Revenues from the Employer Cost Containment and Health Services segment for the year ended 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 acquisition of Octagon in October 2003. The operations of Octagon were included in our 2003 results only for the three months following the acquisition whereas, in 2004, the operations of Octagon were included for the entire year. The inclusion of Octagon for twelve months in 2004 compared to only three months in 2003 resulted in additional revenue of $33,918.
Consolidated depreciation 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 for 2003. Consolidated D&A increased $174, or 8% for the year ended December 31, 2003 compared to $2,277 for 2002. D&A by segment was as follows:
Net cash used in investing activities was $1,118, $15,970 and $5,190 for the years ended December 31, 2004, 2003 and 2002, respectively. Cash of $3,841 and $1,801 was used in 2004 for capital expenditures and acquisitions, respectively. These uses of cash were partially offset by net cash of $4,524 received from discontinued operations. Cash used in 2003 was primarily due to the acquisition of Octagon for $14,893, net of cash and investments acquired. Capital expenditures in 2004 increased compared to 2003 and 2002, primarily due to facilities expansion at Octagon in 2004. 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.
Operating lease amounts do not include sublease income of $218 in 2005 and $296 in 2006-2007. The obligation for management fees is the amount due to Capital Partners under the MAS Agreement. The MAS Agreement is effective for the calendar year and is automatically renewed on December 31 unless either party 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 revisited in the course of the formal sales process for the Company, neither the Company nor Capital Partners has any immediate plans to rescind or materially change the terms of the Agreement. The obligations for long-term debt represent the minimum required principal repayments for the long-term debt outstanding at December 31, 2004.
(4) The Preferred Stock was redeemed in October 2004, and the third quarter includes accelerated accretion of $1,023 to increase the carrying value of the Preferred Stock to its redemption value. For the full year, Preferred Stock accretion was $1,275 compared to $457 for 2003.
reporting unit is allocated to the assets and liabilities of the reporting unit, including an amount for any “implied” goodwill. If implied goodwill exceeds the net carrying amount of goodwill, no impairment loss is recorded. Otherwise, an impairment loss is recognized for the difference.
The changes in the carrying amount of goodwill for 2004 were as follows:
The following table summarizes information about stock options outstanding and exercisable at December 31, 2004:
At December 31, 2004, we had issued stock options to employees of WC to acquire 921 shares of WC at an exercise price of $694.00 per share and stock options to acquire 100 shares at an exercise price of $1,626.00 per share. These options were granted at the fair market value of a share of stock in WC, as determined by the Company and approved by the Board. The options vest between three and five years and expire on the tenth anniversary of the grant date. The option grant for 100 shares at an exercise price of $1,626.00 per share vests over eight years but provides for accelerated vesting if certain goals and objectives are obtained. At December 31, 2004, options to acquire 866 shares of stock in WC were exercisable at a weighted average exercise price of $721.00, and there were 422 shares available for future issuance. The options may be settled in either Security Capital stock or cash, at the option of the Company. If all such outstanding options had been vested and exercised for WC stock at December 31, 2004, our ownership share of WC would have been 74.7%. On January 3, 2005, an additional 206 options to acquire WC stock at a price of $694 were canceled and available for future issuance.
In connection with a written offer made by Mr. Brian Fitzgerald, our Chairman of the 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”), three complaints were filed in the Court of Chancery of the State of Delaware in and for New Castle County (the “Court”) naming the Company, each then-member of our Board of Directors and CPI as defendants. Each of the complaints alleges that the defendants breached their fiduciary duties to the putative class and that the then-proposed Initial Capital Partners Offer was unfair, inadequate and not the result of arm’s-length negotiations. Each complaint sought an injunction against the proposed merger or, if the merger was consummated, the rescission of the merger, as well as money damages, attorneys’ fees, expenses and other relief. The Court has issued an
Management evaluates the performance of its segments based upon segment income, defined as earnings before interest, taxes, depreciation, amortization, minority interests, corporate expenses and management fees, discontinued operations and other income or expense. Segment income is used to evaluate performance because management believes this is the best financial indicator of value, of our ability to incur and service debt and to generate operating cash flows. It is also one method by which we evaluate and value potential acquisition opportunities and by which we value our current subsidiaries. Segment income is not a substitute for operating income or cash flows from operating activities determined in accordance with GAAP. All prior period segment information has been reclassified to conform to the current presentation.
On June 7, 2005, we announced that the Special Committee recommended, and the Board of Directors had approved, a formal sale process for the Company and the retention of UBS Securities LLC (“UBS”) to conduct the process. For the past year and one-half, the Special Committee has evaluated various strategic alternatives to maximize stockholder value, including the offers described below, and now supports the switch to a formal sale process. Management fully supports the recommendation of the Special Committee and the actions of the full Board of Directors and believes that a formal sale process represents the best possibility of achieving the highest price reasonably obtainable for the stockholders of the Company.
We have restated our previously issued financial statements for the years ended December 31, 2003 and 2002 to reflect a correction in our accounting practices for leases and 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 has also been restated. The restatement had no impact on net revenues or net cash flows.