|------------|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Brian  D. Fitzgerald               |       | 60      |       | 1990                |       | Chairman  of the Board of the Company since January 1990 and President and CEO of  the Company since July 2000; President of FGS, Inc. since  March 1989; and a partner, general partner, stockholder, officer and/or  director of various Capital Partners entities for more than five years.                                                                                                                                                                                                                                                      |       |
|                               |       |    |       |                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |
| A.  George Gebauer                 |       | 72      |       | 1990                |       | Vice Chairman of the Board of the Company since  July 2000 and Secretary of the Company since February 1994; Vice  President, Secretary and a director of FGS, Inc. since March 1989;  and a partner, general partner, stockholder, officer and/or director of  various Capital Partners entities for more than five years. Mr. Gebauer  was also the President of the Company from January 1990 to  July 2000.                                                                                                                      |       |
|                               |       |    |       |                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |
| Samuel  B. Fortenbaugh III (1)     |       | 71      |       | 2001                |       | Practicing lawyer (private practice) from  August 2002. Mr. Fortenbaugh is also a former chairman of the law  firm of Morgan, Lewis & Bockius LLP (“MLB”), an international law  firm. Mr. Fortenbaugh was a senior partner from January 1980 to  September 2001 and a senior counsel from October 2001 to  August 2002 of MLB. Mr. Fortenbaugh serves as a director of Baldwin  Technology Company, Inc., a leading international manufacturer of  controls and accessories for the printing industry. |       |
|                               |       |    |       |                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |
| John  H. F. Haskell, Jr            |       | 73      |       | 2001                |       | Non-employee advisor at UBS Securities LLC, an  investment banking firm, from March 2004 to 2005; managing director of  Dillon, Read & Co. Inc. and its successors, Warburg Dillon Read LLC  and UBS Warburg LLC, from 1975 to 2003; and presently serving as a director  of Pall Corporation.                                                                                                                                                                                                                                                            |       |
|                               |       |    |       |                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |
| Edward  W. Kelley, Jr. (1)(2) |       | 71      |       | 2002                |       | Retired;  Governor of the Federal Reserve Board** **of the  United States from 1987 to 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |
|                               |       |    |       |                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |
| M.  Paul Kelly (2)(3)              |       | 61      |       | 2000                | ** ** | Founder and President of PK Enterprises, an equity investment and operational  consulting practice, since 1990.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |
|                               |       |    |       |                | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |
| Robert  M. Williams, Sr. (2)  |       | 65      |       | 2004                |       | Founded  RFE Investment Partners in 1979 and managed six private equity funds with  total assets in excess of $600 million.                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |

 

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(1)          Member of Compensation Committee

(2)          Member of Audit Committee

(3)   Mr.Kelly is an Independent director and the audit committee financial expert.

 

The executive officers of the Company and their positions are asfollows:

 
| Brian D. Fitzgerald  |   | Chairman of  the Board, President and Chief Executive Officer |   | 60 |   |
|----------------------|--------|---------------------------------------------------------------|--------|----|--------|
| A. George Gebauer    |   | Vice  Chairman of the Board and Secretary                     |   | 72 |   |
| William R. Schlueter |   | Senior Vice  President and Chief Financial Officer            |   | 39 |   |

 

The executive officers serve at the discretion of the Company’s Boardof Directors.  Biographical informationconcerning Mr. Schlueter is set forth below.  Biographical information regarding Messrs. Fitzgeraldand Gebauer is contained with the biographical information of other directorsbelow.

 

William R. Schlueter has been a Senior Vice President ofthe Company since April 2003 and Assistant Secretary of the Company since July 2000.  In March 2004, he was re-named ChiefFinancial Officer of the Company.  He wasVice President and Chief Financial Officer of the Company from 1999 through April 2003and Treasurer of the Company from July 2001 to April 2003.  He has also been Chief Financial Officer ofCapital Partners since 1998 and a Senior Vice President and Managing Directorof Capital Partners since 2002.

 

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#### **Section 16(a) BeneficialOwnership Reporting Compliance**

#### ** **

Section 16(a) ofthe Securities Exchange Act of 1934, as amended, requires the Company’sofficers and directors and persons who beneficially own more than 10% of the Class ACommon Stock of the Company to file initial reports of ownership of suchsecurities and reports of changes in ownership of such securities with theSEC.  Such officers, directors and 10%stockholders of the Company are also required by SEC regulations to furnish theCompany with copies of all Section 16(a) forms they file.

 

Basedsolely on the Company’s review of the copies of the forms furnished by suchpersons, the Company believes that, for the fiscal year ended December 31,2004, officers, directors and 10% stockholders filed all required Section 16(a) formson a timely basis.

 

**Code of Conduct**

 

The Company adopted a Code of Conduct in September 2003,as amended June 2004.  All of theCompany’s employees and officers (including senior executive, financial andaccounting officers) are held accountable for adherence to the Company’s Codeof Conduct.  The Code of Conduct isintended to promote compliance with applicable governmental laws andregulations and help ensure adherence to the highest ethical standards ofconduct and that persons subject to the Code of Conduct act as responsiblecitizens.  The Code of Conduct covers avariety of areas, including violations of law, conflicts of interest, fairdealing, proper use of Company assets, delegation of authority, confidentialityand handling of financial information. Employees have an obligation to promptly report any known or suspectedviolation of the Code of Conduct and retaliation is prohibited.

 

Copies of the Code of Conduct may be obtained withoutcharge upon written request to our Corporate Secretary, Eight Greenwich OfficePark, 3rd Floor, Greenwich, Connecticut 06831-5149, or a copy of the Code ofConduct can be found in its entirety on our website atwww.securitycapitalcorporation.com in the Company Policies section.  Additionally, should there be any changes to,or waivers from, the Company’s Code of Conduct, those changes or waivers willbe posted promptly on our website at www.securitycapitalcorporation.com.

 

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

 

The following Summary Compensation Table sets forthcertain information about the annual compensation earned by or awarded to theChief Executive Officer of the Company and the other executive officers of theCompany:

 
| ** **                  | ** ** | ** **              | ** ** | **LONG-TERM  COMPENSATION  AWARDS** | ** ** |
|-----------------------------|------------|-------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **ANNUAL COMPENSATION** | ** ** | **Securities**                      | ** ** |
| **Fiscal**                  | ** ** | ** **              | ** ** | ** **                          | ** ** | **Other Annual** | ** ** | **Underlying** |
| **Year**                    | ** ** | **Salary(1)(2)**        | ** ** | **Bonus(1)(2)**                     | ** ** | **Compensation** | ** ** | **Options (#)** |
|                        |       |                    |       |                                |       |   |   |   |   |   |   |
| Brian D. Fitzgerald         |       | 2004                    |       | $                                   | 335,000    |   | $ | 85,000 |   | — |   | — |   |
| Chairman of the Board,      |       | 2003                    |       | $                                   | 335,000    |   | $ | 82,000 |   | — |   | — |   |
| President and CEO           |       | 2002                    |       | $                                   | 325,000    |   | $ | 92,000 |   | — |   | — |   |
|                        |       |                    |       |                                |       |   |   |   |   |   |   |   |   |
| A. George Gebauer           |       | 2004                    |       | $                                   | 85,000     |   | $ | 50,000 |   | — |   | — |   |
| Vice Chairman of the Board  |       | 2003                    |       | $                                   | 96,000     |   | $ | 29,000 |   | — |   | — |   |
| and Secretary               |       | 2002                    |       | $                                   | 74,000     |   | $ | 26,000 |   | — |   | — |   |
|                        |       |                    |       |                                |       |   |   |   |   |   |   |
| William R. Schlueter        |       | 2004                    |       | $                                   | 150,000    |   | $ | 75,000 |   | — |   | — |   |
| Senior Vice President       |       | 2003                    |       | $                                   | 150,000    |   | $ | 60,000 |   | — |   | — |   |
| and Chief Financial Officer |       | 2002                    |       | $                                   | 153,300    |   | $ | 61,700 |   | — |   | — |   |

 

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(1)                                  Capital Partners, acorporation controlled by Mr. Fitzgerald and for which Mr. Gebauerand Mr. Schlueter serve as officers, is paid an advisory and managementservices fee pursuant to the MAS Agreement with the Company.

 

(2)                                  All Company executive officers are paidcompensation by Capital Partners rather than by the Company.  The Company pays Capital Partners an advisoryand management services fee as discussed in Item 13. “Certain Relationships andRelated Transactions”.  At the request ofthe Board’s Compensation Committee, the Company’s management performed adetailed allocation analysis of the Company’s executive officers’ time for theyears ended December 31, 2004, 2003 and 2002.  The table above reflects the portion of thesalaries and bonuses of the Company’s executive officers paid by CapitalPartners allocable to their performance of services as executive officers ofthe Company.

 

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***Option Grants in Last Fiscal Year***

 

There were no options granted to the Company’s executiveofficers during the year ended December 31, 2004.

 

***Aggregated Option Exercises in Last FiscalYear and Fiscal Year-End Option Values***

 

No options were exercised by any executive officer ofthe Company during the year ended December 31, 2004.  The following table represents the value ofunexercised options held by the Chief Executive Officer and the other executiveofficers of the Company at December 31, 2004:

 
| **Name**             | ** ** | **Shares  Acquired on  Exercise (#)** | ** ** | **Value Realized  ($)** | ** ** | **Number of Securities  Underlying  Unexercised  Options/SARs at  Fiscal Year-End(#)****Exercisable (E)/  Unexercisable (U)** | ** ** | **Value of  Unexercised In-the-  Money Options at  Fiscal Year-End ($)****Exercisable (E)/  Unexercisable (U)** | ** ** |
|----------------------|------------|---------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
|                 |       |                                  |       |                    |       |                                                                                                                          |       |                                                                                                            |       |
| Brian D. Fitzgerald  |       | —                                |       | —                  |       | 440,000                                                                                                                       | (E)        | 1,204,800                                                                                                       | (E)        |
|                 |       | —                                |       | —                  |       | 160,000                                                                                                                       | (U)        | 301,200                                                                                                         | (U)        |
|                 |       |                                  |       |                    |       |                                                                                                                          |       |                                                                                                            |       |
| A. George Gebauer    |       | —                                |       | —                  |       | 40,000                                                                                                                        | (E)        | 150,600                                                                                                         | (E)        |
|                 |       | —                                |       | —                  |       | 10,000                                                                                                                        | (U)        | 37,650                                                                                                          | (U)        |
|                 |       |                                  |       |                    |       |                                                                                                                          |       |                                                                                                            |       |
| William R. Schlueter |       | —                                |       | —                  |       | 56,000                                                                                                                        | (E)        | 150,600                                                                                                         | (E)        |
|                 |       | —                                |       | —                  |       | 14,000                                                                                                                        | (U)        | 37,650                                                                                                          | (U)        |

 

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***Equity Compensation Plan Information***

 

The following table sets forth information, as of December 31,2004, with regard to the Company’s 2000 Long-Term Incentive Plan which wasapproved by stockholders in July 2000. There are no other equity compensation plans in effect with regard tothe 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  (Excluding Shares  Reflected in Column (a))** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                    |       |                                                                                            |       |                                                              |       |                                                                                                                                                               |       |
| Equity compensation plans  approved by stockholders     |       | 843,000                                                                                         |       | $                                                                 | 7.89       |                                                                                                                                                               | 123,346    |   |
|                                                    |       |                                                                                            |       |                                                              |       |                                                                                                                                                               |       |
| Equity compensation plans  not approved by stockholders |       | —                                                                                          |       | —                                                            |       | —                                                                                                                                                             |       |
|                                                    |       |                                                                                            |       |                                                              |       |                                                                                                                                                               |       |
| Total                                                   |       | 843,000                                                                                         |       | $                                                                 | 7.89       |                                                                                                                                                               | 123,346    |   |

 

***Compensation of Directors***

 

Each director receives an annual fee of $12,000 plus afee of $2,000 per Board meeting and reimbursement of reasonable expenses inconnection with attendance at Board meetings. Each committee chairperson receives an additional annual fee of $4,000,and each committee member, including the chairperson, receives up to $1,500 percommittee meeting, dependent upon the length of the meeting and as determinedby the respective committee’s chairperson, plus reimbursement of reasonableexpenses in connection with attendance at committee meetings.  The annual fee is prorated for thosedirectors not serving the full year.  Inaddition to fees, each of the directors received, on the date of his electionto the Board of Directors, an option to purchase 24,000 shares of Class ACommon Stock at an exercise price equal to fair market value per share on thedate of grant.  Subject to termination ofthe optionee’s directorship, each option expires 10 years from the date ofgrant.  The options are not transferableother than on death and are exercisable in three equal annual installmentscommencing on the date of grant.  Messrs. Fitzgeraldand Gebauer do not and will not receive any annual fee or any fees forattendance at meetings.

 

***Compensation Committee Interlocks andInsider Participation***

 

For the fiscal year ended December 31, 2004, themembers of the Compensation Committee were Samuel B. Fortenbaugh III and EdwardW. Kelley, Jr.  All of theCompensation Committee members during 2004 were non-employee directors and notformer officers.  During 2004, noexecutive officer served as a member of a board of directors or compensationcommittee of a corporation where any of its executive officers served on theCompany’s Compensation Committee or Board of Directors.

 
| **ITEM 12****.** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  STOCKHOLDER MATTERS** |
|-----------------------|-----------------------------------------------------------------------------------------------------|

 

The following table and the notes thereto set forth information withrespect to the beneficial ownership, as of June 15, 2005, of shares ofeach class of voting securities of the Company by the only persons known to theCompany to have beneficial ownership of more than 5% of such class, by eachdirector of the Company, by each named executive

 

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officer of theCompany and by the directors and executive officers of the Company as a group.Except as otherwise indicated, each person is believed to exercise sole votingand dispositive power over the shares reported.

 
| ** **                                                                                | ** ** | ** **       | ** ** | ** **     | ** ** | **Class A Common Stock** | ** ** | **Percentage**  | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------|------------|----------------|------------|-------------------------------|------------|-----------------|------------|
| ** **                                                                                | ** ** | **Common Stock** | ** ** | ** **     | ** ** | **Acquirable**                | ** ** | ** **      | ** ** | **of Total** | ** ** |
| **Name  and Address of Beneficial**                                                       | ** ** | **Currently**    | ** ** | **Percentage** | ** ** | **Currently**                 | ** ** | **Within**      | ** ** | **Percentage** | ** ** | **Common** | ** ** |
| **Owner**                                                                                 | ** ** | **Owned**        | ** ** | **of Class**   | ** ** | **Owned**                     | ** ** | **60 days (3)** | ** ** | **of Class** | ** ** | **Equity** | ** ** |
|                                                                                      |       |             |       |           |       |                          |       |            |       |   |   |   |   |
| Brian D. Fitzgerald  Eight Greenwich Office Park,  3rd Floor, Greenwich,  CT 06830 (1)(2) |       | 128              | *     | 33.7           | %*         | 5,497,306                     | *          | 240,000         |       | 81.8 | %* | 81.8 | %* |
| Capital Partners  Eight Greenwich Office Park,  3rd Floor, Greenwich,  CT 06830 (1)(2)    |       | 128              |       | 33.7           | %          | 4,983,361                     |       | —          |       | 73.6 | % | 73.6 | % |
| A. George Gebauer(1)                                                                      |       | —           |       | —         |       | 89,198                        |       | 50,000          |       | 2.0 | % | 2.0 | % |
| William R. Schlueter (1)                                                                  |       | —           |       | —         |       | —                        |       | 66,000          |       | 1.0 | % | 1.0 | % |
| Samuel B. Fortenbaugh III                                                                 |       | —           |       | —         |       | —                        |       | 24,000          |       |   | ** |   | ** |
| John H.F. Haskell, Jr.                                                               |       |             |       |           |       | 1,000                         |       | 24,000          |       |   | ** |   | ** |
| Edward W. Kelley, Jr.                                                                |       |             |       |           |       | 10,000                        |       | 24,000          |       |   | ** |   | ** |
| M. Paul Kelly                                                                             |       | —           |       | —         |       | —                        |       | 24,000          |       |   | ** |   | ** |
| Robert M. Williams, Sr.                                                              |       | —           |       | —         |       | —                        |       | 8,000           |       |   | ** |   | ** |
| All Directors and Executive Officers as a  Group (8 persons)                              |       | 128              |       | 33.7           | %          | 5,597,504                     |       | 460,000         |       | 83.8 | % | 83.8 | % |

 

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*  As more fully described in footnotes (1) and(2) to this table, these share and percentage amounts include the shareand percentage amounts indicated as beneficially owned by Capital Partners.

 

**  Less than one percent.

 

(1)                      For purposes of this table, the following related entities are referredto as “Capital Partners”: (a) Capital Partners, Inc., a Connecticutcorporation, of which Brian D. Fitzgerald is the sole stockholder and directorand A. George Gebauer and William R. Schlueter are officers; (b) FGS, Inc.,a Delaware corporation (“FGS”), of which Messrs. Fitzgerald and Gebauerare executive officers; and (c) CP Acquisition, L.P. No. 1, aDelaware limited partnership (“CPI”).  CapitalPartners, Inc., FGS, Inc., of which Mr. Fitzgerald is thecontrolling stockholder, president, treasurer and a director, and FGS Partners,L.P., a Connecticut limited partnership (“FGS Partners”), of which CapitalPartners, Inc. is the general partner, are the general partners of CPI .

 

Theshare amounts in the table attributable to Capital Partners include the4,455,672 shares of the Class A Common Stock owned of record by CPI andthe 527,689 shares of the Class A Common Stock and the 128 shares of theCommon Stock owned of record by FGS.  Byvirtue of their status as general partners of CPI , each of Capital Partners, Inc.,FGS and FGS Partners may be deemed to own beneficially all of the shares of theClass A Common Stock owned of record by CPI.

 

(2)                      Mr. Fitzgerald maybe deemed to own beneficially the 513,945 shares of the Class A CommonStock owned of record by him, the 4,455,672 shares of the Class A CommonStock owned of record by CPI  and the527,689 shares of the Class A Common Stock and the 128 shares of theCommon Stock owned of record by FGS. Mr. Fitzgerald has shared authorityto vote and dispose of the FGS-owned shares of the Class A Common Stockand the Common Stock and disclaims beneficial ownership of such FGS-ownedshares for all other purposes. Mr. Gebauer is also a stockholder, officerand director of FGS and an officer of Capital Partners, Inc., but hedisclaims beneficial ownership of shares of the Class A Common Stock andthe Common Stock owned of record by such corporations for any purpose. Theownership noted above excludes the 82,453 shares of Class A Common Stockowned by the Fitzgerald Trust (of which Mr. Fitzgerald’s brother is thetrustee and Mr. Fitzgerald’s minor children are sole beneficiaries), as towhich beneficial ownership is disclaimed for all purposes.

 

(3)                      The amounts shown inthe “Acquirable Within 60 Days” column relate to options issued pursuant to theCompany’s 2000 Long-Term Incentive Plan.

 

66

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

 

The Company has a the MAS Agreement with Capital Partners wherebyCapital Partners provides certain management advisory services related toinvestments, general administration, corporate development, strategic planning,stockholder relations, financial matters and general business policy.  The MAS Agreement is effective for thecalendar year and terminable by either Capital Partners or the Company as ofany December 31 upon not less than 60 days’ prior written notice to theother.  Fees paid to Capital Partners formanagement advisory services were $1,550, $1,400, and $1,273 in the years endedDecember 31, 2004, 2003 and 2002, respectively.  The Company also reimbursed Capital Partnersfor travel-related expenses of $22 during 2004.

 

In addition, the Company has agreed to pay fees to Capital Partners foracquisition opportunities presented to the Company at usual and customary ratesfor investment banking fees for transactions of similar size and complexity.  Capital Partners is under no obligation topresent to the Company any or all acquisition candidates of which it becomesaware.  Furthermore, the Company is underno obligation to utilize Capital Partners for investment banking services.  The payment of an investment banking fee toCapital Partners is subject to Board of Directors, Audit Committee andCompensation Committee’s approval.  In2003, the Company paid a one-time investment banking fee of $150 to CapitalPartners as compensation for the services it performed relative to the Octagonacquisition.

 

Amounts due to Capital Partners were $16 and $293 at December 31,2004 and 2003, respectively.  Fees paidto Capital Partners are generally subordinate to the rights of the lenders tothe Company.

 

**ITEM14****. PRINCIPALACCOUNTANT FEES AND SERVICES**

 

In addition to retaining Ernst & Young LLP toaudit the consolidated financial statements for 2004 and 2003, the Company andits subsidiaries retained Ernst & Young LLP to provide audit-relatedand tax services in 2004 and 2003.  Theaggregate fees for professional services by Ernst & Young LLP in 2004and 2003 were as follows:

 

**Audit Fees**:  The Company was charged $1,750 and $467 forservices rendered in connection with the annual audit of the Company’sconsolidated financial statements for 2004 and 2003, respectively, and $206 and$94 for services rendered for three quarterly reviews of the financialstatements during 2004 and 2003, respectively. Also in 2004, the Company was charged $732 for services and proceduresrelating to the Investigation and an additional $140 for services rendered forthe annual audit of the Company’s consolidated financial statements for 2003.In 2003, the Company incurred an additional $89 for services rendered for theannual audit of the Company’s consolidated financial statements for 2002.

 

**Audit-Related Fees**:  TheCompany was charged $170 in 2003 for fees associated with the audit for theacquisition of Octagon which was acquired during the year.

 

**Tax Fees**:  The Company wascharged $120 and $90 for tax compliance services for the Company and itssubsidiaries for 2004 and 2003, respectively. The Company was charged $30 in 2004 and $326 in 2003 for specificsubsidiary tax advice.

 

**All Other Fees**:  The aggregate Ernst & Young fees forservices other than as set forth above were $0 and $5 in 2004 and 2003,respectively.

 

All of the services provided above were pre-approved bythe Audit Committee pursuant to policies set forth in the Company’s AuditCommittee Charter.  The Audit Committeeconsidered that the provision of these services was compatible with maintainingErnst & Young LLP’s independence.

 

67

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**PART IV**

 

**ITEM 15****. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE**

 

(a)           (1) FinancialStatements and Financial Statement Schedule and (2) See “Index toConsolidated Financial Statements” set forth in Item 8. of this Form 10-K.

 

(a)                                  (3) ExhibitsRequired To Be Filed By Item 601 of Regulation S-K

 

The documents required to be filed as exhibits to this Form 10-Kare listed below.  Each managementcontract or compensatory plan or arrangement required to be filed as an exhibitto this Form 10-K is marked with an asterisk.  All other schedules of the Company for whichprovision is made in the applicable accounting regulations of the SEC are notrequired under the related instructions, are inapplicable, or have beendisclosed in the Notes to Consolidated 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 as of 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. |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.11+               |       | —     |       | Stock Purchase Agreement dated March 31, 2005 between  Continental Casuality Company, as Seller and Octagon Risk  Services, Inc., as Purchaser relating to Managed Care Holdings  Corporation and its subsidiary, Caronia Corp.                                                                                                                                                                                                                                                                                                                                                                  |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.20                |       | —     |       | Registration Rights Agreement and Amendment to Stock Purchase  Agreement dated as of 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)).                                                                                                                                                                                                                                                                                           |

 

68

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| 10.23  |   | — |   | Loan and Security Agreement dated as of 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 as of 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  |   | — |   | Warrantholders Rights Agreement dated as of 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 as of  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 as of 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 as of 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 as of 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 as of  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 as of 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 as of 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). |

 

69

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| 10.41  |   | — |   | Credit Agreement dated as of 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  |   | — |   | Warrantholders Rights Agreement dated as of 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 as of 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 as of 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 as of  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 as of 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 as of 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 as of 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 as of 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 as of 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).                                                       |

 

70

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| 10.63  |   | — |   | Warrant Agreement, dated as of 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 as of 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 Partners (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 as of 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 as of 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 as of 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 as of 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 as of  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 as of 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 as of 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 as of 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 as of 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

71

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| 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).                                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.84  |   | — |   | Management Consulting Agreement dated as of 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 as of 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 as of April 5,  2002 between Security Capital and Bank One (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 as of  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 as  of April 5, 2002 between Jewel I, Inc. d/b/a Primrose Country  Day School and Primrose and Security Capital (incorporated by reference to  Exhibit 4 to the Registrant’s Form 10-Q Quarterly Report dated  March 31, 2002). |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.92  |   | — |   | Reimbursement Agreement dated as of 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 as of 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).                                                                              |

 

72

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| 10.94  |   | — |   | First Amendment to Loan Agreement dated as of December 31, 2002  by and among Primrose Holdings, Security Capital, Brian D. Fitzgerald  and Bank One (incorporated by reference to Exhibit 10.94 of the Registrant’s  Form 10-K for the year ended December 31, 2002).                                                                                                                                                                                                                                                                                                          |
|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.95  |   | — |   | Advisory Services Agreement dated as of January 1, 2003 between  Security Capital and Capital Partners (incorporated by reference to Exhibit  10.95 of the Registrant’s Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.96  |   | — |   | First Amendment to Advisory Services Agreement dated as of  November 4, 2003 between Security Capital and Capital Partners (incorporated  by reference to Exhibit 10.96 of the Registrant’s Form 10-K for the year  ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                        |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.97  |   | — |   | Amended and restated loan agreement dated as of 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 as of 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).                                                                                                                                                                                                                                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 21+    |   | — |   | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 23.1+  |   | — |   | 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.

 

73

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**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: June 28, 2005     |

 

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)    |       | June 28, 2005 |
| Brian D. Fitzgerald                 |       |                                                   |       |          |
|                                |       |                                                   |       |          |
| /s/ WILLIAM R. SCHLUETER            |       | Chief Financial Officer (Principal Accounting Officer) |       | June 28, 2005 |
| William R. Schlueter                |       |                                                   |       |          |
|                                |       |                                                   |       |          |
| /s/ A. GEORGE GEBAUER               |       | Vice Chairman                                          |       | June 28, 2005 |
| A. George Gebauer                   |       |                                                   |       |          |
|                                |       |                                                   |       |          |
| /s/ SAMUEL B. FORTENBAUGH, III |       | Director                                               |       | June 28, 2005 |
| Samuel B. Fortenbaugh, III     |       |                                                   |       |          |
|                                |       |                                                   |       |          |
| /s/ JOHN H.F. HASKELL, Jr.     |       | Director                                               |       | June 28, 2005 |
| John H.F. Haskell, Jr.         |       |                                                   |       |          |
|                                |       |                                                   |       |          |
| /s/ EDWARD W. KELLEY, JR.      |       | Director                                               |       | June 28, 2005 |
| Edward W. Kelley, Jr.          |       |                                                   |       |          |
|                                |       |                                                   |       |          |
| /s/ M. PAUL KELLY                   |       | Director                                               |       | June 28, 2005 |
| M. Paul Kelly                       |       |                                                   |       |          |
|                                |       |                                                   |       |          |
| /s/ ROBERT M. WILLIAMS SR.          |       | Director                                               |       | June 28, 2005 |
| Robert M. Williams Sr.              |       |                                                   |       |          |

 

74

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**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 is marked with anasterisk.

 

 
| **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 as of 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. |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.11+               |       | —     |       | Stock Purchase Agreement dated March 31, 2005 between  Continental Casuality Company, as Seller and Octagon Risk  Services, Inc., as Purchaser relating to Managed Care Holdings  Corporation and its subsidiary, Caronia Corp.                                                                                                                                                                                                                                                                                                                                                                  |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.20                |       | —     |       | Registration Rights Agreement and Amendment to Stock Purchase  Agreement dated as of 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)).                                                                                                                                                                                                                                                                                           |

 

75

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| 10.23  |   | — |   | Loan and Security Agreement dated as of 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 as of 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  |   | — |   | Warrantholders Rights Agreement dated as of 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 as of  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 as of 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 as of 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 as of 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 as of  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 as of 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 as of 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). |

 

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| 10.41  |   | — |   | Credit Agreement dated as of 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  |   | — |   | Warrantholders Rights Agreement dated as of 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 as of 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 as of 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 as of  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 as of 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 as of 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 as of 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 as of 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 as of 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 as of 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 as of 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 Partners (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 as of 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 as of 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 as of 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 as of 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 as of  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 as of 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 as of 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 as of 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 as of  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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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| 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).                                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.84  |   | — |   | Management Consulting Agreement dated as of 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 as of 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 as of April 5,  2002 between Security Capital and Bank One (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 as of  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 as  of April 5, 2002 between Jewel I, Inc. d/b/a Primrose Country  Day School and Primrose and Security Capital (incorporated by reference to  Exhibit 4 to the Registrant’s Form 10-Q Quarterly Report dated  March 31, 2002). |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                 |
| 10.92  |   | — |   | Reimbursement Agreement dated as of 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 as of 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).                                                                              |

 

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| 10.94  |   | — |   | First Amendment to Loan Agreement dated as of December 31, 2002  by and among Primrose Holdings, Security Capital, Brian D. Fitzgerald  and Bank One (incorporated by reference to Exhibit 10.94 of the Registrant’s  Form 10-K for the year ended December 31, 2002).                                                                                                                                                                                                                                                                                                          |
|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.95  |   | — |   | Advisory Services Agreement dated as of January 1, 2003 between  Security Capital and Capital Partners (incorporated by reference to Exhibit  10.95 of the Registrant’s Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.96  |   | — |   | First Amendment to Advisory Services Agreement dated as of  November 4, 2003 between Security Capital and Capital Partners  (incorporated by reference to Exhibit 10.96 of the Registrant’s Form 10-K for  the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                        |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.97  |   | — |   | Amended and restated loan agreement dated as of 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 as of 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).                                                                                                                                                                                                                                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 21+    |   | — |   | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 23.1+  |   | — |   | 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.

 

80

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