~~UNITED STATES~~FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		for the quarterly period ended June 30, 2004.
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		for the transition period from to .

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

for the quarterly period ended March 31, 2005.

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

for the transition period from to .

1-7921

(Commission file number)

Security Capital Corporation

(Exact name of registrant as specified in its charter)

Delaware		13-3003070
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
Eight Greenwich Office Park, Third Floor, Greenwich, CT 06831
(Address of principal executive offices, including zip code)
(203) 625-0770
(Registrant’s telephone number, including area code)
N.A.
(Former address, if changed since last report)

~~Eight~~Indicate ~~Greenwich~~by ~~Office~~check ~~Park,~~mark ~~Third~~whether ~~Floor,~~the ~~Greenwich~~registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), CTand ~~06831~~(2) has been subject to such filing requirements for the past 90 days. Yes o No ý.

(Address of principal executive offices, including zip code)

(203) 625-0770

(Registrant’s telephone number, including area code)

N.A.

(Former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o.

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

AsIndicate ofby ~~August 11,~~check ~~2004,~~mark ~~there~~whether ~~were~~the ~~6,450,587~~registrant ~~outstanding~~is ~~shares~~a ofshell ~~Class~~company ~~A Common Stock, par~~(as ~~value~~defined $in ~~.01,~~Rule 12b-2 ~~and 380 outstanding shares~~ of ~~Common~~the ~~Stock,~~Exchange ~~par value $~~ Act).~~01,~~ ~~of the registrant~~Yes o No ý.

As of August 25, 2005, there were 6,770,587 outstanding shares of Class A Common Stock, par value $ 0.01, and 380 outstanding shares of Common Stock, par value $ 0.01, of the registrant.

TABLE OF CONTENTS

Part I	Financial Information
Item 1.	~~Consolidated~~ Financial Statements (unaudited)
	Consolidated Balance Sheets
	Condensed Consolidated Balance Sheets
	Consolidated Statements of Operations
	Condensed Consolidated Statements of Income
	Consolidated Statements of Cash Flows
	Condensed Consolidated Statements of Cash Flows
	Notes to the Consolidated Financial Statements
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II	Other Information
Item 1.	Legal Proceedings
Item 5.	Other Information
Item 6.	Exhibits
Item 6.	Exhibits and Reports on Form 8-K

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Security Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share amounts)	June 30, 2004			December 31, 2003
	(Unaudited)			(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	4,473		$	11,645
Restricted cash	30,750			—
Accounts receivable, net	21,625			16,468
Deferred income taxes	1,395			1,618
Current assets of discontinued operations	4,567			4,425
Other current assets	1,660			1,465
Total current assets	64,470			35,621
Property and equipment, net	5,034			4,196
Goodwill, net	59,579			59,284
Franchise agreements, net	6,572			6,780
Other intangible assets, net	6,898			6,491
Deferred income taxes	2,903			2,928
Long-lived assets of discontinued operations, net	6,903			7,044
Other assets	996			1,015
Total assets	$	153,355		$	123,359
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable and current portion of long-term debt	$	39,398		$	9,031
Accounts payable	2,799			2,859
Accrued expenses and other liabilities	16,498			18,322
Unearned revenues	22,272			20,263
Current liabilities of discontinued operations	3,923			2,678
Total current liabilities	84,890			53,153
Long-term debt	21,926			25,858
Other long-term liabilities	273			662
Long-term liabilities of discontinued operations	382			312
Losses in excess of investment in Possible Dreams	1,401			1,401
Minority interests	5,377			4,644
Redeemable convertible preferred stock (redemption value at April 6, 2006 — $5,000), $.01 par value, 2,500,000 shares authorized; 500,000 shares issued and outstanding	3,977			3,725
Commitments and contingencies (Note 11)
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	65,418			65,670
Accumulated deficit	(30,422		)	(32,046		)
Accumulated other comprehensive income	153			—
Less: treasury stock, at cost, 7,722 shares	(85		)	(85		)
Total stockholders’ equity	35,129			33,604
Total liabilities and stockholders’ equity	$	153,355		$	123,359

The accompanying notes are an integral part of these consolidated financial statements.

~~Security Capital~~PART I—FINANCIAL ~~Corporation and Subsidiaries~~INFORMATION

~~Consolidated Statements~~Item of1. ~~Operations~~Financial Statements

~~(Unaudited)~~Security Capital Corporation and Subsidiaries

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share amounts)	2004			2003			2004			2003
Revenues:
Employer cost containment-related services	$	29,479		$	18,416		$	57,692		$	36,553
Educational services	2,826			2,174			5,497			4,384
Total revenues	32,305			20,590			63,189			40,937
Selling, general and administrative expenses	27,552			17,501			53,539			34,034
Depreciation and amortization	861			538			1,797			1,086
Operating income	3,892			2,551			7,853			5,817
Interest expense	(1,451		)	(151		)	(2,807		)	(571		)
Other income, net	265			91			373			139
Income from continuing operations before income taxes and minority interests	2,706			2,491			5,419			5,385
Income tax expense	(1,109		)	(1,095		)	(2,243		)	(2,320		)
Minority interest in income of consolidated subsidiaries	(394		)	(231		)	(733		)	(516		)
Income from continuing operations	1,203			1,165			2,443			2,549
Loss from discontinued operations (net of tax benefit of $152 and $663 for the three months ended June 30, 2004 and 2003, respectively, and $503 and $1,391 for the six months ended June 30, 2004 and 2003, respectively)	(247		)	(824		)	(819		)	(1,828		)
Net income	956			341			1,624			721
Preferred stock accretion	(133		)	(112		)	(252		)	(221		)
Income available to common stockholders	$	823		$	229		$	1,372		$	500
Basic earnings per common share from continuing operations	$	0.17		$	0.16		$	0.34		$	0.36
Basic loss per common share from discontinued operations	(0.04		)	(0.13		)	(0.13		)	(0.28		)
Basic earnings per common share	$	0.13		$	0.04		$	0.21		$	0.08
Diluted earnings per common share from continuing operations	$	0.15		$	0.15		$	0.30		$	0.33
Diluted loss per common share from discontinued operations	(0.04		)	(0.13		)	(0.13		)	(0.28		)
Diluted earnings per common share	$	0.11		$	0.02		$	0.18		$	0.05
Weighted average shares used in computation
Basic	6,451			6,451			6,451			6,451
Diluted	6,520			6,548			6,537			6,539

Condensed Consolidated Balance Sheets

~~The accompanying notes are an integral part of these consolidated financial statements.~~(unaudited)

	March 31,			December 31,
(in thousands, except share and per share amounts)	2005			2004

ASSETS
Current assets:
Cash and cash equivalents	$	22,472		$	12,488
Restricted cash	425			373
Accounts receivable, net	16,246			18,340
Reimbursable assignment development costs, net	2,044			1,548
Deferred income taxes	2,681			2,681
Other current assets	1,241			1,345
Total current assets	45,109			36,775
Property and equipment, net	6,018			6,036
Goodwill, net	72,533			59,041
Identified intangible assets, net	20,284			12,563
Deferred income taxes	—			1,358
Other assets	966			862
Total assets	$	144,910		$	116,635

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,024		$	5,363
Accrued expenses and other liabilities	13,777			9,899
Income taxes payable	5,593			8,191
Unearned revenue	31,584			24,566
Current portion of long-term debt	8,100			5,970
Total current liabilities	64,078			53,989
Long-term debt	32,400			18,959
Other long-term obligations	978			2,297
Deferred income taxes	2,128			—
Minority interests	6,298			6,023
Stockholders’ equity:
Common stock, $0.01 par value, 7,500 shares authorized; 380 shares issued and outstanding	—			—
Class A common stock, $0.01 par value, 10,000,000 shares authorized; 6,778,309 shares issued, 6,770,587 and 6,450,587 shares outstanding at March 31, 2005 and December 31, 2004, respectively	68			65
Additional paid-in capital	66,351			64,395
Accumulated deficit	(27,467		)	(29,067		)
Accumulated other comprehensive income	161			59
Less: treasury stock, at cost, 7,722 shares	(85		)	(85		)
Total stockholders’ equity	39,028			35,367
Total liabilities and stockholders’ equity	$	144,910		$	116,635

~~Security~~The ~~Capital~~accompanying ~~Corporation~~notes ~~and~~are ~~Subsidiaries~~an integral part of these condensed consolidated financial statements.

~~Consolidated Statements of Cash Flows~~3

~~(Unaudited)~~Security Capital Corporation and Subsidiaries

	For the Six Months Ended June 30,
(in thousands)	2004			2003
Cash flows from operating activities:
Income from continuing operations	$	2,443		$	2,549
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Gain on sale of land	—			(109		)
Deferred income taxes	248			330
Depreciation and amortization	1,797			1,086
Amortization of deferred financing costs	600			130
Provision for doubtful accounts	196			401
Minority interests in income of consolidated subsidiaries	733			516
Unrealized gain on derivatives	(236		)	(5		)
Changes in operating assets and liabilities:
Increase in accounts receivable	(5,258		)	(1,848		)
Increase in other current assets	(195		)	(431		)
Increase in accounts payable, accrued expenses and other liabilities	828			606
Other	128			—
Net cash provided by operating activities	1,284			3,225
Cash flows from investing activities:
Capital expenditures	(1,804		)	(431		)
Proceeds from sale of land	—			109
Acquisitions	(1,775		)	(45		)
Net cash received from discontinued operations	150			137
Net cash used in investing activities	(3,429		)	(230		)
Cash flows from financing activities:
Proceeds from long-term borrowings	30,000			1,000
Repayments of long-term borrowings and capital leases	(5,865		)	(3,656		)
Proceeds from lines of credit	14,254			9,498
Repayment of lines of credit	(11,954		)	(6,797		)
Deferred financing costs paid	(712		)	—
Investment in restricted cash	(30,750		)	—
Net cash (used in) provided by financing activities	(5,027		)	45
(Decrease) increase in cash and cash equivalents	(7,172		)	3,040
Cash and cash equivalents, beginning of period	11,645			3,141
Cash and cash equivalents, end of period	$	4,473		$	6,181

Condensed Consolidated Statements of Income

~~The accompanying notes are an integral part of these consolidated financial statements.~~(unaudited)

	For the Three Months Ended March 31,
(in thousands, except per share amounts)	2005			2004
				(Restated)
Revenues:
Employer cost containment and health services	$	31,585		$	28,213
Educational services	3,302			2,671
Total revenues	34,887			30,884
Selling, general and administrative expenses	30,425			26,079
Depreciation and amortization	1,028			938
Operating income	3,434			3,867
Interest expense	(430		)	(1,356		)
Other income, net	139			108
Income from continuing operations before income taxes and minority interest	3,143			2,619
Income tax expense	(1,268		)	(1,096		)
Minority interest in income of consolidated subsidiaries	(275		)	(329		)
Income from continuing operations	1,600			1,194
Loss from discontinued operations (net of income tax benefit of $351 in 2004)	—			(572		)
Net income	1,600			622
Preferred stock accretion	—			(119		)
Income available to common stockholders	$	1,600		$	503

Net income	$	1,600		$	622
Unrealized gain (loss) on interest rate swap, net of tax expense of $89 and minority interest expense of $26 for the quarter ended March 31, 2005 and tax benefit of $80 and minority interest benefit of $23 for the quarter ended March 31, 2004	102			(93		)
Comprehensive income	$	1,702		$	529

Basic earnings per common share:
Earnings from continuing operations	$	0.24		$	0.17
Loss from discontinued operations	—			(0.09		)
Basic earnings per common share available to common stockholders	$	0.24		$	0.08

Diluted earnings per common share:
Earnings from continuing operations	$	0.23		$	0.15
Loss from discontinued operations	—			(0.09		)
Diluted earnings per common share available to common stockholders	$	0.23		$	0.06

Basic weighted average shares used in computation	6,579			6,451

Diluted weighted average shares used in computation	6,651			6,553

~~Security~~The accompanying ~~Capital~~notes ~~Corporation~~are ~~and~~an integral part of these condensed consolidated ~~Subsidiaries~~financial statements.

~~Notes to Consolidated Financial Statements (unaudited)~~4

~~(in~~Security ~~thousands,~~Capital ~~except~~Corporation ~~per~~and ~~share amounts)~~Subsidiaries

~~(1) Basis~~Condensed Consolidated Statements of ~~Presentation~~Cash Flows

~~The unaudited interim financial statements of Security Capital Corporation and its subsidiaries~~ (~~“Security Capital,” “Company,” “we,” “us” and “our”~~unaudited) have been prepared in accordance with United States generally accounting principles (“GAAP”) and the instructions to Form 10-Q and Article 10 of Regulation S-X and should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2003. In the opinion of management, all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the financial position and results of operations for the interim periods presented have been made. The consolidated balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain 2003 amounts have been reclassified to conform to the 2004 presentation.

(2) Organization and Description of Business

	For the Three Months Ended March 31,
(in thousands)	2005			2004
				(Restated)
Cash flows from operating activities:
Income from continuing operations	$	1,600		$	1,194
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Deferred income taxes	124			155
Amortization	545			457
Depreciation	483			481
Minority interest in income of consolidated subsidiaries	275			339
Amortization of deferred financing costs	41			276
Allowances for doubtful accounts and reimbursable assignment development costs	102			363
Unrealized gain on derivative	(93		)	(17		)
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease (increase) in accounts receivable	3,252			(1,799		)
Increase in reimbursable assignment development costs	(516		)	(316		)
Decrease (increase) in other assets	172			(565		)
Increase in unearned revenue	2,716			5,086
Decrease in accounts payable, accrued expenses and other liabilities	(2,195		)	(1,379		)
Net cash provided by operating activities	6,506			4,292

Cash flows from investing activities:
Capital expenditures	(463		)	(872		)
Acquisitions (net of acquired cash of $2,611 in 2005)	(13,449		)	(305		)
Net cash used in investing activities	(13,912		)	(1,177		)

Cash flows from financing activities:
Proceeds from long-term borrowings (net of deferred financing costs of $141 and $712 in 2005 and 2004, respectively)	40,359			29,288
Repayments of long-term borrowings	(24,929		)	(3,462		)
Proceeds from employee stock option exercises	1,960			—
Transfers to restricted cash	—			(30,720		)
Net cash provided by (used in) financing activities	17,390			(4,894		)

Increase (decrease) in cash and cash equivalents	9,984			(1,779		)
Cash and cash equivalents, beginning of period	12,488			11,645
Cash and cash equivalents, end of period	$	22,472		$	9,866

Supplemental cash flow information:
Noncash investing activities
Accrued transaction costs related to acquisitions	$	736		$	—

~~Security Capital operates as a holding~~The ~~company~~accompanying ~~that~~notes ~~participates~~are in the management of its subsidiaries while encouraging operating autonomy and preservation of entrepreneurial environments. Currently, we have three operating subsidiaries, known as WC Holdings, Inc. (“WC”), Primrose Holdings, Inc. (“Primrose”) and Pumpkin Masters Holdings, Inc. (“Pumpkin”). WC is an ~~80%-owned~~integral ~~subsidiary~~part ~~which provides cost containment services relative to direct and indirect costs~~ of ~~corporations and~~these ~~their~~condensed ~~employees primarily relating to industrial health and safety,~~consolidated ~~industrial~~financial ~~medical care and workers’ compensation insurance~~statements. WC’s activities are primarily centered in California, Ohio, Virginia, Maryland, Texas, Georgia and, to a lesser extent, in other Middle Atlantic states, Indiana and Washington. Primrose is a 98.5%-owned subsidiary involved in the franchising of educational child care centers. This segment’s activities are in the franchising of educational child care centers, with related activities in real estate consulting and site selection services. Currently, Primrose schools are located in the Southeast and Southwest. Pumpkin is a 100%-owned subsidiary engaged in the business of designing and distributing Halloween-oriented pumpkin carving kits and related accessories. Pumpkin distributes its products primarily throughout the United States and in Canada. Pumpkin is accounted for as a discontinued operation as we are actively marketing this subsidiary for sale and expect to conclude a sale during 2004 (see Note 4).

P.D. Holdings, Inc. (“Possible Dreams”) is a 75%-owned subsidiary that formerly operated as a designer, importer and distributor of giftware and collectible figurines. Possible Dreams distributed its products throughout the United States. In October 2003, Possible Dreams filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. As of the date of filing, we no longer had control over this subsidiary and therefore the accounts of Possible Dreams were excluded from our consolidated financial statements. For the 2003 reporting periods presented, Possible Dreams is reported as a discontinued operation (see Note 4).5

~~(3) Significant~~Security Capital ~~Accounting~~Corporation ~~Policies~~and Subsidiaries

~~There are certain accounting policies that we~~Notes ~~believe are critical~~ to ~~our~~Condensed ~~business~~Consolidated ~~and~~Financial ~~the~~Statements understanding of our financial statements, either because of their magnitude to the financial statements or because they require management to make certain estimates and assumptions. These critical accounting policies are described below. For disclosure of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2003.(unaudited)

~~Revenue~~(in thousands, ~~Recognition~~except per share amounts)

~~Revenues~~(1) Basis for the employer cost containment and health services segment are derived from claims management, self-insured plan administrator services, consulting services and managed care administration services and are recorded based on the requirements and duration of ~~the related contracts. Revenues from~~Presentation

5The unaudited interim financial statements of Security Capital Corporation and its subsidiaries (“Security Capital,” the “Company,” “we,” “us” and “our”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and the instructions to Form 10-Q and Article 10 of Regulation S-X and should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2004. In the opinion of management, all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the financial position and results of operations for the interim periods presented have been made. The consolidated balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain 2004 amounts have been reclassified to conform to the 2005 presentation.

~~managed~~(2) Organization ~~care~~and ~~administration~~Description ~~services are recognized on a monthly basis based on the contracted administrative fee with the Ohio Bureau~~ of Workers’ Compensation. In addition, contract revenues are recorded for certain incentive awards when the claims are processed to which the incentive is related, and a bonus award is recorded in the year earned. Cash received in advance on certain contracts is initially deferred and recognized as revenue on a pro rata basis over the related contract periods, which typically range between three and 12 months. Commissions associated with these contracts are also deferred and recognized as an expense on a pro rata basis over the related contract periods.Business

~~Revenues for the educational services segment are~~Security ~~derived~~Capital ~~from~~operates ~~royalties~~as ~~received from franchisees based on~~ a ~~percentage~~holding ofcompany ~~the school’s~~that ~~monthly~~actively ~~revenue~~participates ~~and various fees for services provided to franchisees. Royalty revenue is recorded~~ in the ~~month~~management of ~~earned~~its ~~and typically collected in the subsequent month~~subsidiaries. ~~Franchise~~At ~~fees are collected at various~~March 31, ~~intervals~~2005, ~~prior~~we tooperated ~~the~~two ~~opening of a school and the recognition of the revenue is deferred until the franchised school has been certified for occupancy~~subsidiaries, ~~which is~~WC ~~generally concurrent with the commencement of operations~~Holdings, Inc. ~~Assignment~~ ~~fees~~(“WC”) ~~are received for site identification~~ and ~~preparation for the construction of the school, including~~Primrose ~~zoning permits~~Holdings, Inc. ~~and are recognized upon the purchase of the property by the franchisee~~(“Primrose”). ~~Transfer~~WC ~~fees are earned~~is ~~upon the sale of~~ an ~~existing~~80%-owned ~~franchise~~subsidiary tothat ~~another~~provides ~~franchisee. Real~~cost ~~estate~~containment services ~~fees~~relative ~~are received for~~to ~~engineering~~direct and ~~architectural~~indirect ~~design~~costs ~~consulting services provided to the franchisee during the construction~~ of ~~the~~corporations ~~school. Real~~and ~~estate~~their ~~services~~employees ~~fees are collected in~~primarily ~~advance~~relating ~~upon~~to ~~the~~industrial ~~signing~~health ofand asafety, ~~franchise~~industrial ~~agreement. These~~medical ~~fees~~care ~~are initially deferred~~ and workers’ ~~recognized~~compensation ~~as revenue when the school is certified for occupancy~~insurance. ~~Option~~WC’s ~~fees~~ activities are ~~received~~primarily tocentered ~~initiate~~in ~~an option~~California, ~~agreement~~Ohio, ~~which~~Virginia, ~~gives~~Maryland, ~~the option holder the right to purchase a~~Texas, ~~franchise~~Michigan, inFlorida, aWashington ~~designated~~and ~~geographical area for a stated period of time (typically six to twelve months)~~Minnesota. ~~If the~~ ~~option~~Primrose is ~~exercised,~~a ~~the~~98.5%-owned ~~option~~subsidiary ~~fee~~involved isin ~~applied against~~ the ~~franchise~~franchising ~~fee, and~~of ~~recognized~~educational aschildcare ~~revenue~~centers, ~~when~~with ~~the~~related ~~school~~activities isin ~~certified~~real ~~for occupancy. If the option expires, the fee is recognized~~estate asconsulting ~~revenue~~and atsite ~~the~~selection ~~time of expiration~~services. ~~Fees~~Primrose ~~are~~schools ~~also received if a franchisee terminates the franchise agreement. These fees~~ are ~~recognized~~located ~~as revenue~~in at the ~~time~~Southeast, ofSouthwest ~~termination~~and Midwest.

~~Goodwill~~We had two reportable operating segments at March 31, 2005. The Employer Cost Containment and ~~Other~~Health Services ~~Intangible~~segment ~~Assets~~consists of WC, and the Educational Services segment consists of Primrose. See Note 9 for further details regarding our reportable operating segments.

~~Acquisitions~~Pumpkin Masters ~~are~~Holdings, Inc. ~~accounted~~(“Pumpkin”) ~~for~~was ~~under~~a ~~the~~wholly ~~purchase-method~~owned ~~whereby~~subsidiary weengaged ~~record~~in ~~acquired~~the ~~tangible~~business ~~and~~of ~~intangible~~designing ~~assets~~ and ~~assumed~~distributing ~~liabilities~~Halloween-oriented ~~at fair~~pumpkin ~~value. The~~carving ~~valuation~~kits ofand ~~acquired~~related ~~assets~~accessories. ~~and~~Pumpkin ~~the~~was ~~resulting~~reported ~~goodwill~~as ~~require~~a ~~management~~discontinued tooperation ~~make~~in ~~certain~~the ~~estimates~~2004 ~~and assumptions~~period ~~that could affect amounts reported in our financial~~as ~~statements. Goodwill~~we ~~and~~were ~~other intangible~~committed ~~assets~~to ~~are~~a ~~subject~~plan to ~~impairment~~sell ~~testing~~the atoperations ~~least~~of ~~annually~~Pumpkin. In orthe ~~more frequently~~fourth ifquarter ~~indications~~ of ~~possible~~2004, ~~impairment~~we ~~exist. We~~sold substantially ~~perform~~all ~~our~~of ~~annual~~the ~~impairment~~assets ~~testing~~of ~~at year-end~~Pumpkin.

~~Employee~~(3) Restatement of ~~Stock~~Financial ~~Options~~Statements for Accounting for Leases and Leasehold Improvements

WeThe ~~follow~~condensed ~~Accounting~~consolidated ~~Principles~~statement ~~Board~~of ~~Opinion No.~~income 25for the quarter ended March 31, 2004 ~~“Accounting~~included ~~for~~herein ~~Stock~~has ~~Issued~~been restated to ~~Employees” and~~reflect ~~related~~the ~~interpretations~~change in our accounting practices for ~~stock~~leases ~~options~~and leasehold improvements. ~~Compensation~~The ~~expense~~table ~~related~~below toreconciles the ~~issuance~~amounts ofreported ~~stock~~in ~~options~~our toQuarterly ~~employees~~Report oron ~~non~~Form 10-~~employee~~Q ~~directors~~for isthe ~~only~~quarter ~~recognized~~ended ~~if the~~March 31, ~~exercise~~2004 ~~price~~to of the ~~stock~~amounts ~~option~~reported isherein. For additional ~~less~~disclosures ~~than~~with respect to the ~~fair~~restatement, ~~market~~see ~~value~~our ofAnnual ~~the~~Report ~~underlying~~on ~~stock~~Form 10-K atfor the ~~grant~~year ~~date~~ended December 31, 2004.

The fair value of options was estimated at the date of grant using a Black-Scholes option-pricing model. This model requires management to make estimates and assumptions relating to, among other things, the expected life of the option and the expected stock price volatility. There have been no stock options granted during 2004. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the pro forma disclosures shown are not necessarily representative of the effects on income and earnings per share in future years.6

	As previously reported			Lease adjustments			Restated

Revenues:
Employer cost containment and health services	$	28,213		$	—		$	28,213
Educational services	2,671			—			2,671
Total revenues	30,884			—			30,884
Selling, general and administrative expenses	25,988			91			26,079
Depreciation and amortization	936			2			938
Operating income	3,960			(93		)	3,867
Interest expense	(1,356		)	—			(1,356		)
Other income, net	108			—			108
Income from continuing operations before income taxes and minority interest	2,712			(93		)	2,619
Income tax expense	(1,133		)	37			(1,096		)
Minority interest in income of consolidated subsidiaries	(339		)	10			(329		)
Income from continuing operations	1,240			(46		)	1,194
Loss from discontinued operations (net of income tax benefit of $351)	(572		)	—			(572		)
Net income	669			(46		)	622
Preferred stock accretion	(119		)	—			(119		)
Income available to common stockholders	$	549		$	(46	)	$	503

Basic earnings per common share:
Earnings from continuing operations	$	0.17		$	—		$	0.17
Loss from discontinued operations	(0.09		)	—			(0.09		)
Basic earnings per common share available to common stockholders	$	0.08		$	—		$	0.08

Diluted earnings per common share:
Earnings from continuing operations	$	0.15		$	—		$	0.15
Loss from discontinued operations	(0.09		)	—			(0.09		)
Diluted earnings per common share available to common stockholders	$	0.06		$	—		$	0.06

~~The following table reflects the pro forma net income and earnings per share assuming we applied the fair value method of Statement of Financial Accounting Standards~~ (~~“SFAS”~~4) Significant ~~No. 123 “~~Accounting ~~for Stock-Based Compensation.”~~Policies

	For the three months ended June 30,						For the six months ended June 30,
	2004			2003			2004			2003
Net income, as reported	$	956		$	341		$	1,624		$	721
Add: Stock-based employee compensation expense included in reported net income, net of related tax effect and minority interests	—			—			—			—
Deduct: Stock-based compensation expense that would have been included in the determination of net income if the fair value method had been applied to all awards granted since January 1995, net of related tax effects and minority interest	(152		)	(207		)	(328		)	(418		)
Pro forma net income	804			134			1,296			303
Preferred stock accretion	(133		)	(112		)	(252		)	(221		)
Pro forma income available to common stockholders	$	671		$	22		$	1,044		$	82
Basic earnings per share
As reported	$	0.13		$	0.04		$	0.21		$	0.08
Pro forma	$	0.10		$	0.00		$	0.16		$	0.01
Diluted earnings per share
As reported	$	0.11		$	0.02		$	0.18		$	0.05
Pro forma	$	0.09		$	(0.01	)	$	0.13		$	(0.01	)

There are certain accounting policies that we believe are critical to our business and the understanding of our financial statements, either because of their magnitude to the financial statements or because they require management to make certain estimates and assumptions. These critical accounting policies are described below. For additional disclosures with respect to our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2004.

~~Derivative Financial~~Use ~~Instruments~~of Estimates

~~Our~~The ~~use~~preparation of ~~derivative~~consolidated financial ~~instruments~~statements in conformity with isGAAP ~~currently~~requires ~~limited~~management to ~~interest~~make ~~rate~~estimates ~~swap~~and ~~agreements,~~assumptions ~~which~~that weaffect ~~utilize to~~the ~~mitigate~~reported ~~our~~amounts ~~exposure~~of toassets ~~changes~~and inliabilities ~~interest~~and ~~rates~~disclosure onof ~~our~~contingent ~~variable rate~~assets ~~debt. We~~and doliabilities ~~not~~at ~~utilize~~the ~~derivative financial~~date ~~instruments~~of ~~for~~the ~~trading~~financial orstatements ~~speculative~~and ~~purposes. We~~the ~~account~~reported amounts ~~for~~of ~~derivatives~~revenues and ~~hedging instruments~~expenses induring ~~accordance~~the ~~with~~reported ~~SFAS~~period. Actual Noresults could differ from those estimates. ~~133,~~ Significant ~~“Accounting~~estimates include allowances for ~~Derivative~~doubtful ~~Instruments~~accounts and ~~Hedging~~uncollectible ~~Activities,”~~reimbursable asassignment ~~amended and~~development ~~interpreted~~costs, ~~which~~reserves ~~require~~for ~~that~~contingencies, ~~all~~the ~~derivative~~utilization ~~instruments~~of becarry ~~recorded~~forward ~~at their~~tax ~~fair~~benefits, ~~values. The~~the determination of fair value and economic lives of intangible ~~derivatives~~assets, isthe ~~recorded~~estimates and assumptions inherent in our goodwill impairment testing procedures and the ~~consolidated~~allocation ~~balance~~of ~~sheets~~the inpurchase ~~other~~price ~~long-term~~of an acquisition to the fair value of tangible and intangible assets acquired and liabilities assumed.

WeRevenue currently have two outstanding interest rate swap agreements. One agreement has a notional value of $8,500, which effectively converts $8,500 of variable rate debt to fixed rate debt. Under the terms of this swap, we pay a fixed rate of 7.57% and receive a variable rate based on one-month LIBOR. This swap agreement has not been designated as a hedge for financial accounting purposes and changes in the fair value of this swap are recorded through earnings. 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 2005.Recognition

~~During~~Revenues for the ~~first~~Employer ~~quarter~~Cost ofContainment ~~2004, we entered~~and ~~into~~Health anServices ~~interest~~segment ~~rate~~are ~~swap~~derived ~~with~~from athird-party ~~notional~~administrative ~~amount of $10~~services,~~000,~~ self-insured ~~which~~plan ~~effectively converts~~administrator ~~$10~~services,~~000~~ ofconsulting ~~variable~~services, ~~rate~~group ~~debt~~rating services toand ~~fixed~~managed ~~rate~~care ~~debt~~administration services. ~~Under~~Revenues ~~the~~from ~~terms~~third-party ~~of this swap agreement~~administrative services, ~~we pay~~self-insured aplan ~~fixed~~administrator ~~rate~~services, ofconsulting ~~5.44%~~services and group ~~receive~~rating aservices ~~variable~~are ~~rate~~recorded based on ~~one-month~~the terms and duration of the ~~LIBOR~~related contracts. ~~This~~Cash ~~swap~~received ~~has~~in advance ~~been~~of ~~designated~~services being provided is initially deferred and recognized as revenue on a ~~cash~~pro ~~flow~~rata ~~hedge~~basis ~~for~~over ~~financial~~the ~~accounting~~related ~~purposes~~contract periods, ~~and~~which totypically range ~~the~~between ~~extent~~three ~~the~~and ~~swap~~12 months. ~~provides~~Revenues anfrom ~~effective~~managed ~~hedge,~~care ~~changes~~administration inservices are recognized on a monthly basis based on the ~~fair~~contracted ~~value~~administrative offee with the ~~swap~~Ohio ~~are~~Bureau of ~~recorded~~Workers’ Compensation (“OBWC”). In inaddition, ~~other~~certain contracts provide for an incentive

~~comprehensive~~or bonus ~~income,~~award abased ~~component~~on ~~of stockholders’~~certain ~~equity~~criteria stipulated in the contracts. ~~Any~~Revenues from incentive or bonus awards are ~~ineffectiveness~~recognized iswhen ~~recorded~~they ~~through~~are ~~earnings~~earned and collectibility is reasonably assured.

~~Use~~Revenues from the Educational Services segment are composed of ~~Management~~royalties, ~~Estimates~~franchising fees, assignment fees, transfer fees, real estate services fees, forfeiture fees and tuition fees. Royalties are received from franchisees based on a percentage of a school’s monthly revenue and include fees for corporate services provided to franchisees. Royalty revenue is recorded in the month earned and typically collected in the subsequent month. Franchising fees are received when a franchise agreement is signed with a franchisee and recognized as revenue when the school receives its certificate of occupancy, which is generally concurrent with the commencement of operations. Assignment fees are received for pre-development services, such as site identification and evaluation, environmental studies, architectural and engineering services, and applying for and obtaining all required building and zoning permits (collectively, “Pre-development Services”). Assignment fees are recognized upon the sale of the property to the franchisee. Real estate services fees are received for consulting services related to architectural and engineering design services provided to the franchisee during the construction of the school. These fees are received when the franchise agreement is signed with a franchisee and recognized when the school receives its certificate of occupancy. Transfer fees are received and earned upon the sale of an existing franchise to another franchisee. Forfeiture fees include fees applicable to the termination of franchise agreements or for the expiration of option agreements. Tuition fees are earned at the Company-owned school and are generally billed weekly for services to be provided in the following week. All fees received in advance of the services being provided are initially deferred.

~~The~~Primrose will ~~preparation~~occasionally ofprovide ~~consolidated~~existing ~~financial~~franchisees ~~statements~~an inoption ~~conformity~~to ~~with~~purchase a ~~GAAP~~franchise ~~requires~~in ~~management~~a todesignated ~~make~~geographical ~~estimates~~area ~~and~~for ~~assumptions~~a ~~that~~stated ~~affect~~period ~~the~~of ~~reported~~time ~~amounts~~(typically ofsix ~~assets~~to ~~and~~12 ~~liabilities~~months) ~~and~~for ~~disclosure~~which ofPrimrose ~~contingent~~receives ~~assets~~a ~~and liabilities~~fee. This atfee ~~the~~is ~~date~~initially ofdeferred ~~the~~when received. When ~~financial statements and~~ the ~~reported~~option ~~amounts~~is ofexercised, ~~revenues and expenses during~~ the ~~reported~~option ~~period. Actual~~fee ~~results~~is ~~could~~credited ~~differ~~against ~~from~~the ~~those~~amount ~~estimates. Significant~~of ~~estimates~~the ~~include~~franchise anfee ~~allowance~~and ~~for~~recognized ~~doubtful~~as ~~accounts,~~revenue ~~bankruptcy~~when ~~accruals,~~the ~~our~~school ~~ability~~receives toits ~~utilize~~certificate ~~carry~~of ~~forward~~occupancy. If ~~tax~~the ~~benefits~~option ~~and~~expires, the fee ~~fair~~is ~~value~~recognized ~~and~~as ~~economic~~a ~~lives~~forfeiture ~~of intangible assets~~fee.

~~(4) Discontinued Operations~~Receivables

~~During~~Receivables ~~the~~are ~~fourth~~composed ~~quarter~~primarily of ~~2003,~~amounts ~~we committed~~due ~~to a plan to sell the operations of Pumpkin and, accordingly,~~ for ~~all~~contract services ~~periods~~provided ~~presented,~~by ~~the~~WC ~~net assets~~ and ~~results~~royalty ofpayments ~~operations~~due ofto ~~Pumpkin~~Primrose ~~are reported~~from ~~as a discontinued operation in accordance with SFAS No~~franchisees. ~~144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”~~ ~~Management~~An ~~believes~~allowance ~~that the sale of Pumpkin is probable by the end of 2004. In October 2003, Possible Dreams filed~~ for ~~bankruptcy~~doubtful ~~protection, at which time we no longer had control over this subsidiary and no longer included the~~ accounts ~~of Possible Dreams in our~~is ~~consolidated~~established ~~financial~~based ~~statements. For periods~~on ~~prior~~customer tocredit ~~the bankruptcy filing~~evaluations, ~~the~~collection ~~results~~history ofand ~~operations of Possible~~other ~~Dreams~~pertinent ~~are reported as a discontinued operation~~information. At Receivables ~~June 30, 2004, the cumulative losses of Possible Dreams in excess of our investment were $1,401 and~~ are ~~reported as a~~ ~~deferred~~generally ~~credit~~not ~~in the consolidated balance sheet until such time as the plan of liquidation is finalized~~collateralized.

~~The~~Reimbursable ~~combined~~Assignment ~~net~~Development sales of discontinued operations were $1,055 and $2,372 for the three months ended June 30, 2004 and 2003, respectively, and $1,190 and $4,823 for the six months ended June 30, 2004 and 2003, respectively. The assets and liabilities of discontinued operations at June 30, 2004 and December 31, 2003 consisted of the following:Costs

	June 30, 2004		December 31, 2003
Cash	$	9	$	534
Accounts receivable, net	1,187		2,584
Inventory	3,002		1,076
Other assets	369		231
Current assets of discontinued operations	$	4,567	$	4,425
Property, plant and equipment, net	$	375	$	388
Intangible assets, net	6,528		6,656
Long-lived assets of discontinued operations	$	6,903	$	7,044
Notes payable	$	1,565	$	1,812
Accounts payable and accrued expenses	2,358		866
Current liabilities of discontinued operations	$	3,923	$	2,678
Long-term liabilities of discontinued operations	$	382	$	312

Reimbursable assignment development costs are recoverable costs incurred by Primrose on behalf of potential franchisees for Pre-development Services. Potential franchisees are contractually obligated to reimburse Primrose for Pre-development Services upon the purchase of the property by the potential franchisee. A reserve is established for potentially uncollectible reimbursable assignment development costs based on franchisee credit evaluations, historical experience and other pertinent information.

~~Although~~Goodwill weand ~~have~~Identified noIntangible involvement in Possible Dreams’ Chapter 11 proceedings, we have gross receivables of approximately $411 from Possible Dreams which may ultimately be settled for less than their face value. It is management’s opinion that adequate reserves have been established against these receivables to provide for any such reduced settlement. We have also agreed to pay any portion of an outstanding severance claim that is not fully paid by the estate of Possible Dreams in its Chapter 11 liquidation settlement. At June 30, 2004, we have a reserve of $98 established, which we believe represents the maximum amount we may be required to pay.Assets

8Acquisitions are accounted for under the “purchase method” whereby acquired tangible and intangible assets and assumed liabilities are recorded at fair value. Identified intangible assets are amortized over their estimated useful lives. Goodwill is not amortized; however, it is subject to annual impairment testing. We perform our annual goodwill impairment testing at year-end. We review identified intangible assets, and other long-lived assets, for impairment when events or circumstances lead management to believe that the carrying value of an asset may not be recoverable.

~~(5) Earnings~~Stock ~~Per Share~~Options

~~Basic~~The ~~earnings~~Company ~~per~~measures ~~common~~compensation ~~share~~cost ~~(“EPS”)~~for ~~from~~stock options issued to ~~continuing~~employees ~~operations~~using ~~are~~the ~~derived~~intrinsic byvalue ~~dividing~~method ~~income~~of ~~from~~accounting ~~continuing~~for ~~operations~~stock-based ~~available~~compensation tounder ~~common~~Accounting ~~stockholders~~Principles byBoard ~~the~~Opinion ~~weighted~~No. 25, ~~average~~Accounting ~~shares outstanding~~for Stock Issued to Employees (“APB 25”). ~~Diluted~~Under ~~EPS~~APB 25, ~~from~~when ~~continuing~~the exercise price of ~~operations~~the ~~are~~Company’s ~~derived~~stock byoptions ~~dividing~~equals ~~income~~the ~~from~~market ~~continuing~~value ~~operations~~of ~~available to~~the ~~common~~underlying ~~stockholders~~stock ~~less~~on the date of the ~~impact~~grant, onno ~~our~~compensation ~~income~~expense ~~from~~is recognized. The Company has adopted the ~~assumed~~disclosure ~~exercise~~only provisions of ~~stock~~Statement ~~options~~ of ~~subsidiary~~Financial ~~companies~~Accounting byStandards ~~the~~No. 123, ~~weighted~~Accounting ~~average~~for ~~shares~~Stock-Based Compensation, ~~outstanding~~as ~~plus~~amended ~~the~~by ~~dilutive~~Statement ~~effect~~ of ~~common~~Financial ~~stock~~Accounting ~~equivalents~~Standards No. ~~The~~ 148, ~~following~~Accounting ~~table~~for ~~presents~~Stock-Based ~~the~~Compensation ~~computation~~- Transitions ofand ~~basic~~Disclosure, ~~and~~an ~~diluted~~amendment ~~EPS~~to FASB Statement No. 123 (“SFAS 148”).

	For the three months ended June 30,						For the six months ended June 30,
	2004			2003			2004			2003
Earnings
Net income	$	956		$	341		$	1,624		$	721
Less: Preferred stock accretion	(133		)	(112		)	(252		)	(221		)
Income available to common stockholders	823			229			1,372			500
Add back: Net loss from discontinued operations	247			824			819			1,828
Income from continuing operations available to common stockholders – numerator for basic EPS from continuing operations	$	1,070		$	1,053		$	2,191		$	2,328
Income from continuing operations available to common stockholders	$	1,070		$	1,053		$	2,191		$	2,328
Effect on our income assuming stock options of subsidiary companies are converted into stock of subsidiary companies	(117		)	(73		)	(207		)	(165		)
Diluted earnings from continuing operations – numerator for diluted EPS from continuing operations	$	953		$	980		$	1,984		$	2,163
Weighted average shares outstanding
Basic weighted average shares outstanding	6,451			6,451			6,451			6,451
Dilutive effect of stock options	69			97			86			88
Diluted weighted average shares outstanding	6,520			6,548			6,537			6,539
Basic earning per share *
From continuing operations	$	0.17		$	0.16		$	0.34		$	0.36
From discontinued operations	(0.04		)	(0.13		)	(0.13		)	(0.28		)
Basic earnings per common share	$	0.13		$	0.04		$	0.21		$	0.08
Diluted earning per share *
From continuing operations	$	0.15		$	0.15		$	0.30		$	0.33
From discontinued operations	(0.04		)	(0.13		)	(0.13		)	(0.28		)
Diluted earnings per common share	$	0.11		$	0.02		$	0.18		$	0.05

The following table is presented in accordance with SFAS 148 and illustrates the effect on income available to common stockholders and earnings per share for the quarters ended March 31, 2005 and 2004 if the Company had applied the fair value recognition provisions of SFAS 123.

* basic and diluted EPS per common share amounts are based on unrounded amounts and therefore may not equal the sum of EPS from continuing operations and discontinued operations.8

For the three and six months ended June 30, 2004 and 2003, 500 shares of zero coupon redeemable convertible preferred stock, which were convertible into 500 shares of Class A common stock, were excluded from the computation of diluted EPS because the effect of their assumed conversion would have been antidilutive. In addition, options to purchase 294 shares of our Class A common stock for the three and six months ended June 30, 2004 and 324 shares of our Class A common stock for the three and six

	For the Quarter Ended March 31,
	2005			2004
				(Restated)
Net income, as reported	$	1,600		$	622
Deduct: Stock-based compensation expense determined under the fair value method, net of related tax effects and minority interest	(151		)	(176		)
Pro forma net income	1,449			446
Preferred stock accretion	—			(119		)
Pro forma income available to common stockholders	$	1,449		$	327

Basic earnings per common share available to common stockholders:
As reported	$	0.24		$	0.09
Pro forma	$	0.22		$	0.06

Diluted earnings per common share available to common stockholders:
As reported	$	0.23		$	0.06
Pro forma	$	0.21		$	0.03

The fair value of options is estimated at the date of grant using a Black-Scholes option-pricing model. This model requires management to make estimates and assumptions relating to, among other things, the expected life of the option and the expected stock price volatility. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the pro forma disclosures shown are not necessarily representative of the effects on income and earnings per share in future years. There were no stock options granted during the first quarter of 2005. In April of 2005, the Company granted an option to purchase 64,510 shares of Class A Common Stock at a price of $9.83 per share to a key employee.

~~months~~In December ~~ended~~of ~~June~~2004, 30the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), ~~2003~~Share-Based ~~were~~Payment ~~also~~(“SFAS ~~excluded~~123R”). Under SFAS 123R, share-based payment awards result in a cost that should be measured at fair value on the awards’ grant dates, based on the estimated number of awards expected to vest. SFAS 123R requires this cost to be recognized through earnings over that expected vesting period. The provisions of SFAS 123R will become effective for the Company beginning January 1, 2006. SFAS 123R allows public companies to select from two alternative transition methods when adopting SFAS 123R, the modified ~~computation~~prospective application or the modified retrospective application. Under the modified prospective application, the provisions of ~~diluted~~SFAS ~~EPS~~123R ~~because~~are applied to new awards and awards modified, repurchased or cancelled after the ~~effect~~effective ~~would~~date. Under ~~have~~the ~~been~~modified ~~antidilutive~~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 interim periods in the year of adoption unless the effective date of SFAS 123R coincides with a company’s fiscal year. We are currently in the process of quantifying the impact of SFAS 123R on our financial statements, and determining which transition method to use.

(65) ~~Segment Disclosure~~ Acquisitions

~~After~~On March 31, ~~giving~~2005, ~~effect to~~ the ~~discontinuation~~Company, ofthrough ~~Pumpkin and~~its ~~Possible~~indirect, ~~Dreams~~majority-owned subsidiary, weOctagon ~~have~~Risk ~~two reportable segments~~Services, Inc., ~~The~~acquired ~~employer~~100% ~~cost containment and health services segment consists~~ of ~~WC and~~ the ~~educational~~outstanding ~~services~~capital ~~segment~~stock ~~consists~~ of ~~Primrose. Management~~Managed ~~evaluates~~Care ~~the~~Holdings ~~performance~~Corporation of(“MCHC”) and its ~~segments based upon segment~~wholly ~~income~~owned subsidiary, ~~defined~~Caronia asCorporation ~~earnings before interest~~(“Caronia”), ~~taxes,~~from ~~depreciation,~~Continental ~~amortization,~~Casualty ~~minority~~Company ~~interest~~for ~~expense~~$16, ~~corporate expenses~~000, ~~including~~plus ~~management~~$937 ~~fees,~~of ~~discontinued operations~~transaction ~~and~~costs. Caronia ~~other~~provides ~~income~~third-party ~~or expense.~~ professional ~~Segment~~medical ~~income~~liability isclaims ~~used~~administration toand ~~evaluate~~risk ~~performance~~management ~~because~~services ~~management~~to ~~believes~~hospitals ~~this~~and ishealthcare ~~the~~systems, ~~best~~physician ~~financial~~and ~~indicator~~paraprofessional ofgroups, nursing ~~value~~homes, ofrehabilitation ~~our~~centers ~~ability to incur~~ and ~~service debt and to generate operating cash flows~~clinics. ItCaronia is ~~also~~based ~~one~~in ~~method~~Melville, byNew ~~which~~York ~~we evaluate~~ and services ~~value~~clients ~~potential~~through ~~acquisition~~40 ~~opportunities~~locations ~~and~~nationwide. Upon bythe ~~which~~consummation weof ~~value~~the ~~our current~~transaction, ~~subsidiaries. Segment~~MCHC ~~income~~and isCaronia ~~not~~became ~~a substitute~~part ~~for~~of ~~operating~~our ~~income~~Employer orCost ~~cash~~Containment ~~flows~~and ~~from~~Health Services operating ~~activities determined in accordance with GAAP~~segment.

~~Segment~~The acquisition ~~information~~was accounted for ~~the~~as ~~three~~a purchase business combination, and accordingly, ~~six~~the ~~months~~costs ~~ended~~to acquire Caronia were allocated to the tangible and ~~June~~identified ~~30,~~intangible ~~2004~~assets acquired and ~~2003~~liabilities isassumed ~~presented~~based inon ~~the~~their respective ~~table~~fair ~~below~~values, and any excess was allocated to goodwill.

	For the three months ended June 30,						For the six months ended June 30,
	2004			2003			2004			2003
Revenues:
Employer cost containment and health services	$	29,479		$	18,416		$	57,692		$	36,553
Educational services	2,826			2,174			5,497			4,384
Total revenues	$	32,305		$	20,590		$	63,189		$	40,937
Segment income (as defined):
Employer cost containment and health services	$	4,318		$	2,496		$	8,574		$	5,716
Educational services	1,442			958			2,740			2,019
Total segment income	$	5,760		$	3,454		$	11,314		$	7,735
Reconciliation of segment income to net income:
Segment income	$	5,760		$	3,454		$	11,314		$	7,735
Depreciation and amortization expense	(861		)	(538		)	(1,797		)	(1,086		)
Interest expense	(1,451		)	(151		)	(2,807		)	(571		)
Income tax expense	(1,109		)	(1,095		)	(2,243		)	(2,320		)
Minority interests in income of consolidated subsidiaries	(394		)	(231		)	(733		)	(516		)
Corporate expenses, including management fees	(1,007		)	(365		)	(1,664		)	(832		)
Other income, net	265			91			373			139
Loss from discontinued operations	(247		)	(824		)	(819		)	(1,828		)
Net income	$	956		$	341		$	1,624		$	721

10Under the terms of the agreement governing the acquisition of Caronia, the contractual purchase price was subject to adjustment based upon the working capital of Caronia as of the closing date. Accordingly, based on the working capital of Caronia as of the closing date, we are required to make a payment to the seller of $1,223. This payment, which is expected to be made during the third quarter of 2005, has been reflected in accrued liabilities in the preliminary purchase price allocation shown below. The purchase price allocation below is based on the best information currently available and is subject to change as additional information becomes available.

Segment assets at June 30, 2004 and December 31, 2003 are presented below.

Total purchase price	$	16,000
Transactions costs	937
Total purchase price to allocate	$	16,937

Allocation of Purchase Price
Cash	$	2,611
Accounts receivable, net	1,315
Fixed assets, net	66
Customer list	5,200
Trade names	3,000
Goodwill	13,491
Deferred financing costs	141
Unearned revenue	(4,302		)
Accrued liabilities	(1,223		)
Deferred tax liability	(3,362		)
Total	$	16,937

	June 30, 2004		December 31, 2003
Segment assets:
Employer cost containment and health services	$	80,778	$	81,300
Educational services	26,669		28,480
Total segment assets	107,447		109,780
Corporate	34,438		2,110
Discontinued operations, net	11,470		11,469
Total consolidated assets	$	153,355	$	123,359

The acquisition of Caronia is reflected in our condensed consolidated balance sheet at March 31, 2005. The following unaudited pro forma condensed consolidated statements of income for the quarters ended March 31, 2005 and 2004 present the combined results of the Company and Caronia as if the Caronia acquisition had taken place on January 1, 2004. The pro forma amounts give effect to the amortization of intangibles, increased interest expense and the related income tax and minority interest effects. This pro forma information does not necessarily reflect the results of operations if the business had been managed by the Company during these periods and is not indicative of results that may be obtained in the future.

~~(7) Debt~~10

At June 30, 2004 and December 31, 2003, our debt consisted of the following:

	For the Quarter Ended March 31,
	2005			2004
Revenues:
Employer cost containment and health services	$	35,302		$	31,969
Educational services	3,303			2,671
Total revenues	38,605			34,640
Selling, general and administrative expenses	33,314			29,066
Depreciation and amortization	1,233			1,143
Operating income	4,058			4,431
Interest expense	(701		)	(1,490		)
Other income, net	139			108
Income from continuing operations before income taxes and minority interest	3,496			3,049
Income tax expense	(1,586		)	(1,229		)
Minority interest in income of consolidated subsidiaries	(282		)	(389		)
Income from continuing operations	1,628			1,431
Loss from discontinued operations (net of income tax benefit of $351 in 2004)	—			(572		)
Net income	1,628			859
Preferred stock accretion	—			(119		)
Income available to common stockholders	$	1,628		$	740

Basic earnings per common share:
Earnings from continuing operations	$	0.25		$	0.20
Loss from discontinued operations	—			(0.09		)
Basic earnings per common share available to common stockholders	$	0.25		$	0.11

Diluted earnings per common share:
Earnings from continuing operations	$	0.23		$	0.18
Loss from discontinued operations	—			(0.09		)
Diluted earnings per common share available to common stockholders	$	0.23		$	0.09

	June 30, 2004		December 31, 2003
Primrose Term Loan	$	1,464	$	2,928
Borrowings under bank lines	2,300		—
WC Holdings note to Community Insurance	70		481
WC Holdings senior term debt	27,490		31,480
10% Senior subordinated note	30,000		—
Total debt	61,324		34,889
Less: current portion	39,398		9,031
Long-term debt	$	21,926	$	25,858

During the first quarter of 2004, WC acquired 100% of the stock of KRAMMCO, Inc., an Ohio corporation, for $984, including transaction costs of $9. KRAMMCO, Inc. is a management company whose sole asset is a management contract with the North American Employer’s Council, Inc. (“NAEC”), an Ohio not-for-profit corporation. NAEC is an Ohio association that provides association members with, among other value-added services, an Ohio group rating sponsor. The purchase price was allocated as follows:

On January 14, 2004, we issued a $30,000 Senior Subordinated Promissory Note (the “Note”), due September 30, 2008, to a mezzanine lender. The Note bears interest at an initial rate of 10% per annum, with interest payable quarterly beginning March 31, 2004. The interest rate is subject to adjustment upwards to 16% per annum effective upon the earlier of September 30, 2004 or the occurrence of certain triggering events under the Note. A triggering event will occur on the earlier of September 30, 2004 or upon a permitted transaction approved by the lender. If no permitted transaction occurs by September 30, 2004, the lender may at its option call the loan. Accordingly, the Note has been classified as a current liability. If a triggering event does occur, the interest rate will increase to 12% per annum, payable quarterly, plus the lender will receive quarterly PIK, or payment-in-kind, notes equal to 4% of the unpaid principal and interest balance. We will also be required to pay $375 of loan costs to the lender. The proceeds of the Note and one interest payment of $750 are being held in a collateral account until such time as the Note is repaid or a plan for the use of the proceeds is submitted and approved by the lender. An amount of $30,750 is reported as restricted cash on the June 30, 2004 balance sheet. Until a triggering event occurs, we can prepay the debt in part or in full, penalty free. However, after a triggering event, a prepayment penalty of 5%, 3% and 1% will be assessed on all principal payments made on or before January 14, 2005, 2006 and 2007, respectively. On July 2, 2004, we prepaid $15,000 of the outstanding principal balance under the Note. The funds were obtained from the release of $15,000 from the collateral account.

Total purchase price	$	975
Transactions costs	9
Total purchase price to allocate	$	984

Allocation of Purchase Price
Customer list	$	984
Goodwill	406
Deferred tax liability	(406		)
Total	$	984

In June 2004, Pumpkin entered into a revolving credit facility (the “Pumpkin Revolver”) giving Pumpkin the ability to borrow up to a maximum of $7,000, subject to borrowing base restrictions. Borrowings under the Pumpkin Revolver bear interest at Prime or LIBOR plus 2.75%, at our option. Concurrent with the signing of the Pumpkin Revolver, we entered into an agreement with the lender to guarantee all outstanding borrowings under the Pumpkin Revolver. The Pumpkin Revolver expires on May 31, 2006.11

11(6) Goodwill and Identified Intangible Assets

~~Each~~Goodwill ofrepresents ~~our~~the ~~subsidiaries~~excess ~~has borrowing~~of ~~facilities~~the ~~under~~purchase ~~bank~~price ~~credit~~of ~~agreements (each a “Revolver”). WC maintains a Revolver with a $8,000 borrowing capacity, subject to~~acquisitions ~~borrowing~~over ~~base restrictions (~~the ~~“WC~~estimated ~~Revolver”),~~fair ~~Primrose~~value ~~maintains~~of ~~a Revolver with a $1,000 borrowing capacity, subject to borrowing base restrictions (~~the ~~“Primrose~~ ~~Revolver”)~~tangible and ~~Pumpkin~~identified ~~maintains~~intangible ~~the~~assets ~~Pumpkin~~acquired ~~Revolver~~and ~~noted~~liabilities ~~above~~assumed. ~~Each~~During ~~Revolver contains~~the ~~restrictive~~2005 ~~covenants which prohibit or limit certain actions~~period, ~~including~~ ~~specified levels of capital expenditures~~$13, ~~investments and incurrence~~491 of ~~additional~~goodwill ~~debt,~~was ~~and~~recorded ~~which~~from ~~require~~ the ~~maintenance~~Caronia ofacquisition ~~defined~~(see ~~levels~~Note ~~of profitability and tangible net worth~~5). Additionally, there are restrictions on the transfer by the subsidiaries of their net assets to the parent company. There were no outstanding borrowings under the Primrose Revolver or the Pumpkin Revolver and $2,300 outstanding under the WC Revolver at June 30, 2004.

~~Consistent~~Identified ~~with~~intangible ~~the~~assets ~~Revolvers,~~include ~~most~~franchise ofagreements, ~~our long-term debt obligations~~customer ~~carry restrictive covenants which prohibit or limit certain actions~~lists, ~~including specified~~trade ~~levels of capital expenditures~~names, ~~investments~~proprietary curriculum and ~~incurrence~~trademarks. ofIdentified ~~additional~~intangible ~~debt,~~assets ~~and~~are ~~which~~amortized ~~require~~on ~~the~~a ~~maintenance~~straight-line ofbasis ~~defined~~over ~~levels~~their ofestimated ~~profitability~~useful ~~and~~lives. The ~~tangible~~cost ~~net~~and ~~worth.~~ accumulated ~~Most~~amortization ~~borrowings~~for ~~are~~identified ~~secured~~intangible ~~by a pledge of substantially all~~ assets at ~~the~~ ~~subsidiary level~~March 31, as2005 ~~well~~was as ~~by a pledge of our share ownerships in the~~ ~~subsidiary. Accordingly, substantially all of each subsidiary’s net assets are restricted.~~follows:

(8) Comprehensive income

	Useful Lives	Cost		Accumulated amortization			Net

Franchise agreements	21 years	$	8,750	$	(2,490	)	$	6,260
Customer lists	5 – 10 years	12,862		(2,108		)	10,754
Trade names	10 years	3,000		—			3,000
Proprietary curriculum	10 years	393		(170		)	223
Trademarks	15 years	82		(35		)	47
Total		$	25,587	$	(4,803	)	$	20,284

~~Accumulated comprehensive~~(7) Earnings ~~income~~Per isCommon ~~comprised entirely of unrealized gains from an interest rate swap designated as a cash flow hedge. Comprehensive income for the three and six months ended June 30, 2004 and 2003 was as follows:~~Share

	For the three months ended June 30,				For the six months ended June 30,
	2004		2003		2004		2003
Net income	$	956	$	341	$	1,624	$	721
Unrealized gain on interest rate swap, net of taxes of $187 and $106, respectively)	269		—		153		—
Comprehensive income	$	1,225	$	341	$	1,777	$	721

Basic earnings per common share (“EPS”) are derived by dividing net income by the weighted average shares outstanding. Diluted EPS assumes the potential dilution from the exercise of employee stock options in Company stock and in stock of subsidiary companies. The assumed exercise of stock options of subsidiary companies has the effect of reducing our earnings (“diluted earnings”) as our overall ownership interest in the subsidiary companies, and thus our share of the net income of the subsidiaries, would be reduced. Diluted EPS are derived by dividing the applicable diluted earnings by the weighted average shares outstanding plus the dilutive effect, if any, of outstanding stock options. Weighted average shares outstanding include the weighted average number of Common and Class A Common shares outstanding because the two classes are identical except for certain transfer restrictions. The calculation of basic and diluted EPS for the quarters ended March 31, 2005 and 2004 is shown below:

(9) Related Party Transactions

Quarter Ended March 31, 2005

Basic Earnings per Common Share
Net income — numerator for basic EPS	$	1,600
Basic weighted average shares outstanding — denominator for basic EPS	6,579
Basic EPS	$	0.24

Diluted Earnings per Common Share
Net income	$	1,600
Effect on income assuming exercise of subsidiary stock options	(72		)
Diluted earnings available to common stockholders — numerator for diluted EPS	1,528

Basic weighted average shares outstanding	6,579
Dilutive effect of stock options	72
Diluted weighted average shares outstanding — denominator for diluted EPS	6,651

Diluted EPS	$	0.23

Under a Management Advisory Services Agreement between us and Capital Partners, Inc. (“CPI”), we recorded expenses of $388 and $775 for the three and six months ended June 30, 2004, respectively, and $313 and $625 for the three and six months ended June 30, 2003, respectively.12

(10) Acquisitions

Quarter Ended March 31, 2004	Continuing Operations			Discontinued Operations			Total
Basic Earnings per Common Share
Net income — restated	$	1,194		$	(572	)	$	622
Preferred stock accretion	(119		)	—			(119		)
Income available to common stockholders — numerator for basic EPS	$	1,075		$	(572	)	$	503
Basic weighted average shares outstanding — denominator for basic EPS	6,451			6,451			6,451

Basic EPS available to common stockholders	$	0.17		$	(0.09	)	$	0.08

Diluted Earnings per Common Share
Income available to common stockholders — restated	$	1,075		$	(572	)	$	503
Effect on income assuming exercise of subsidiary stock options	(117		)	—			(117		)
Diluted earnings available to common stockholders — numerator for diluted EPS	$	958		$	(572	)	$	386

Basic weighted average shares outstanding	6,451			6,451			6,451
Dilutive effect of stock options	102			102			102
Diluted weighted average shares outstanding — denominator for diluted EPS	6,553			6,553			6,553

Diluted EPS available to common stockholders	$	0.15		$	(0.09	)	$	0.06

~~Integrated~~For the ~~Claims~~quarter ~~Strategies~~ended March 31, 2005 and 2004, stock options to acquire 294,000 and 324,000 shares of Class A Common Stock, respectively, were excluded from the computation of diluted EPS because the effect of their assumed conversion was antidilutive. For the quarter ended March 31, 2004, 500,000 shares of zero coupon redeemable convertible preferred stock, which were convertible into 500,000 shares of Class A Common Stock, were also excluded from the computation of diluted EPS because the effect of their assumed conversion was antidilutive.

~~During the second quarter of 2004, WC acquired 100% of the stock of Integrated Claims Strategies~~ (~~“ICS”~~8) for $880, including a cash payment of $800 and the assumption of $80 of net liabilities. ICS provides insurance claims processing and administration services in the Tampa, Florida area. The preliminary allocation of the purchase price is as follows: Debt

Accounts receivable acquired	$	95
Goodwill	880
Current liabilities assumed	(175		)
Cash payment	$	800

At March 31, 2005 and December 31, 2004, debt consisted of the following:

	March 31, 2005		December 31, 2004

WC Holdings Term Loans	$	40,500	$	24,929
Less: current portion	8,100		5,970
Long-term debt	$	32,400	$	18,959

~~KRAMMCO~~On March 31, 2005, in connection with the acquisition of Caronia, WC entered ~~Inc~~into 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 $8,000 revolving line of credit (the “WC Revolver”). The Term Loan bears interest at LIBOR plus 2.5% or Prime, at the Company’s option, and borrowings under the WC Revolver bear interest at LIBOR plus 2.0% or Prime minus 0.5%, at the Company’s option. Principal payments of $675 are due monthly beginning May 1, 2005. The proceeds of the Term Loan were used to fund the Caronia acquisition and repay then-existing outstanding debt.

~~During~~At ~~the~~March 31, ~~first~~2005 ~~quarter~~and ofDecember 31, 2004, ~~WC acquired~~ ~~100%~~Primrose ofmaintained ~~the~~a ~~stock~~revolver ofwith ~~KRAMMCO~~a $1, ~~Inc.,~~000 anborrowing ~~Ohio~~capacity ~~corporation,~~(the ~~for $975~~“Primrose Revolver”). ~~KRAMMCO, Inc.~~Borrowings isunder ~~a management company~~the ~~whose~~Primrose ~~sole~~Revolver ~~asset~~bear isinterest aat ~~management~~LIBOR ~~contract~~plus ~~with~~2.0% ~~the~~or ~~North~~Prime, ~~American~~at ~~Employer~~the Company’s ~~Council, Inc~~option. At March 31, ~~(“NAEC”)~~2005 anand ~~Ohio not-for-profit corporation. NAEC is an~~December 31, ~~Ohio association that provides association members with~~2004, ~~among~~there ~~other value-added~~were ~~services,~~no anborrowings ~~Ohio~~outstanding ~~group~~under ~~rating~~the ~~sponsor~~Primrose Revolver. The ~~entire~~Primrose ~~$975~~Revolver ~~was~~expires ~~allocated~~in ~~to contracts and customer lists and is being amortized over seven years~~December 2005.

~~Octagon~~At ~~Risk~~December 31, ~~Services~~2004, outstanding borrowings under the WC Holdings Senior Term Loan (the “WC Term Debt”) bore interest at Prime minus 0.5% or one-month LIBOR plus 1.75%, at the Company’s option. ~~Inc~~ Principal and interest payments were payable monthly through 2008. WC also maintained an $8,000 revolving line of credit (the “Prior WC Revolver”). Borrowings under the Prior WC Revolver bore interest at LIBOR plus 1.75%. All borrowings under the WC Term Debt outstanding at March 31, 2005 were repaid with the proceeds from the Term Loan and the Prior WC Revolver was replaced by the WC Revolver.

~~In connection with our acquisition of Octagon~~The ~~Risk~~Term ~~Services~~Loan, ~~Inc.~~WC ~~in 2003~~Revolver, weand ~~adjusted~~Primrose ~~our~~Revolver ~~preliminary~~contain ~~purchase~~restrictive ~~price~~covenants ~~allocation~~that ~~due~~prohibit toor alimit ~~purchase~~certain ~~price~~actions, ~~adjustment~~including ~~relating~~specified tolevels ~~working~~of capital~~. The~~ expenditures, ~~net~~investments ~~effect~~and ~~was~~incurrence toof ~~reduce~~additional ~~goodwill by $585. In addition~~debt, ~~certain~~and ~~portions~~require ofthe ~~deferred~~maintenance ~~tax~~of ~~assets~~a ~~resulting~~minimum ~~from~~fixed ~~net~~charge ~~operating~~ratio. Borrowings ~~loss carryforwards~~ are ~~subject to~~secured ~~revision upon their potential utilization~~ by ~~the~~a ~~former~~pledge ~~owners in the filing~~ of ~~their~~substantially ~~2003~~all ~~tax~~assets ~~returns. We~~at ~~expect~~the ~~that~~subsidiary ~~any~~level, ~~further~~as ~~revisions~~well toas ~~the~~a ~~purchase~~pledge ~~price~~of ~~allocation will be finalized during~~ the ~~fourth~~Company’s ~~quarter~~ownership ofin ~~2004~~the subsidiary. ~~Any revisions~~The toCredit ~~the preliminary purchase price allocation through the fourth~~Agreement ~~quarter~~contains ofprovisions ~~2004~~that ~~would~~required ~~result~~WC ~~in an adjustment~~ to ~~goodwill~~deliver ~~and not impact earnings.~~audited

~~(11) Contingencies~~13

~~CompManagement,~~financial ~~Inc.~~statements ~~(“CMI”),~~for a2004 ~~subsidiary of WC, is party~~ to ~~a lawsuit brought by~~ the ~~Cleveland Bar Association which alleges that certain practices~~lender by ~~this subsidiary and its hearing representatives in Ohio constitute~~ the ~~unauthorized~~ ~~practice~~end of ~~law. The~~April ~~Ohio Supreme Court Board~~ of ~~Commissioners~~2005 onand ~~the~~require ~~Unauthorized~~WC ~~Practice of Law has issued a recommendation~~ to ~~the~~deliver ~~Supreme~~monthly ~~Court of Ohio that the activities~~financial ~~engaged~~statements inbeginning ~~by CMI constitute the unauthorized practice of law~~April 2005. ~~The~~WC obtained ~~matter~~a ~~has~~waiver ~~been~~from ~~set for oral arguments in front of~~ the ~~Ohio~~lender ~~Supreme~~until ~~Court on August 17~~June 30, ~~2004. Both~~2005 ~~parties have filed their respective briefs~~ to ~~the~~deliver ~~Ohio~~its ~~Supreme~~2004 ~~Court.~~ audited ~~Several~~financial ~~parties~~statements ~~have~~and ~~filed~~until ~~amicus briefs on behalf of CMI~~August 31, ~~including representatives~~2005 ofto ~~the~~begin ~~labor~~delivering ~~unions, trial attorneys and several trade and~~monthly ~~business~~financial ~~associations~~statements. ~~CMI~~WC ~~believes~~delivered ~~that~~to ~~its~~the ~~practices~~lender doits ~~not~~2004 ~~differ~~audited ~~from~~financial ~~any~~statements ~~other~~prior ~~Ohio~~to ~~workers’~~June 30, ~~compensation third~~2005 ~~party administrator~~ and ~~do not constitute the practice of law. We anticipate that the ultimate outcome of this action~~ will ~~not~~deliver ~~have~~monthly ~~a material adverse effect on our~~ financial ~~position or~~statements ~~future~~beginning ~~operating results~~September 2005.

In(9) Segment March 2004, the holder of the convertible redeemable preferred stock requested redemption of his shares at a value of $5,000 on April 6, 2004. However, we believe the redemption value on such date was approximately $2,700. At June 30, 2004, the carrying value of the redeemable convertible preferred stock was $3,976.Disclosure

AsManagement ~~noted~~evaluates inthe ~~our~~performance ~~proxy~~of its ~~statement~~segments ~~dated~~based ~~April~~upon ~~2004~~segment income, adefined ~~member~~as ofearnings ~~our~~before ~~Board~~interest, oftaxes, depreciation, ~~Directors~~amortization, ~~Mr.~~minority ~~Haskell~~interest, ~~resigned~~ ascorporate aand ~~member~~other ofexpenses, including ~~the~~management ~~Audit~~fee, ~~Committee~~other asincome, aand ~~result~~discontinued ofoperations. Segment aincome ~~new~~is ~~policy~~used ~~adopted~~to evaluate byperformance ~~UBS~~because ~~Securities~~management ~~LLC~~believes ~~prohibiting~~this ~~membership~~is onthe ~~outside~~best ~~audit~~financial ~~committees~~indicator ~~and~~of ~~compensation committees. Therefore~~value, of our ~~audit~~ ~~committee~~ability ~~consists~~to ~~only~~incur ofand ~~two~~service ~~independent~~debt ~~directors,~~ and weto ~~are~~generate ~~not~~operating incash ~~compliance~~flows. It ~~with~~is ~~the~~also ~~American~~one ~~Stock~~method ~~Exchange~~by ~~(“AMEX”)~~which ~~requirement that a~~we ~~company’s~~evaluate ~~audit~~and ~~committee~~value bepotential ~~comprised~~acquisition ofopportunities ~~three~~and ~~independent~~by ~~directors as~~which ~~set~~we ~~forth in Section 121B(2) of the AMEX~~value ~~Company~~our ~~Guide~~current subsidiaries. WeSegment ~~notified the AMEX of~~income ~~such~~is ~~noncompliance~~not ona ~~April~~substitute ~~29,~~for ~~2004. On May~~operating ~~21,~~income ~~2004,~~or ~~the~~cash ~~AMEX~~flows ~~granted~~from usoperating activities andetermined ~~extension~~in ~~until~~accordance ~~August~~with ~~9, 2004 to become~~GAAP. ~~fully~~Segment ~~compliant~~information ~~with~~for ~~Section 121B(2) of~~ the ~~AMEX~~quarters ~~Company~~ended ~~Guide. Although~~March 31, we2005 ~~have~~and ~~been actively searching, we~~2004 ~~have~~is ~~not~~as ~~yet found a new director to serve on our audit committee.~~follows:

We are party to several legal actions arising in the ordinary course of business. It is management’s opinion that we have adequate legal defenses to these actions and that the resolution of such matters will not have a material adverse effect on our financial position or future operating results.

	2005			2004
				(Restated)
Revenues from external customers:
Employer cost containment and health services	$	31,585		$	28,213
Educational services	3,302			2,671
Total revenues	$	34,887		$	30,884

Segment income:
Employer cost containment and health services	$	3,555		$	4,165
Educational services	1,752			1,298
Total segment income	5,307			5,463

Reconciliation of segment income to net income:
Depreciation and amortization	(1,028		)	(938		)
Interest expense	(430		)	(1,356		)
Income tax expense	(1,268		)	(1,096		)
Minority interest	(275		)	(329		)
Corporate, management fee and other expenses	(845		)	(658		)
Other income	139			108
Loss from discontinued operations	—			(572		)
Net income	$	1,600		$	622

(1210) Related-Party ~~Subsequent Events~~Transactions

OnThe ~~July~~Company ~~14,~~has ~~2004,~~a weManagement ~~received~~Advisory anServices ~~offer~~Agreement ~~from~~(the Mr“MAS Agreement”) with Capital Partners, Inc. ~~Brian Fitzgerald~~(“Capital Partners”), ~~our~~the controlling ~~Chairman~~stockholder of the ~~Board~~Company, ~~President~~whereby ~~and~~Capital ~~Chief~~Partners ~~Executive~~provides certain ~~Officer~~management advisory services related to investments, general administration ~~and~~(including ~~the~~payroll ~~controlling~~and ~~person~~rent), ofcorporate ~~our~~development, ~~majority~~strategic planning, stockholder relations, CPfinancial ~~Acquisition,~~matters Land general business policy.P. The MAS Agreement has been approved by our NoBoard of Directors and is effective for the calendar year. The 1MAS ~~(“CP-1”),~~Agreement tocan ~~purchase~~be ~~all~~terminated ofby either Capital Partners or the ~~outstanding~~Company ~~Class~~upon Aat ~~Common~~least ~~Stock,~~60 days’ ~~Common~~prior written ~~Stock~~notice to the other. Fees paid to Capital Partners for management advisory services were $388 for each of the quarters ended March 31, 2005 and ~~Zero~~2004.

13In addition, the Company has agreed to pay fees to Capital Partners for acquisition opportunities presented to the Company at usual and customary rates for investment banking fees for transactions of similar size and complexity. Capital Partners is under no obligation to present to the Company any or all acquisition candidates of which it becomes aware. Furthermore, the Company is under no obligation to utilize Capital Partners for investment banking services. The payment of an investment banking fee to Capital Partners is subject to the approval of the Compensation Committee, Audit Committee and the full Board. In connection with the Caronia acquisition, an investment banking fee of $240 was paid in May of 2005 to Capital Partners.

~~Coupon Convertible Preferred Stock of Security Capital~~ (~~collectively “Stock”~~11), other than shares held by Mr. Fitzgerald, CP-1 and certain other persons, at a price of $9.00 per share. On July 28, 2004, we received a revised offer from CP-1 to purchase all of such outstanding Stock for $9.50 per share. In response to the negotiations, Mr. Fitzgerald increased the offer to $9.65 per share. Contingencies

~~In connection with the proposed offer~~CompManagement, Inc. ~~on July 14~~(“CMI”), ~~2004~~ a ~~complaint~~wholly ~~was~~owned ~~filed~~subsidiary ~~in the Court~~ of ~~Chancery~~WC, was ofparty ~~the~~to ~~State~~a oflawsuit ~~Delaware~~brought inby ~~and~~the ~~for~~Cleveland ~~New~~Bar ~~Castle~~Association ~~County~~that ~~and~~alleged wethat ~~were served such~~certain ~~complaint,~~practices ~~naming~~by ~~us,~~CMI ~~each~~and ~~member~~its ofhearing ~~our~~representatives ~~board~~in ofOhio ~~directors~~constituted ~~and CP-1 as~~the ~~defendants,~~unauthorized ~~styled~~practice ~~Paul Berger, on behalf~~ of ~~himself and all others similarly situated, v~~law. ~~Brian D. Fitzgerald, A. George Gebauer, Samuel B.~~ CMI ~~Fortenbaugh,~~believes ~~III,~~that ~~John~~its H.practices F.do ~~Haskell,~~not ~~Jr.,~~differ ~~Edward~~from ~~Kelley,~~any ~~Jr.,~~other M.Ohio ~~Paul Kelly,~~workers’ ~~Security~~compensation ~~Capital~~third-party ~~Corporation~~administrator and CPdo ~~Acquisition, L.P. No. 1. While we have~~ not ~~been~~constitute ~~served in such complaints, we are aware of~~ the ~~filing~~practice of ~~two additional complaints naming us,~~ ~~each~~law. On ~~member of our board of directors and CP-1 as defendants as follows: (i) on July 16~~May 15, 2004 ~~a complaint styled Milton Pfeiffer v. Brian D. Fitzgerald~~, ~~A. George~~the ~~Gebauer,~~Board ~~Samuel B. Fortenbaugh, III, John H. F. Haskell, Jr., Edward~~of ~~Kelley,~~Commissioners ~~Jr.,~~on M.the ~~Paul~~Unauthorized ~~Kelly,~~Practice ~~Security~~of ~~Capital~~Law ~~Corporation~~(the ~~and~~“UPL ~~CP Acquisition, L.P. No. 1 was filed and (ii~~Board”) onfound ~~August 3, 2004 a complaint styled Sara~~that ~~Gottlieb~~the v.activities ~~Brian~~of D.CMI ~~Fitzgerald,~~and A.its ~~George~~hearing ~~Gebauer,~~representatives ~~Samuel~~did B.constitute ~~Fortenbaugh, III,~~the ~~John~~unauthorized H.practice ~~F. Haskell, Jr., Edward Kelley, Jr., M. Paul Kelly, Security Capital Corporation and CP Acquisition, L.P. No. 1 was filed. Each~~ of ~~the~~law; ~~complaints~~CMI ~~allege~~appealed ~~that~~these ~~the defendants~~findings ~~breached their fiduciary duties~~ to the ~~putative~~Ohio ~~class and that the~~State ~~proposed~~Supreme ~~offer~~Court ~~is unfair, inadequate and not~~ (the ~~result~~“Supreme ~~of arm’s-length negotiations~~Court”). ~~Each~~On ~~complaint seeks an injunction against the proposed offer or~~December 15, ~~if the~~ ~~offer is consummated~~2004, the ~~rescission~~Supreme ofCourt ~~the~~ruled ~~offer,~~that ~~as well as money damages, attorneys’ fees, expenses and other relief.~~the

~~Item~~activities 2engaged in by CMI did not constitute the unauthorized practice of law. However, in its decision, the Supreme Court ~~Management’s~~remanded ~~Discussion~~the ~~and~~matter ~~Analysis~~back to the UPL Board to consider whether those activities which were the subject of ~~Financial~~the ~~Condition~~original ~~and~~suit ~~Results~~were in violation of a recently enacted Industrial Commission resolution. Oral arguments on this issue were held on July 29, 2005. At this time, we are unable to evaluate the outcome of ~~Operations~~this matter.

~~The~~In ~~following~~connection ~~discussion~~with ~~should~~a bewritten ~~read~~offer inmade ~~conjunction with~~by Mr. Brian Fitzgerald, our ~~financial~~Chairman ~~statements~~of the Board, President and ~~related~~Chief ~~notes~~Executive ~~appearing~~Officer, ~~elsewhere~~and, inthrough ~~this~~Capital ~~Report~~Partners, onthe ~~Form~~controlling ~~10-Q~~person ~~and~~of inour ~~conjunction~~majority ~~with~~stockholder, CP Acquisition, L.P. No. 1 (“CPI”), to acquire by merger all of the ~~financial~~outstanding ~~statements~~Class A Common Stock and Common Stock of Security Capital, other than shares held by Mr. Fitzgerald, ~~related~~Capital ~~notes~~Partners, ~~included~~CPI and certain other persons, at a price of $9.00 per share (the “Initial Capital Partners Offer”), three complaints were filed in ~~our~~the ~~Annual~~Court ~~Report~~of onChancery ~~Form~~of ~~10-K~~the State of Delaware in and for New Castle County (the ~~year~~“Court”) ~~ended December~~naming 31the Company, ~~2003~~each then-member of our Board of Directors and CPI as defendants. ~~Additional~~ ~~information~~Each ~~concerning~~of ~~factors~~the complaints alleges that ~~could~~the ~~cause~~defendants ~~results~~breached their fiduciary duties to ~~differ~~the ~~materially from~~putative ~~forward~~class and that the then-~~looking~~proposed ~~statements~~Initial Capital isPartners ~~contained~~Offer ~~under~~was ~~“Part~~unfair, IIinadequate and not the result of arm’s-length negotiations. Each ~~Item~~complaint 5sought 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. ~~Other~~The ~~Information~~Court has issued an order of consolidation, consolidating the three complaints into one class action.” ~~All~~Plaintiffs ~~dollar~~have ~~amounts~~submitted their first request for the production of documents. At this time, we are inunable ~~thousands~~to evaluate the possible outcome of the class action.

Since the announcement of the Initial Capital Partners Offer, Mr. Fitzgerald and Capital Partners have increased their offer to $10.60 per share, and offers to acquire the Company ~~Overview~~for $11.00 and $13.00 per share have been submitted by others. In addition, on June 6, 2005, the Company announced that it had retained UBS Securities LLC to conduct a formal sale process for the Company, and that Mr. Fitzgerald and Capital Partners had declared their full support for the sale process and committed to sell the shares they control if appropriate value is achieved.

~~Security Capital Corporation (“Security~~We ~~Capital,”~~are ~~“Company,”~~party ~~“we,”~~to ~~“us”~~several ~~and~~legal ~~“our”)~~actions ~~operates~~arising ~~as a holding company that participates~~ in the ~~management~~ordinary ofcourse ~~its subsidiaries while encouraging operating autonomy and preservation~~ of ~~entrepreneurial environments. We currently have three operating~~ ~~subsidiaries, WC Holdings, Inc~~business. ~~(“WC”), Primrose Holdings, Inc. (“Primrose”) and Pumpkin Masters Holdings, Inc. (“Pumpkin”).~~ WCIt ~~Holdings~~ is an 80%-owned subsidiary which provides cost containment services relative to direct and indirect costs of corporations and their employees primarily relating to industrial health and safety, industrial medical care and workersmanagement’ ~~compensation insurance. WC’~~s ~~activities are primarily centered in~~opinion ~~California,~~that ~~Ohio,~~we ~~Virginia,~~have ~~Maryland,~~adequate ~~Texas,~~legal ~~Georgia~~defenses ~~and,~~ to athese ~~lesser~~actions ~~extent, in other Middle Atlantic states, Indiana~~ and ~~Washington. Primrose~~that ~~is a 98.5%-owned subsidiary involved in~~ the ~~franchising of educational child care centers. This segment’s activities are in the~~resolution ~~franchising~~ of ~~educational~~such ~~child~~matters ~~care~~will ~~centers,~~not ~~with~~have ~~related~~a ~~activities~~material inadverse ~~real estate~~effect ~~consulting~~on ~~and~~our ~~site selection services. Currently~~financial condition, ~~Primrose~~results ~~schools are located in the Southeast and Southwest. Pumpkin is a 100%-owned subsidiary engaged in the business~~ of ~~designing~~operations ~~and~~or ~~distributing Halloween-oriented~~cash ~~pumpkin carving kits and related accessories~~flows. Pumpkin distributes its products primarily throughout the United States and in Canada. Pumpkin is accounted for as a discontinued operation as we are actively marketing this subsidiary for sale and expect to conclude a sale during 2004.

P.D. Holdings, Inc. (“Possible Dreams”) is a 75%-owned subsidiary that formerly operated as a designer, importer and distributor of giftware and collectible figurines. Possible Dreams distributes its products throughout the United States. In October 2003, Possible Dreams filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. As a result, we no longer have control over this subsidiary and therefore the accounts of Possible Dreams are no longer included in our consolidated statements of income or consolidated balance sheet. For the 2003 reporting periods presented, Possible Dreams is reported as a discontinued operation.15

WeItem ~~have two reportable segments at June 30, 2004~~2. ~~The~~ ~~employer~~Management’s ~~cost~~Discussion ~~containment~~ and ~~health services~~Analysis ~~segment consists~~ of ~~the~~Financial ~~consolidated~~Condition ~~operating results of WC~~ and ~~the educational~~Results ~~services segment consists~~ of the consolidated operating results of Primrose. Pumpkin and Possible Dreams comprised our seasonal products segment before they were accounted for as discontinued operations. All prior period segment information has been restated to conform to the current presentation.Operations

~~Critical~~Forward-Looking ~~Accounting Policies~~Statements

~~Our~~This ~~accounting~~filing ~~policies~~contains ~~are~~“forward-looking” statements within the meaning of ~~disclosed~~the in“safe harbor” provisions of the ~~Notes~~Private Litigation Reform Act of 1995. Such statements are based on management’s current expectations and are subject to ~~Consolidated~~a ~~Financial~~number ~~Statements~~of infactors ~~our~~and ~~Annual~~uncertainties ~~Report~~which oncould ~~Form 10-K~~cause ~~for~~actual ~~the~~results ~~year~~to ~~ended~~differ ~~December~~materially ~~31,~~from ~~2003~~those described in the forward-looking statements. ~~However~~ Such factors and uncertainties include, ~~there~~but are ~~certain~~not ~~accounting~~limited to: future legislative changes ~~policies~~which ~~that~~could weimpact ~~believe~~the ~~are~~laws ~~critical~~governing workers’ compensation and medical malpractice insurance in the various states in which the Company’s employer cost containment and health services segment operates, the Company’s ability to enhance ~~our~~its ~~business~~existing services and successfully introduce and market new services, new service developments by the ~~understanding~~Company’s competitors, market acceptance of new services of both the Company and its competitors, competitive pressures ~~our~~on ~~financial~~prices, ~~statements~~the ability to attract and retain qualified personnel, ~~either~~interest rates, ~~because~~the ofCompany’s ~~their~~ability ~~magnitude~~to attract qualified franchisees or access to financing for these franchisees, the ~~financial~~effects on the Company if a lender to one ~~statements~~of orthe ~~because~~Company’s ~~they~~subsidiaries ~~require~~utilizes ~~management~~remedies available to ~~make~~it ~~certain~~upon ~~estimates~~an event of default on loans at one of the Company’s subsidiaries, the Company’s ability to file its Form 10-Q for the second quarter ended June 30, 2005 and regain ~~assumptions. These~~compliance ~~critical~~with ~~accounting~~the AMEX’s continued listing standards and decisions relative ~~policies~~to ~~are~~and ~~described~~the ~~below~~outcome of any such decisions regarding strategic alternatives with respect to maximizing stockholder value and enhancing stockholder liquidity.

~~Revenue~~The ~~Recognition~~following discussion should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Report on Form 10-Q and in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2004. All dollar amounts are in thousands.

~~Revenues from the employer cost containment and health~~Company services segment are derived from claims management, self-insured plan administrator services, consulting services and managed care administration services and are recorded based on the requirements and duration of the related contracts. Revenues from managed care administration services are recognized on a monthly basis based on the contracted administrative fee with the Ohio Bureau of Workers’ Compensation. In addition, contract revenues are recorded for certain incentive awards when the claims are processed to which the incentive is related, and a bonus award is recorded in the year earned. Cash received in advance on certain contracts is initially deferredOverview

15Security Capital operates as a holding company that actively participates in the management of our subsidiaries, but also gives each subsidiary a certain degree of operating autonomy, with its own chief executive officer and senior management. The Company itself is managed by Capital Partners, pursuant to a Management Advisory Services Agreement (the “MAS Agreement”). Capital Partners controls approximately 81% of the Company’s shares, held principally by, CP Acquisition, L.P. No. 1 (“CPI”), and provides us with management services under the MAS Agreement. Mr. Brian Fitzgerald controls Capital Partners and serves as our Chairman of the Board of Directors, President and Chief Executive Officer.

Our current operations consist of two reportable operating segments, Employer Cost Containment and ~~recognized~~Health asServices ~~revenue~~and onEducational aServices. Our ~~pro~~Employer ~~rata~~Cost ~~basis~~Containment ~~over~~and ~~the~~Health ~~related~~Services ~~contract~~segment ~~periods,~~is ~~which~~conducted ~~typically~~through ~~range~~our ~~between~~80%-owned ~~three~~subsidiary, WC Holdings, Inc. (“WC”), and 12WC’s wholly-owned subsidiary, CompManagement, Inc. (“CMI”). Our Educational Services segment is conducted ~~months~~through our 98.5%-owned subsidiary, Primrose Holdings, Inc. (“Primrose”). ~~Commissions~~In ~~associated~~keeping with our management philosophy, ~~these~~senior ~~contracts~~management ~~are~~of ~~also~~WC ~~deferred~~have ~~and~~a ~~recognized~~20% asequity aninterest ~~expense~~and onsenior management of Primrose have a ~~pro~~1.5% ~~rata~~equity interest in our businesses. ~~basis~~Senior ~~over~~management ~~the~~of ~~related~~WC ~~contract~~and ~~periods~~Primrose also receive stock options in those subsidiaries.

~~Revenues from the educational services segment are~~Through ~~derived~~CMI, ~~from~~WC ~~royalties~~provides ~~received from franchisees based on a percentage of the school’s monthly revenue and~~ various ~~fees for~~ services ~~provided~~ to ~~franchisees. Royalty~~ ~~revenue~~corporations ~~is recorded in the month earned~~ and ~~typically~~their ~~collected~~employees relating into ~~the~~reducing ~~subsequent~~or ~~month. Franchise~~containing ~~fees~~employers’ ~~are~~workers’ ~~collected~~compensation ~~at various~~costs, ~~intervals~~including ~~prior~~employee tolost ~~the~~time, ~~opening~~medical ofmanagement ~~a school~~ and ~~the~~administrative ~~recognition of the revenue~~services isrelated ~~deferred~~to ~~until~~workers’ ~~the~~compensation ~~franchised~~and ~~school~~medical ~~has~~liability ~~been certified for occupancy~~claims, ~~which~~consulting, istraining ~~generally~~and ~~concurrent~~education ~~with~~services ~~the~~designed ~~commencement~~to ofimprove, ~~operations. Assignment fees are received for site identification~~ and ~~preparation~~manage ~~for~~ the ~~construction~~costs of ~~the school~~, ~~including~~ ~~zoning~~workplace ~~permits,~~health and ~~are~~safety, ~~recognized~~and, ~~upon~~to ~~the~~a ~~closing~~lesser ofextent, ~~the~~management ~~purchase of the~~and ~~property~~administrative byservices ~~the~~related ~~franchisee. Transfer fees are earned upon the sale of an existing franchise~~ to ~~another franchisee. Real~~auto ~~estate services fees are received for engineering~~ and ~~architectural~~general ~~design~~liability ~~consulting services~~insurance ~~provided to the franchisees during the construction of the school~~claims. ~~Real~~CMI ~~estate~~ services ~~fees~~fall ~~are~~into ~~collected in~~two ~~advance~~general ~~upon~~categories: ~~the~~(1) third-party ~~signing~~administration ofor a“TPA” ~~franchise agreement and the recognition of the~~services ~~revenue~~related ~~is deferred until the franchised school has been certified for occupancy. Option fees are received~~ to ~~initiate~~ anworkers’ ~~option agreement~~compensation, ~~which~~professional ~~gives~~medical ~~the~~liability, ~~option~~auto ~~holder the right to~~and ~~purchase~~general aliability ~~franchise~~claims inand ~~a designated geographical area for a stated period of time~~ (~~typically six to twelve months~~2). Ifmedical ~~the~~management ~~option~~of ~~is exercised, the option fee is applied against the~~workers’ ~~franchise~~compensation ~~fee and recognized as revenue when the school is certified for occupancy. If the option expires~~claims, ~~the fee~~or is“MCO” ~~recognized as revenue at the time of expiration~~services. ~~Fees are also received if a franchisee terminates the franchise agreement. These fees are recognized as revenue at the time of termination.~~

~~Goodwill~~Primrose is involved in the franchising of educational child care centers, with related activities in real estate consulting and ~~Other~~site ~~Intangible~~selection ~~Assets~~services. Currently, Primrose schools are located in the Southeast, Southwest and Midwest.

~~Acquisitions are accounted for under the purchase-method whereby we~~First ~~record~~Quarter ~~acquired~~2005 tangible and intangible assets and assumed liabilities at fair value. The valuation of acquired assets and the resulting goodwill require management to make certain estimates and assumptions that affect amounts reported in our financial statements. Goodwill and other intangible assets are subject to impairment at least annually or more frequently if indications of possible impairment exist. There have been no impairment charges recognized during the period. We perform our annual impairment testing at year-end.Highlights

~~Employee~~During ~~Stock~~the ~~Options~~first quarter of 2005, the Audit Committee’s independent investigation of related-party transactions and conflicts of interest at CMI and CompManagement Health Systems, Inc., wholly owned subsidiaries of WC (the “Investigation”), which began in the fourth quarter of 2004, was completed. The total cost of the Investigation was $3,000, with $2,100 included in our first quarter 2005 results.

WeAs a ~~follow~~result ~~Accounting~~of ~~Principles~~the ~~Board~~Investigation ~~Opinion No.~~and ~~25,~~a ~~“Accounting~~number ~~for~~of ~~Stock~~other ~~Issued~~unique ~~to Employees”~~challenges ~~and~~that ~~related~~we ~~interpretations~~faced in ~~accounting~~the ~~for~~fourth ~~stock~~quarter ~~options. Compensation~~of ~~expense~~2004 ~~related~~and to the ~~issuance~~ first quarter of ~~stock~~2005, extraordinary ~~options~~and tounforeseen ~~employees~~demands orwere ~~non-employee~~placed ~~directors~~on ismanagement ~~only~~and ~~recognized~~the ifCompany’s ~~the~~system ~~exercise price~~ of ~~the~~disclosure ~~stock~~controls ~~option~~and isprocedures, ~~less~~straining ~~than~~ the ~~fair~~Company’s disclosure, ~~market~~accounting, ~~value~~and ~~of the~~financial ~~underlying~~reporting ~~stock~~resources at ~~the~~both ~~grant~~WC ~~date.~~and the

~~Derivative Financial Instruments~~16

~~Our~~corporate ~~use~~level. As ofa ~~derivative financial instruments is currently limited to interest rate swap agreements~~result, ~~which~~ we ~~utilize~~were ~~to mitigate~~unable ~~our exposure~~ to ~~changes~~timely infile ~~interest rates on~~ our ~~variable rate~~ ~~debt. We~~Annual doReport ~~not~~on ~~utilize~~Form 10-K ~~derivative financial instruments~~ for ~~trading~~the oryear ~~speculative~~ended ~~purposes. We account for derivatives and hedging instruments in accordance with Statement of Financial Accounting Standards No.~~December ~~133~~31, ~~“Accounting~~ ~~for~~2004 ~~Derivative~~(the ~~Instruments and Hedging~~“2004 ~~Activities,~~Form 10-K”) ~~as amended~~ and ~~interpreted,~~this ~~which~~Quarterly ~~require~~Report ~~all derivative~~on ~~instruments~~Form 10-Q be(the ~~recorded~~“First Quarter ~~at their fair values~~Form 10-Q”). ~~The~~We ~~fair~~filed ~~value of derivatives is recorded in~~our ~~the~~2004 ~~consolidated~~Form 10-K ~~balance~~on ~~sheets~~June 28, ~~in other long-term liabilities~~2005.

WeIn ~~have~~addition, anon ~~interest~~March 31, ~~rate~~2005, ~~swap~~we ~~with~~acquired aCaronia ~~notional value~~Corporation ~~of $8~~(“Caronia”),~~500~~ from ~~that~~Continental ~~has~~Casualty ~~not~~Company ~~been designated as a hedge~~ for ~~financial accounting purposes and~~$16, ~~accordingly~~000, ~~changes~~plus in$937 ~~the fair value~~ of ~~this~~transaction ~~swap are recorded through earnings~~costs. ~~For~~Caronia ~~the three~~provides ~~and~~third-party ~~six~~professional medical ~~months~~liability ~~ended~~claims ~~June~~administration ~~30,~~and ~~2004,~~risk ~~changes~~management inservices ~~the fair value of the swap~~to ~~resulted~~hospitals inand ahealthcare ~~gain~~systems, ofphysician ~~$219 ($129 after tax)~~ and ~~$236~~paraprofessional ~~($139 after tax)~~groups, ~~respectively. The~~ ~~amounts included in~~nursing ~~earnings~~homes, ~~during~~rehabilitation ~~the~~centers ~~2003~~and ~~periods~~clinics. Caronia ~~were~~is ~~not~~based ~~material. Additionally,~~ in ~~2004~~Melville, weNew ~~entered~~York ~~into~~and ~~an interest~~services ~~rate~~clients ~~swap~~through ~~agreement~~40 locations ~~with a notional amount of $10,000~~nationwide. ~~This~~Upon ~~swap has been designated as a cash flow hedge for financial accounting purposes and, to~~ the ~~extent the swap provides an~~ ~~effective~~consummation ~~hedge, changes in the fair value~~ of the ~~swap are recorded in accumulated other comprehensive income~~transaction, aCaronia ~~component~~became part of ~~stockholders’ equity. Any~~our ~~ineffectiveness~~Employer isCost ~~recorded~~Containment ~~through earnings. There was no ineffectiveness recorded through earnings related to this swap for the three~~ and ~~six~~Health ~~month~~Services ~~periods~~operating ~~ended June 30, 2004~~segment.

16Despite the challenges faced by the Company during the first quarter of 2005, including the Investigation and the Caronia acquisition, we maintained our focus on building the strength of our core WC and Primrose businesses and delivering strong operating results for our stockholders. Results at WC benefited from additional revenue from new customers added during 2004, while Primrose continues to have double-digit revenue growth quarter over quarter due to the opening of new schools and increasing revenue from existing schools. During the 2005 quarter, Primrose opened six new schools, bringing the total number of franchised schools to 131 at March 31, 2005. Consolidated operating income for the first quarter of 2005 was $3,434 compared to $3,867 for the first quarter of 2004, but included $2,100 of one-time expenses related to the Investigation. Excluding these one-time expenses, operating income for the first quarter of 2005 increased $1,667, or 43% compared to the first quarter of 2004.

~~Use~~Recognizing that we are now a stronger and much more valuable company, and that the market for control of ~~Management~~companies ~~Estimates~~such as ours had recovered considerably over the last year and one-half, we recently announced that we retained UBS Securities LLC to assist us in a formal sale process of the Company. While there can be no assurance that the formal sale process will result in the sale of the Company at an acceptable price, we believe that a formal sale process represents the best possibility at this time to maximize stockholder value.

~~The~~In ~~preparation~~the ofcoming ~~consolidated~~months, ~~financial~~we ~~statements~~will incontinue ~~conformity with United States generally accepted accounting principles requires management~~ to ~~make~~ ~~estimates~~actively ~~and~~manage ~~assumptions~~WC ~~that affect the reported amounts of assets~~ and ~~liabilities~~Primrose, ~~and~~to ~~disclosure~~keep ofthem ~~contingent~~on ~~assets~~a ~~and~~solid ~~liabilities~~operational atfooting ~~the date of the financial statements~~ and ~~the~~to ~~reported~~grow ~~amounts~~them internally ~~of revenues~~ and ~~expenses~~through ~~during the~~acquisitions ~~reported~~as ~~period~~opportunities arise. ~~Actual~~We ~~results could~~believe ~~differ~~that ~~from~~both ~~those~~businesses ~~estimates.~~ have strong ~~Significant~~management ~~estimates~~and ~~include~~solid anfinancial ~~allowance~~positions ~~for~~and ~~doubtful~~are ~~accounts, bankruptcy~~poised ~~accruals, our ability~~ to ~~utilize~~produce ~~carry~~improved operating ~~forward~~results ~~tax~~while ~~benefits and~~ the ~~fair~~ ~~value~~formal ~~and~~sale ~~economic~~process ~~lives of intangible assets~~continues.

~~Results~~Critical ofAccounting ~~Operations~~ Policies

~~Revenues~~There are ~~for~~certain ~~the~~accounting ~~three~~policies ~~months~~that ~~ended~~we ~~June~~believe ~~30,~~are critical to our business ~~2004~~and ~~increased~~the ~~$11,715,~~understanding orof ~~57%,~~our tofinancial ~~$32~~statements,~~305~~ ~~compared~~either tobecause ~~revenues~~ of ~~$20,590 for~~their magnitude to the ~~three~~financial ~~months~~statements ~~ended~~or ~~June~~because ~~30,~~they ~~2003~~require management to make certain estimates and assumptions. ~~Revenues~~These ~~for~~critical ~~the~~accounting ~~six~~policies ~~months~~are ~~ended~~described ~~June~~below. For ~~30,~~additional ~~2004~~disclosures ~~increased~~with ~~$22,252,~~respect orto ~~54%,~~our tosignificant ~~$63~~accounting policies,~~189~~ ~~compared~~see toour ~~revenues~~Annual ofReport ~~$40,937~~on Form 10-K for the ~~six~~year ~~months~~ ended ~~June 30~~December 31, ~~2003~~2004.

~~Revenues~~Use from the employer cost containment and health services segment for the three months ended June 30, 2004 increased $11,063, or 60%, to $29,479 compared to $18,416 reported in last year’s period and revenues for the six months ended June 30, 2004 increased $21,139, or 58%, to $57,692 as compared to $36,553 reported in the same period last year. The increase for the three and six-month periods was primarily due to additional revenue resulting from the acquisition of ~~Octagon~~ ~~Risk Services, Inc. (“Octagon”) in October 2003.~~Estimates

~~Revenues~~The ~~from~~preparation ~~the~~of ~~educational~~consolidated ~~services~~financial ~~segment~~statements ~~for~~in ~~the~~conformity with ~~three~~GAAP ~~months~~requires ~~ended~~management ~~June~~to ~~30,~~make ~~2004~~estimates ~~increased~~and ~~$652,~~assumptions orthat ~~30%,~~affect tothe reported ~~$2,826~~amounts ~~compared~~of ~~to $2,174~~assets ~~for~~and ~~the~~liabilities ~~same~~and ~~period~~disclosure ~~last~~of ~~year~~contingent assets and ~~revenue~~liabilities ~~for~~at the ~~six~~date ~~months~~of ~~ended~~the ~~June 30,~~financial ~~2004~~statements ~~increased~~and ~~$1,113,~~the orreported amounts ~~25%,~~of torevenues ~~$5,497~~and ~~compared~~expenses toduring ~~$4,384 for~~ the ~~same period~~reported ~~last year~~period. ~~The~~ ~~increase~~Actual inresults ~~revenues~~could ~~for~~differ ~~the~~from ~~quarter~~those ~~was~~estimates. Significant ~~primarily~~estimates ~~due~~include toallowances anfor ~~increase~~doubtful inaccounts ~~royalty~~and ~~revenue of~~uncollectible ~~$307,~~reimbursable orassignment ~~16%~~development costs, ~~due~~bankruptcy toaccruals, anreserves ~~increase~~for contingencies, in the ~~number~~utilization of ~~schools~~carry ~~opened~~forward ~~and~~tax ~~higher same~~benefits, ~~school revenue. During~~ the ~~second~~determination ~~quarter~~of ~~2004,~~fair ~~two~~value ~~schools~~and ~~were~~economic ~~opened~~lives ~~(compared~~of tointangible ~~none~~assets, in the ~~second~~estimates ~~quarter~~and ofassumptions ~~2003)~~inherent ~~resulting~~ in ~~higher~~our ~~franchise~~goodwill ~~fees~~impairment oftesting ~~$87~~procedures and ~~revenue from~~ the ~~company-owned~~allocation ~~school,~~of ~~which~~the ~~opened~~purchase inprice ~~January~~of ~~2003,~~an ~~increased~~acquisition ~~$82~~to ~~due~~the tofair ~~higher~~value of ~~enrollment~~tangible asand ~~the~~intangible ~~school~~assets ~~becomes~~acquired ~~established~~and liabilities assumed.

~~For~~Revenue the six months ended June 30, 2004, royalty revenue increased $609, or 15%, due to higher same school revenue and the revenue contribution of 13 additional schools opened since June 30, 2003, company-owned school revenue increased $224 due to increasing enrollment as the school becomes established and transfer fees increased $125 due to an increase in the number of sales of an existing franchise to another franchisee.Recognition

AsRevenues anfor ~~additional~~the ~~performance~~Employer ~~measure~~Cost ofContainment ~~the increasing~~and ~~success~~Health ofServices ~~the educational services~~ segment, weare ~~monitor~~derived ~~the~~from ~~gross~~third-party ~~revenues~~administrative ofservices, ~~all educational~~self-~~based~~insured ~~child~~plan ~~care~~administrator ~~center~~services, ~~franchisees~~consulting ~~(“system revenues”). Total system revenues increased by $4~~services,~~473,~~ orgroup rating ~~16%,~~services toand ~~$32,906~~managed ~~for~~care ~~the~~administration ~~three~~services. Revenues ~~months~~from ~~ended~~third-party ~~June 30~~administrative services, ~~2004~~self-insured ~~compared~~plan toadministrator ~~$28~~services,~~433 for~~ ~~the~~consulting ~~three~~services ~~months~~and group ~~ended~~rating ~~June~~services ~~30,~~are ~~2003~~recorded ~~and~~based ~~$8,931~~on orthe ~~16%,~~terms toand ~~$65,813~~duration ~~for~~of the ~~six~~related ~~months~~contracts. Cash ~~ended~~received ~~June~~in advance ~~30,~~of ~~2004~~services ~~compared~~being toprovided ~~$56,882~~is ~~for~~initially ~~the~~deferred ~~six~~and ~~months~~recognized ~~ended~~as ~~June~~revenue ~~30,~~on ~~2003. Same-school~~a ~~system revenues~~pro ~~for~~rata ~~schools~~basis ~~operating~~over ~~more~~the ~~than~~related 24contract ~~months increased $1~~periods,~~731,~~ orwhich ~~6%, and~~typically ~~$3,600,~~range orbetween ~~7%, for the~~ three and ~~six~~12 months ~~ended June 30, 2004, respectively,~~. ~~and~~Revenues ~~same~~from ~~school~~managed ~~system~~care ~~revenues~~administration ~~for~~services ~~schools~~are ~~operating~~recognized ~~less~~on ~~than 24 months~~a ~~increased~~monthly ~~$567,~~basis orbased ~~64%,~~on ~~and~~the ~~$1,433,~~contracted oradministrative ~~97%,~~fee ~~for~~with the ~~three~~Ohio ~~and six months ended~~Bureau ~~June~~of ~~30,~~Workers’ ~~2004,~~Compensation ~~respectively~~(“OBWC”). ~~Additional~~In ~~system revenues from schools operating subsequent to June 30~~addition, ~~2003~~certain ~~were~~contracts ~~$2,175 and~~provide ~~$3,898~~ for ~~the~~an ~~three~~incentive ~~and~~or ~~six~~bonus ~~months~~award ~~ended June 30, 2004, respectively. There were 120 educational-~~based ~~childcare~~on ~~centers~~certain ~~opened~~criteria atstipulated ~~June~~in ~~30,~~the ~~2004 compared to 107 opened at June 30, 2003~~contracts. ~~To evaluate performance, management looks at~~ ~~system~~Revenues ~~revenues~~ from ~~schools~~incentive inor ~~operation~~bonus ~~more~~awards ~~than~~are 24recognized ~~months~~when ~~and~~they ~~less than 24~~are ~~months~~earned ~~separately because it typically takes a new school approximately that long to reach its mature stage~~ and ~~operate~~collectibility atis orreasonably ~~near full-capacity~~assured.

~~Selling, general and administrative expense (“SG&A”) for the three months ended June 30, 2004 increased by $10,051, or 57%, to $27,552 compared to SG&A of $~~17,501 for the three months ended June 30, 2003. SG&A for the six months ended June 30, 2004 increased $19,505, or 57%, to $53,539 compared to $34,034 for the six months ended June 30, 2003. This increase was primarily due to additional expenses of approximately $9,400 and $18,600 for the three and six-months ended June 30, 2004, respectively, in the employer cost containment and health services segment resulting from the Octagon acquisition. Also

17Revenues from the Educational Services segment are composed of royalties, franchising fees, assignment fees, transfer fees, real estate services fees, forfeiture fees and tuition fees. Royalties are received from franchisees based on a percentage of the school’s monthly revenue and include fees for corporate services provided to franchisees. Royalty revenue is recorded in the month earned and typically collected in the subsequent month. Franchising fees are received when a franchise agreement is signed with a franchisee and recognized as revenue when the school receives its certificate of occupancy, which is generally concurrent with the commencement of operations. Assignment fees are received for pre-development services, such as site identification and evaluation, environmental studies, architectural and engineering services, and applying for and obtaining all required building and zoning permits (collectively, “Pre-development Services”). Assignment fees are recognized upon the sale of the property to the franchisee. Real estate services fees are received for consulting services related to architectural and engineering design services provided to the franchisee during the construction of the school. These fees are received when the franchise agreement is signed with a franchisee and recognized when the school receives its certificate of occupancy. Transfer fees are received and earned upon the sale of an existing franchise to another franchisee. Forfeiture fees include fees applicable to the termination of franchise agreements or for the expiration of option agreements. Tuition fees are earned at the Company-owned school and are generally billed weekly for services to be provided in the following week. All fees received in advance of the services being provided are initially deferred.

~~contributing~~Primrose will tooccasionally ~~the~~provide ~~quarter~~existing ~~and~~franchisees ~~year-~~an option to~~-date~~ purchase a ~~increase~~franchise ~~were~~in ~~higher~~a ~~corporate~~designated ~~costs~~geographical area for a stated period of ~~approximately~~time (typically ~~$600~~six ~~and~~to ~~$800,~~12 months) for which Primrose receives a fee. This fee is initially deferred when ~~respectively~~received. When the option is exercised, the ~~mainly~~option ~~due~~fee tois ~~professional~~credited ~~fees~~against ~~related~~the toamount of the ~~pursuit~~franchise fee and recognized as revenue when the school receives its certificate of ~~various~~occupancy. If the option expires, the fee is recognized ~~corporate~~as ~~opportunities~~a ~~and~~forfeiture ~~objectives~~fee.

Depreciation and amortization expense increased by $323, or 60%, to $861 for the three months ended June 30, 2004 compared to $538 for the three months ended June 30, 2003 and by $711, or 65%, to $1,797 for the six months ended June 30, 2004 compared to $1,086 for the six months ended June 30, 2003. The increase is primarily due to additional depreciation and amortization expense in the employer cost containment and health services segment resulting from the Octagon acquisition.Receivables

AsReceivables aare ~~result~~composed primarily of ~~the~~amounts ~~above~~due ~~factors, operating income~~ for ~~the~~contract ~~three~~services provided ~~months~~by ~~ended~~WC ~~June~~and ~~30,~~royalty ~~2004~~payments ~~increased~~due ~~$1,341, or 53%,~~ to ~~$3,892~~ ~~compared~~Primrose tofrom ~~$2,551~~franchisees. An allowance for ~~the~~doubtful ~~three~~accounts ~~months ended June 30, 2003 and~~is ~~operating~~established ~~income~~based ~~for~~on ~~the~~customer ~~six~~credit ~~months ended June 30~~evaluations, ~~2004~~collection ~~increased~~history ~~$2,036,~~and orother ~~35%,~~pertinent toinformation. Receivables ~~$7,853~~are generally ~~compared~~not ~~to $5,817 for the six months ended June 30, 2003~~collateralized.

~~Interest~~Reimbursable ~~expense~~Assignment ~~increased~~Development by $1,300 to $1,451 for the three months ended June 30, 2004 and by $2,236 to $2,807 for the six months ended June 30, 2004. The increase was primarily due to the issuance of a $30,000 Senior Subordinated Promissory Note (the “Note”) in January 2004. Interest expense for the quarter relating to the Note was $988, which included non-cash amortization of financing costs of $237 and interest expense relating to the Note for the six months ended June 30, 2004 was $1,853, which included non-cash amortization of financing costs of $474. Interest expense for the employer cost containment and health services segment increased by $325 and $463 for the three and six months ended June 30, 2004, respectively, due to additional debt related to the Octagon acquisition and a refund received in the second quarter 2003 of $233 for interest payments made in prior periods that were overcharged by the lender. The educational services segment’s interest expense declined by $34 and $81 for the three and six months ended June 30, 2004, respectively, due to the repayment of debt. As a result of the issuance of debt related to the Octagon acquisition and the issuance of the Note, we anticipate that interest expense for the year will be between $4,000 and $4,500 or approximately $2,500 to $3,000 higher than last year.Costs

~~Other~~Reimbursable development ~~income,~~costs ~~net~~are ~~increased~~recoverable bycosts ~~$174~~incurred toon ~~$265~~behalf ~~for~~of ~~the~~potential ~~three~~franchisees ~~months~~that ~~ended~~have ~~June~~executed ~~30,~~assignment ~~2004~~agreements ~~and~~with byPrimrose ~~$234 to $373~~ for ~~the six months ended~~Pre-development ~~June 30, 2004~~services. ~~The~~Potential ~~table~~franchisees ~~below provides~~are ~~the~~contractually ~~details~~obligated ~~of other income, net. The increase in interest income was due~~ to ~~higher~~reimburse ~~cash~~Primrose ~~balances~~for asPre-development ~~the~~Services ~~proceeds of the Note~~upon ~~are being held in a collateral account until such time as~~ the ~~debt~~purchase ~~is repaid or a plan for the use~~ of the ~~proceeds~~property ~~is submitted and approved~~ by the ~~lender~~ potential franchisee. ~~The~~A ~~unrealized~~reserve ~~gain~~is ~~(loss)~~established ~~from~~for potentially ~~hedging~~uncollectible ~~activities~~reimbursable ~~resulted~~assignment ~~from~~development ~~changes~~costs inbased ~~the~~on ~~fair~~franchisee credit ~~value~~evaluations, ofhistorical ~~our~~experience ~~$8,500 notional~~and ~~value~~other ~~interest~~pertinent ~~rate swap~~information.

	For the three months ended June 30,						For the six months ended June 30,
	2004			2003			2004			2003
Interest income	$	91		$	13		$	140		$	20
Unrealized gain (loss) from hedging activities	219			(15		)	236			5
Gain on sale of land	—			109			—			109
Other	(45		)	(16		)	(3		)	5
Total other income, net	$	265		$	91		$	373		$	139

Goodwill and Identified Intangible Assets

~~Net~~Acquisitions ~~losses~~are ~~from~~accounted ~~discontinued~~for ~~operations~~under ~~include~~ the ~~results~~ of“purchase ~~Pumpkin~~method” ~~for~~whereby acquired ~~the~~tangible ~~2004~~and ~~periods~~intangible assets and ~~the~~assumed ~~results~~liabilities ofare ~~Pumpkin~~recorded ~~and~~at fair ~~Possible~~value. Identified intangible assets ~~Dreams~~are ~~for~~amortized ~~the~~over ~~2003~~their ~~periods~~estimated useful lives. WeGoodwill ~~no longer~~is ~~consolidated~~not ~~the~~amortized; ~~results~~however, ofit ~~Possible~~is subject ~~Dreams~~to ~~after~~annual ~~its~~impairment ~~bankruptcy filing~~testing. We inperform ~~October~~our ~~2003~~annual goodwill impairment testing at year-end. ~~The~~We ~~net~~review ~~losses~~identified ~~for Pumpkin~~intangible assets, and other ~~Possible~~long-lived ~~Dreams~~assets, ~~are~~for ~~shown~~impairment inwhen events or circumstances lead management to believe that the ~~table~~carrying ~~below~~value of an asset may not be recoverable.

	For the three months ended June 30,				For the six months ended June 30,
	2004		2003		2004		2003
Pumpkin	$	247	$	194	$	819	$	812
Possible Dreams	—		630		—		1,016
Total net loss from discontinued operations	$	247	$	824	$	819	$	1,828

Stock Options

18The Company measures compensation cost for stock options issued to employees using the intrinsic value method of accounting for stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). Under APB 25, when the exercise price of the Company’s stock options equals the market value of the underlying stock on the date of the grant, no compensation expense is recognized. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transitions and Disclosure, an amendment to FASB Statement No. 123 (“SFAS 148”).

~~The~~In December ~~losses~~of 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). Under SFAS 123R, share-based payment awards result in a cost that should be measured at ~~Pumpkin~~fair ~~are~~value ~~due~~on tothe awards’ grant dates, based on the ~~seasonality~~estimated number of awards expected to vest. SFAS 123R requires this cost to be recognized ~~the~~through ~~operations~~earnings asover ~~most~~that expected vesting period. The provisions of ~~Pumpkin’s~~SFAS ~~income~~123R iswill ~~generated~~become effective ~~during~~for the ~~third quarter~~Company beginning January 1, 2006. ~~Management~~SFAS ~~continues~~123R allows public companies to select ~~actively~~from ~~market~~two ~~this~~alternative ~~business~~transition ~~and~~methods ~~believes~~when ~~that~~adopting SFAS 123R, the ~~sale~~modified prospective ofapplication ~~Pumpkin~~or ~~will~~the ~~be completed~~modified byretrospective ~~year-end~~application. Under the modified prospective application, the provisions of SFAS 123R are applied to new awards and awards modified, repurchased, or

~~Liquidity and Capital Resources~~18

Atcancelled ~~June~~after ~~30,~~the ~~2004,~~effective wedate. Under ~~had~~the $4modified retrospective application,~~473~~ the provisions of ~~cash~~SFAS ~~and cash~~123R ~~equivalents~~may ~~compared~~be applied to ~~$11~~(i) all awards granted,~~645~~ modified ator ~~December~~settled ~~31,~~in ~~2003. The~~cash ~~decrease~~in offiscal ~~$7,172~~years ~~was~~in ~~primarily~~which ~~due~~SFAS to123 was effective (years ~~cash~~beginning ofafter $3December 15,~~429~~ ~~used~~1994) ~~for~~or ~~acquisitions~~(ii) only ~~and~~interim ~~capital~~periods ~~expenditures~~in the ~~and~~year ~~cash~~of adoption unless the effective date of ~~$5,027~~ ~~used~~SFAS ~~primarily~~123R tocoincides ~~repay~~with ~~debt~~a company’s fiscal year. We are currently ~~These~~in ~~uses~~the process of ~~cash~~quantifying ~~were~~the ~~partially~~impact ~~offset~~of bySFAS $1123R on our financial statements,~~284~~ ofand ~~cash~~determining ~~provided~~which ~~by operations~~transition method to use.

WeRESULTS ~~maintain~~OF three revolving lines of credit (each a “Revolver”) that give us the ability to borrow up to $16,000, net of borrowing base restrictions (see the notes to the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003). WC maintains an $8,000 Revolver, subject to borrowing base restrictions (the “WC Revolver”), Primrose maintains a $1,000 Revolver, subject to borrowing base restrictions (the “Primrose Revolver”) and Pumpkin maintains a $7,000 Revolver, subject to borrowing base restrictions (the “Pumpkin Revolver”). Each Revolver contains restrictive covenants which prohibit or limit certain actions, including specified levels of capital expenditures, investments and incurrence of additional debt, and which require the maintenance of defined levels of profitability and tangible net worth. Additionally, there are restrictions on the transfer by the subsidiaries of their net assets to the parent company. We have guaranteed repayment of all outstanding borrowings under the Pumpkin Revolver. There were no outstanding borrowings under the Primrose Revolver or the Pumpkin Revolver and there was $2,300 outstanding under the WC Revolver at June 30, 2004. Management believes that cash flows from operations along with the available borrowing capacity under the Revolvers will be sufficient to fund our operations and service our debt for the next 12 to 24 months.OPERATIONS

WeRestatement ~~issued the Note to a mezzanine lender on January 14, 2004. The purpose~~ of ~~the~~ issuance was to provide us with immediately available funds to finance a variety of strategic alternatives that were being considered. The Note bears interest at an initial rate of 10% per annum, payable quarterly, which was based on market rates at the time of issuance. The interest rate is subject to adjustment upwards to 16% per annum effective upon the earlier of September 30, 2004 or the occurrence of certain triggering events under the Note. A triggering event will occur on the earlier of September 30, 2004 or upon a permitted transaction approved by the lender. If no triggering event occurs by September 30, 2004, the lender may at its option call the loan. If a triggering event does occur, then the interest rate will increase to 12% per annum and the lender will receive quarterly PIK, or payment-in-kind, notes equal to 4% of the unpaid principal and interest balance. The proceeds of the Note and one interest payment of $750 are being held in a collateral account until such time as the Note is repaid or a plan for the use of the proceeds is submitted and approved by the lender. An amount of $30,750 was reported as restricted cash at June 30, 2004. Until a triggering event occurs, we can prepay the debt in part or in full without penalty. However, after a triggering event, a prepayment penalty of 5%, 3% and 1% will be assessed on all principal payments made on or before January 14, 2005, 2006 and 2007, respectively.Results

OnThe ~~July~~results 2,for ~~2004,~~the wequarter ~~prepaid~~ended ~~$15~~March 31,~~000~~ of2004 ~~the~~included herein ~~outstanding~~have ~~principal~~been ~~balance~~restated ~~under~~to ~~the~~reflect ~~Note. As~~ a ~~result~~change ~~of changes~~ in ~~the market, we received a $15,000 senior debt commitment from~~ our ~~principal~~accounting ~~lender,~~practices ~~Bank~~for ~~One, N.A., at significantly lower~~leases ~~interest~~and ~~costs. Additionally,~~leasehold weimprovements ~~are currently~~ in ~~the~~our ~~process~~Employer ofCost ~~negotiating~~Containment ~~additional commitments~~ and ~~believe~~Health ~~that~~Services wesegment ~~will be able to obtain additional senior~~ and~~/or~~ ~~junior debt~~ at ~~lower interest~~our ~~costs~~corporate inheadquarters (the ~~near future~~“Restatement”). ItSelling, isgeneral and administrative ~~our~~expense ~~current~~(“SG&A”) ~~intention~~and todepreciation ~~repay~~and ~~amounts~~amortization ~~outstanding~~expense ~~under~~(“D&A”) for the ~~Note~~2004 asperiod wepresented ~~receive additional~~in ~~lower~~this ~~cost~~Results ~~commitments. The~~of ~~funds for~~Operations ~~the~~have ~~repayment~~been ~~were~~restated ~~obtained~~to reflect ~~from~~ the ~~release~~impact of ~~$15,000 from~~ the ~~collateral account~~Restatement. ~~Accordingly,~~As ~~the~~a ~~amount~~result of ~~restricted~~ ~~cash~~the ~~subsequent~~Restatement, SG&A toexpense ~~the~~and ~~repayment~~D&A ~~was~~expense ~~$15,375,~~for ~~representing~~ the ~~remaining~~ ~~outstanding~~Employer ~~principal~~Cost ~~balance~~Containment and Health ~~one~~Services ~~interest~~segment ~~payment. In~~for ~~addition,~~ the ~~provisions~~quarter ofended ~~the~~March 31, ~~Note stated~~2004 ~~that~~increased ifby $83 aand ~~triggering~~$2, ~~event occurred~~respectively, weand ~~would~~corporate beSG&A ~~required~~expense tofor ~~pay~~the anquarter ended ~~additional~~March 31, ~~$375~~2004 ofincreased ~~loan~~by ~~costs~~$8. ~~However, as~~For aadditional ~~result~~disclosures ofwith respect to the ~~prepayment~~Restatement, ~~should~~see aour ~~triggering~~Annual ~~event~~Report ~~occur,~~on weForm 10-K ~~would~~for ~~now only~~the beyear ~~required~~ended December 31, ~~to pay $188 of loan costs~~2004.

Total debt at June 30, 2004 was $61,324 compared to $34,889 at December 31, 2003. The increase was due to the issuance of the Note and net borrowings under the Revolvers of $2,300 partially offset by $5,865 of term debt principal payments. The term debt has certain covenants at the subsidiary operating company level, the more significant of which require the subsidiary operating companies to maintain minimumRevenues

19Consolidated revenues for the quarter ended March 31, 2005 increased by $4,003, or 13% to $34,887 compared to revenues of $30,884 for the three months ended March 31, 2004. Revenues by segment were as follows:

earnings (as defined) before interest, taxes, depreciation and amortization (“EBITDA”), leverage ratios, interest coverage ratios, fixed charge ratios and maximum lease expenses. We are currently in compliance, and management expects that we will continue to be in compliance, with the covenants on all our debt.

	For the Quarter Ended March 31,
	2005		2004

Employer Cost Containment and Health Services	$	31,585	$	28,213
Educational Services	3,302		2,671
Total revenues	$	34,887	$	30,884

OnRevenues from ~~July~~the ~~14,~~Employer ~~2004,~~Cost weContainment ~~received~~and anHealth ~~offer~~Services ~~from~~segment ~~Mr.~~for ~~Brian~~the quarter ~~Fitzgerald~~ended March 31, ~~our~~2005, ~~Chairman~~increased ~~of the Board~~$3,372, ~~President~~or ~~and~~12% ~~Chief~~to ~~Executive~~$31,585 ~~Officer~~compared to ~~and~~$28,213 for the ~~controlling~~same ~~person~~period oflast ~~our majority stockholder, CP Acquisition, L~~year.P. ~~No.~~The 1increase ~~(“CP-1”),~~was toprimarily ~~purchase~~driven ~~all~~by ofcustomer ~~the~~growth ~~outstanding~~at ~~Class~~Octagon ~~A Common Stock~~Risk Services, ~~Common Stock~~our ~~and~~a ~~Zero~~full-service ~~Coupon~~claims ~~Convertible~~administration ~~Preferred~~and ~~Stock~~consulting ofservices provider ~~Security~~for ~~Capital (collectively~~workers’ ~~“Stock”)~~compensation, ~~other~~medical ~~than~~professional ~~shares~~liability ~~held~~and bygeneral liability ~~Mr.~~based ~~Fitzgerald~~in California, ~~CP-1~~ and ~~certain~~ ~~other~~CompManagement ~~persons~~Virginia, at a ~~price~~TPA ofservice provider ~~$9.00~~based ~~per~~in ~~share~~Virginia. OnThe ~~July~~revenues of ~~28,~~Caronia ~~2004,~~are wenot ~~received~~included ain ~~revised~~revenues ~~offer~~for the quarter ended March 31, ~~from~~2005, ~~CP-1~~but towill ~~purchase~~be ~~all~~included ofin ~~such~~revenue ~~outstanding~~beginning ~~Stock~~with ~~for~~the ~~$9.50~~second ~~per~~quarter ~~share~~of 2005. InWe ~~response~~anticipate tothat ~~the~~Caronia ~~negotiations, Mr.~~revenue ~~Fitzgerald~~for ~~increased~~ the ~~offer~~second toquarter ~~$9.65~~will ~~per~~be ~~share~~approximately $4,000.

AsRevenues from ~~noted~~the inEducational ~~our~~Services ~~proxy statement~~segment ~~dated~~increased ~~April~~by ~~2004~~$631, aor ~~member~~24% ofto ~~our Board of Directors~~$3,302 ~~Mr. Haskell,~~for ~~resigned~~the asquarter aended ~~member~~March 31, of2005 ~~the~~compared ~~Audit~~to ~~Committee~~$2,671 asfor athe ~~result~~same ofperiod ~~a new policy adopted~~of bythe ~~UBS~~prior ~~Securities~~year, ~~LLC~~primarily ~~prohibiting~~due ~~membership~~to onhigher ~~outside~~royalty ~~audit~~revenue, ~~committees~~franchise fees and ~~compensation~~real ~~committees~~estate services fees. ~~Therefore, our~~Royalty ~~audit~~revenue ~~committee~~increased ~~consists~~$238, ~~only~~or of10% ~~two~~for ~~independent~~the ~~directors,~~quarter ~~and~~ended weMarch 31, ~~are~~2005 ~~not in~~compared ~~compliance~~to ~~with~~ the ~~American~~same ~~Stock~~period ~~Exchange~~of ~~(“AMEX”)~~the ~~requirement~~prior ~~that~~year ~~a company’s~~due ~~audit~~to ~~committee~~the beincrease ~~comprised~~in ofthe ~~three~~number ~~independent~~of schools ~~directors as~~opened ~~set forth~~ in ~~Section~~2005 ~~121B(2)~~versus of2004 ~~the~~and ~~AMEX Company~~increasing ~~Guide~~same-school revenue. WeFranchise ~~notified~~fees ~~the~~and ~~AMEX~~real ~~of such~~estate ~~noncompliance~~services onfee increased ~~April~~$292 ~~29,~~and ~~2004. On May 21~~$60, ~~2004~~respectively, for the ~~AMEX~~first ~~granted~~quarter usof an2005 ~~extension~~compared ~~until August 9, 2004~~ to ~~become~~ ~~fully~~the ~~compliant~~first ~~with~~quarter ~~Section~~of ~~121B(2)~~2004 ofdue to the ~~AMEX~~opening ~~Company~~of ~~Guide. Although~~six wenew ~~have~~schools ~~been~~during ~~actively~~the ~~searching, we~~2005 ~~have~~quarter ~~not~~compared ~~yet found a new director~~ to ~~serve~~no onopenings ~~our~~during ~~audit~~the ~~committee~~2004 quarter.

~~Item 3. Quantitative and Qualitative Disclosures about Market Risk~~19

~~Risk~~Selling, ~~Management~~General and Administrative Expenses

~~Market~~Consolidated ~~risks~~SG&A ~~relating~~for ~~to our operations result primarily from changes in interest rates. Our interest rate risk management objective is to lower our overall borrowing cost and to mitigate~~ the ~~impact~~quarter ofended ~~changing interest rates on our net income and cash flow.~~March ~~We achieve our objective primarily through the use of interest rate swap agreements~~31, ~~which effectively convert variable rate debt to fixed rate~~2005 ~~debt. At~~increased ~~June 30, 2004, we had interest rate swap agreements with a total notional value of~~ $184,~~500~~346, ~~which~~or ~~effectively convert~~17% ~~$18,500 of variable rate debt~~ to ~~fixed rate debt. Under the terms of these swap agreements, we receive variable interest based on one-month LIBOR and pay a weighted average fixed rate of 6.4%. At June~~ $30,425 ~~2004, after~~compared ~~the~~to ~~effect~~SG&A of ~~the swaps~~$26,079 ~~variable~~for ~~rate debt comprised 21% of total debt~~the ~~compared~~quarter toended ~~74% at December~~ March 31, ~~2003~~2004. We doSG&A ~~not~~by ~~utilize~~segment ~~interest~~was ~~rate~~as ~~swaps or other derivative financial instruments for trading or speculative purposes.~~follows:

The outstanding interest rate swaps expose us to credit risk in the event that the counterparty to the agreements does not or cannot meet its obligations. The notional amount is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The loss would be limited to the amount that would have been received, if any, over the remaining life of the swap agreements. The counterparty to the swaps is a major financial institution, which we expect to fully perform under the terms thereof.

	For the Quarter Ended March 31,
	2005		2004
			(Restated)

Employer Cost Containment and Health Services	$	28,029	$	24,041
Educational Services	1,551		1,373
Total segment SG&A	29,580		25,414
Corporate	457		277
Management fee paid to Capital Partners	388		388
Total SG&A	$	30,425	$	26,079

~~Market~~SG&A in ~~Risk~~the ~~Sensitive~~Employer ~~Instruments~~Cost Containment and Health Services segment increased $3,988, or 17% to $28,029 for the quarter ended March 31, 2005, compared to $24,041 for the quarter ended March 31, 2004. The increase was primarily due to expenses of $2,100 for the Investigation and higher salaries and benefits of approximately $1,700 due to increased personnel necessary to service the growth in customers and to augment our accounting and financial reporting staff through the hiring of additional permanent and temporary personnel. The SG&A of Caronia is not included in SG&A for the quarter ended March 31, 2005, but will be included in SG&A beginning with the second quarter of 2005. We anticipate that Caronia SG&A for the second quarter will be approximately $3,000.

~~The~~SG&A in ~~weighted~~the ~~average~~Educational ~~borrowing~~Services ~~rate~~segment ~~for~~increased ~~our~~$178, ~~debt portfolio~~or ~~was 10.7~~13% to $1,551 for the quarter ~~six months~~ ended ~~June 30~~March 31, ~~2004~~2005 compared to ~~6.5%~~$1,373 for the ~~six~~quarter ~~months~~ ended ~~June 30~~ March 31, ~~2003~~2004. ~~Assuming~~ This ~~a one percentage point~~ increase ~~in our weighted average~~was ~~borrowing~~primarily ~~rate,~~attributable ~~interest~~to ~~expense would have been~~ higher bysalaries ~~$193~~ and ~~$132~~benefits ~~for~~due to increased ~~the~~personnel ~~six~~necessary ~~months~~to ~~ended~~service ~~June~~the ~~30,~~increased ~~2004~~number ~~and~~of ~~2003,~~franchised ~~respectively~~schools.

~~Item~~SG&A at 4our corporate headquarters increased $180, or 65% to $457 for the quarter ended March 31, 2005 compared to $277 for the quarter ended March 31, 2004. ~~Controls~~This increase was mainly due to the additional reporting expenses surrounding the late filing of our 2004 Form 10-K, communications with the AMEX and ~~Procedures~~the Caronia acquisition and the use of temporary personnel in the accounting and financial reporting area.

~~(a)~~Under the Company’s MAS Agreement, Capital Partners provides certain management advisory services related to investments, general administration, corporate development, strategic planning, stockholder relations, financial matters and general business policy. Under the MAS Agreement in effect for 2005 and 2004, the advisory fee was $1,550 per annum, subject to adjustment upon the occurrence of any unforeseen event. ~~Evaluation~~Management advisory fees for each of ~~Disclosure~~the ~~Controls~~first quarters of 2005 and ~~Procedures~~2004 were $388, representing one quarter of the annual fee.

~~Our~~During ~~management~~the second quarter of 2005, ~~with~~an ~~the~~investment ~~participation~~banking fee of ~~our Chief~~$240 ~~Executive~~was ~~Officer~~paid ~~and~~to ~~Chief~~Capital ~~Financial~~Partners ~~Officer,~~for ~~evaluated~~services provided in connection with the Caronia ~~effectiveness~~acquisition. The ofinvestment ~~our~~banking ~~disclosure~~fee ~~controls~~was ~~and~~based ~~procedures~~on as1.5% of the ~~end~~contractual ofpurchase ~~the~~price ~~period~~of ~~covered~~$16,000 byand ~~this~~was ~~report. Based~~considered onusual ~~that~~and ~~evaluation, our~~customary ~~Chief~~for ~~Executive~~investment ~~Officer~~banking fees for transactions the size and ~~Chief~~complexity ~~Financial~~of ~~Officer~~Caronia. The ~~concluded~~investment ~~that~~banking ~~our~~fee was approved ~~disclosure~~by ~~controls~~the ~~and~~Compensation ~~procedures~~Committee, asAudit ofCommittee and the ~~end~~full Board of Directors. The ~~the~~investment ~~period~~banking ~~covered~~fee was byincluded ~~this report~~in ~~were~~the ~~designed~~purchase price allocation for Caronia.

~~and were functioning effectively to provide reasonable~~Depreciation ~~assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized~~ and ~~reported~~ ~~within~~Amortization the time periods specified in the SEC’s rules and forms. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.Expense

~~(b)~~Consolidated D&A ~~Change~~increased in$90, ~~Internal~~or ~~Control~~10% ~~over~~to ~~Financial~~$1,028 for the quarter ended March 31, ~~Reporting~~2005 compared to $938 for the quarter ended March 31, 2004. D&A by segment was as follows:

No change in our internal controls over financial reporting occurred during the most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

	For the Quarter Ended March 31,
	2005		2004
			(Restated)

Employer Cost Containment and Health Services	$	884	$	782
Educational Services	134		156
Total segment D&A	1,018		938
Corporate	10		—
Total D&A	$	1,028	$	938

~~PART~~D&A IIfor –the ~~OTHER~~Employer ~~INFORMATION~~Cost Containment and Health Services segment increased $102, or 13% to $884 for the quarter ended March 31, 2005 compared to $782 for the quarter ended March 31, 2004. This increase was primarily due to additional depreciation expense on asset additions and an increase in amortization expense resulting from a change in the estimated useful life of an identified intangible asset (customer list).

~~Item~~Due 1to the Caronia acquisition, beginning in the second quarter of 2005 amortization expense will increase approximately $205 per quarter due to the amortization of the acquired customer list and trade names. The aggregate value of these intangible ~~Legal~~assets ~~Proceedings~~was $8,200, and their estimated useful life is ten years.

~~CompManagement, Inc. (“CMI”), a subsidiary of WC, is party to a lawsuit~~Interest brought by the Cleveland Bar Association which alleges that certain practices by this subsidiary and its hearing representatives in Ohio constitute the unauthorized practice of law. The Ohio Supreme Court Board of Commissioners on the Unauthorized Practice of Law has issued a recommendation to the Supreme Court of Ohio that the activities engaged in by CMI constitute the unauthorized practice of law. The matter has been set for oral arguments in front of the Ohio Supreme Court on August 17, 2004. Both parties have filed their respective briefs to the Ohio Supreme Court. Several parties have filed amicus briefs on behalf of CMI, including representatives of the labor unions, trial attorneys and several trade and business associations. CMI believes that its practices do not differ from any other Ohio workers’ compensation third party administrator and do not constitute the practice of law. We anticipate that the ultimate outcome of this action will not have a material adverse effect on our financial position or future operating results.Expense

~~In March 2004, the holder of the~~Consolidated ~~convertible~~interest ~~redeemable~~expense ~~preferred~~decreased ~~stock~~by ~~requested redemption of his shares at a value of~~ $5926,~~000~~ onor ~~April 6,~~68% ~~2004. However,~~to we$430 ~~believe~~for the ~~redemption~~quarter ~~value on such date was approximately~~ended $2March 31,~~700.~~ At2005 ~~June~~compared ~~30,~~to ~~2004~~$1,356 for the ~~carrying~~quarter ~~value~~ended ofMarch 31, 2004. Interest ~~the~~expense ~~redeemable~~by ~~convertible preferred~~segment ~~stock~~ was ~~$3,976.~~as follows:

As noted in our proxy statement dated April 2004, a member of our Board of Directors, Mr. Haskell, resigned as a member of the Audit Committee as a result of a new policy adopted by UBS Securities LLC prohibiting membership on outside audit committees and compensation committees. Therefore, our audit committee consists only of two independent directors, and we are not in compliance with the American Stock Exchange (“AMEX”) requirement that a company’s audit committee be comprised of three independent directors as set forth in Section 121B(2) of the AMEX Company Guide. We notified the AMEX of such noncompliance on April 29, 2004. On May 21, 2004, the AMEX granted us an extension until August 9, 2004 to become fully compliant with Section 121B(2) of the AMEX Company Guide. Although we have been actively searching, we have not yet found a new director to serve on our audit committee.

	For the Quarter Ended March 31,
	2005		2004

Employer Cost Containment and Health Services	$	430	$	462
Educational Services	—		28
Total segment interest expense	430		490
Corporate	—		866
Total SG&A	$	430	$	1,356

~~In connection with the~~The ~~proposed~~decrease ~~offer~~in ~~from~~interest ~~Mr. Brian~~expense ~~Fitzgerald,~~for ~~our~~corporate ~~Chairman~~was ofdue to the ~~Board~~repayment, ~~President and Chief Executive~~in ~~Officer~~September of ~~and~~2004, ~~the~~of ~~controlling~~a ~~person~~$30,000 ofsenior ~~our~~subordinated ~~majority~~promissory ~~stockholder,~~note ~~CP Acquisition,~~issued ~~L.P.~~in ~~No.~~January 1of 2004 (the “~~CP-1~~Note”),. In connection towith ~~purchase~~the ~~all~~acquisition of ~~the~~Caronia, ~~outstanding~~on ~~Class~~March 31, A2005, ~~Common~~WC ~~Stock,~~entered ~~Common~~into ~~Stock~~a ~~and~~Second ~~Zero~~Amended ~~Coupon~~and ~~Convertible~~Restated ~~Preferred~~Loan ~~Stock~~Agreement of(the ~~Security Capita,~~“Credit ~~other~~Agreement”). The ~~than~~Credit ~~shares~~Agreement provided ~~held~~WC bywith ~~Mr.~~a ~~Fitzgerald~~$40,500 CPfive-~~1 and certain other persons~~year, onfully-amortizing ~~July~~term ~~14,~~loan ~~2004~~(the a“Term Loan”) ~~complaint~~and ~~was~~an ~~filed~~$8,000 inrevolving ~~the Court~~line of ~~Chancery~~credit of (the ~~State~~“WC ofRevolver”). The ~~Delaware~~Term inLoan ~~and~~bears ~~for~~interest ~~New~~at ~~Castle~~LIBOR ~~County and we~~plus ~~were~~2.5% ~~served~~or ~~such complaint~~Prime, ~~naming~~at ~~us,~~the ~~each~~Company’s ~~member~~option, ~~of our board of directors~~ and ~~CP-1~~borrowings asunder ~~defendants,~~the ~~styled~~WC ~~Paul Berger, on behalf of himself and all~~Revolver ~~others~~bear ~~similarly~~interest ~~situated,~~at v.LIBOR ~~Brian~~plus D2.0% ~~Fitzgerald,~~or A.Prime ~~George~~minus ~~Gebauer, Samuel B~~0. ~~Fortenbaugh~~5%, ~~III,~~at ~~John~~the HCompany’s option. Principal F.payments ~~Haskell,~~of ~~Jr.,~~$675 ~~Edward Kelley, Jr., M. Paul Kelly,~~are ~~Security~~due ~~Capital~~monthly ~~Corporation~~beginning ~~and CP Acquisition~~May 1, L2005.~~P. No. 1. While we have not been served in such~~ ~~complaints,~~The weproceeds ~~are aware~~ of the ~~filing~~Term ofLoan ~~two~~were ~~additional~~used ~~complaints~~to ~~naming~~fund ~~us, each~~the ~~member~~Caronia ~~of our board of directors~~ acquisition and CPrepay then-1existing asoutstanding ~~defendants as follows: (i) on~~debt. ~~July~~Beginning ~~16,~~in ~~2004~~the asecond ~~complaint~~quarter ~~styled~~of ~~Milton~~2005, ~~Pfeiffer~~we v.estimate ~~Brian~~that ~~D. Fitzgerald, A.~~interest ~~George~~expense ~~Gebauer,~~on ~~Samuel~~the B.Credit ~~Fortenbaugh,~~Agreement ~~III,~~will ~~John~~be H.approximately F.$500 ~~Haskell,~~per Jrquarter.~~, Edward Kelley, Jr., M. Paul Kelly, Security Capital Corporation~~

21WC seeks to mitigate its exposure to changes in variable rates through the use of interest rate swaps, which effectively convert variable rate debt to fixed rate debt. WC has an interest rate swap agreement with a notional value of $8,500, under which it pays a fixed rate of 5.85% and receives a variable rate based on one-month LIBOR, and an interest rate swap 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.

and CP Acquisition, L.P. No. 1 was filed and (ii) on August 3, 2004 a complaint styled Sara Gottlieb v. Brian D. Fitzgerald, A. George Gebauer, Samuel B. Fortenbaugh, III, John H. F. Haskell, Jr., Edward Kelley, Jr., M. Paul Kelly, Security Capital Corporation and CP Acquisition, L.P. No. 1 was filed. Each of the complaints allege that the defendants breached their fiduciary duties to the putative class and that the proposed offer is unfair, inadequate and not the result of arm’s-length negotiations. Each complaint seeks an injunction against the proposed offer or, if the offer is consummated, the rescission of the offer, as well as money damages, attorneys’ fees, expenses and other relief.21

WeIncome are party to several legal actions arising in the ordinary course of business. It is management’s opinion that we have adequate legal defenses to these actions and that the resolution of such matters will not have a material adverse effect on our financial position or future operating results.Taxes

~~Item~~Income 5.tax expense was $1,268 and $1,096 for the quarters ended March 31, 2005 and 2004, respectively, representing an ~~Other~~overall ~~Information~~effective tax rate of 40.3% and 41.8%, respectively.

~~Forward~~While ~~Looking~~we ~~Statements~~believe that our tax return positions are fully supportable, we expect that certain positions could be challenged and that we may not be able to successfully defend our positions. Accordingly, we establish certain reserves, including interest, for these items. In the second quarter of 2005, the reserves established for certain positions taken on our 2001 tax return were reversed as management believes these reserves are no longer necessary. Accordingly, our tax provision for the second quarter of 2005 will include a benefit of $1,684 due to the reversal of these reserves and related interest. This benefit will contribute approximately $0.25 and $0.24 to basic and diluted earnings per share, respectively, out of the estimated basic and diluted earnings per share for the second quarter of 2005 of $0.55 and $0.52, respectively. This reserve reversal did not impact cash flows.

~~This~~Liquidity filing contains “forward-looking” statements within the meaning of the “safe harbor” provisions of the Private Litigation Reform Act of 1995. Where possible, words such as “believe,” “expect”, “anticipate,” “should,” “will,” “would,” “planned,” “estimated,” “potential,” “goal,” “outlook,” “could,” and ~~similar~~ ~~expressions,~~Capital are used to identify such forward-looking statements. All forward-looking statements reflect only our current beliefs and assumptions with respect to our future results, business plans, and prospects, and are based solely on information currently available to us. Accordingly, these statements are subject to significant risks and uncertainties and our actual results, business plans and prospects could differ significantly from those expressed in, or implied by, these statements. We caution readers not to place undue reliance on, and we undertake no obligation to update, other than imposed by law, any forward-looking statements. Any information included in this Form 10-Q is deemed to update and supersede any identical or substantially similar information previously disclosed by us. Such risks and uncertainties include, but are not limited to: future legislative changes which could impact the laws governing workers’ compensation insurance in Ohio, California and the other states in which our employer cost containment and health services segment operates, our ability to enhance existing services and successfully introduce and market new services, new service developments by our competitors, the market’s acceptance of new services introduced by us and our competitors, competitive pressures on prices, the ability to attract and maintain qualified personnel, our ability to attract qualified franchisees or obtain financing for these franchisees, the effects if a lender to us or one of our subsidiaries utilizes remedies available to it upon an event of default on loans to one of our subsidiaries, and decisions relative to and the outcome of any transactions that we enter into with respect to maximizing stockholder value and enhancing stockholder liquidity.Resources

22For the quarter ended March 31, 2005, we generated $6,506 of cash flow from operations, primarily from cash collections of accounts receivable and advance payments on customer contracts. Certain contracts require payments in advance of services being rendered, and these payments are recorded as deferred revenue until the services are provided and the revenue earned. For the quarter ended March 31, 2004, cash flow from operations was $4,292, primarily from advance payments on customer contracts partially offset by lower cash collections of accounts receivable.

~~Item~~Cash used 6in investing activities was $13,912 for the quarter ended March 31, 2005 compared to $1,177 used in investing activities for the quarter ended March 31, 2004. ~~Exhibits~~Net ~~and~~cash ~~Reports~~of $13,449 was used to acquire Caronia on ~~Form~~March 31, ~~8-K~~2005. The purchase price for Caronia was subject to adjustment based upon the working capital of Caronia as of the closing date. Accordingly, based on the working capital of Caronia as of the closing date, we will make an additional payment of $1,223 to the seller during the third quarter of 2005. Also, additional transaction costs of approximately $736 have been paid subsequent to March 31, 2005. These costs include an investment banking fee of $240 paid to Capital Partners and $396 for accounting and legal services and $100 for consulting services.

(Cash provided by financing activities was $17,390 for the quarter ended March 31, 2005 compared to cash used in financing activities of $4,894 for the quarter ended March 31, 2004. During the first quarter of 2005, we received net proceeds of $40,359 from the Credit Agreement. These proceeds were used to fund the Caronia acquisition and to repay then-outstanding borrowings of $24,929. We also received $1,960 from the exercise of employee stock options. In the first quarter of 2004, we received proceeds of $30,000 from the issuance of the Note. Under the terms of the Note, the proceeds were held in a) ~~Exhibits:~~collateral account and were to be released once a use of the proceeds was approved by the lender.

Exhibit No.		Description
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
10.9		Amended and Restated Management Advisory Service Agreement dated January 1, 2004 between Security Capital Corporation and Capital Partners, Inc.
31.1		Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2004 under Section 302 of the Sarbanes-Oxley Act by Brian D. Fitzgerald, Chief Executive Officer of Security Capital Corporation
31.2		Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2004 under Section 302 of the Sarbanes-Oxley Act by William R. Schlueter, Senior Vice President and Chief Financial Officer of Security Capital Corporation
32		Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2004 under Section 906 of the Sarbanes-Oxley Act by Brian D. Fitzgerald, Chief Executive Officer and William R. Schlueter, Senior Vice President and Chief Financial Officer of Security Capital Corporation

At March 31, 2005, WC maintained the $8,000 WC Revolver, and Primrose maintained a $1,000 revolving line of credit (the “Primrose Revolver”). There were no borrowings under the WC Revolver or Primrose Revolver at March 31, 2005. Management believes that cash flow from operations along with the available borrowing capacity under the WC Revolver and Primrose Revolver will be sufficient to fund our operations and service our debt for the next 12 to 24 months.

~~(b)~~The Term Loan, WC Revolver and Primrose Revolver contain restrictive covenants that prohibit or limit certain actions, including specified levels of capital expenditures, investments and incurrence of additional debt, and require the maintenance of a minimum fixed charge ratio. Borrowings are secured by a pledge of substantially all assets at the subsidiary level, as well as a pledge of the Company’s ownership in the subsidiary. ~~Reports~~The Credit Agreement oncontains ~~Form~~provisions ~~8-K:~~that required WC to deliver audited financial statements for 2004 to the lender by the end of April and require WC to deliver monthly financial statements beginning April 2005. WC obtained a waiver from the lender until June 30, 2005 to deliver its 2004 audited financial statements and until August 31, 2005 to begin delivering monthly financial statements. WC delivered to the lender its 2004 audited financial statements prior to June 30, 2005 and will deliver monthly financial statements beginning September 2005.

OnDuring April ~~July~~of 142005, ~~2004,~~ we ~~filed~~received anotification ~~Current~~from ~~Report on~~certain ~~Form~~employees ~~8-K~~of ~~disclosing~~WC ~~under~~(“WC ~~Item~~Stockholders”) that 5they ~~that~~wished weto ~~had~~sell ~~received~~or aconvert ~~letter~~to Company stock their minority shares (“~~Offer Letter~~Shares”) ~~from~~in ~~Mr.~~WC ~~Brian~~and ~~Fitzgerald,~~exercise ~~our~~their ~~Chairman~~vested ofoptions ~~the~~(“Vested ~~Board,~~Options”) ~~President and~~to ~~Chief~~purchase ~~Executive~~shares ~~Officer~~of WC stock and sell or convert them to Company stock. Under the ~~controlling~~terms ~~person~~ of ~~our~~the ~~majority~~agreement ~~stockholder,~~governing the CPShares ~~Acquisition,~~and ~~L.P.~~Vested ~~No.~~Options 1 (the “~~CP-1~~Stockholders Agreement”), ~~offering~~the toWC Stockholders ~~purchase~~are ~~all~~permitted ofto ~~the~~sell ~~outstanding~~or ~~Class~~convert Aa ~~Common~~maximum ~~Stock,~~of ~~Common~~34% ~~Stock~~of their Shares and ~~Zero~~Vested ~~Coupon~~Options. We ~~Convertible~~have ~~Preferred~~calculated ~~Stock~~the offair market ~~Security~~value ~~Capital~~of at a ~~price~~share of ~~$9.00~~WC ~~per~~stock in accordance with the calculation ~~share~~stipulated in the Stockholders Agreement. A We ~~copy~~have ofprovided the ~~Offer~~WC ~~Letter~~Stockholders with the fair market value calculation and notified them that, in accordance with the terms of the ~~our~~Stockholders ~~press~~Agreement, ~~release~~we ~~was~~intend ~~attached~~to aspurchase ~~Exhibit~~the ~~99.1~~maximum number of Shares and Vested 99Options for cash and the WC Stockholders have accepted our offer.2, The ~~respectively,~~cost to purchase the Shares and Vested ~~Form~~Options ~~8-K~~is approximately $4,100.

~~On July 28, 2004, we filed a Current Report on Form~~We ~~8-K~~anticipate ~~disclosing under Item 5~~ that ~~we had received a letter (“Revised Offer Letter”) from Mr. Brian Fitzgerald, our Chairman of~~ the ~~Board,~~funds ~~President~~necessary ~~and Chief~~to ~~Executive~~facilitate ~~Officer~~this ~~and~~transaction ~~the~~would ~~controlling person of our majority stockholder,~~be ~~CP-1,~~initially ~~offering~~borrowed toby ~~purchase~~Primrose ~~all of the outstanding Class A Common Stock, Common Stock~~ and ~~Zero~~dividended ~~Coupon~~to ~~Convertible Preferred Stock of~~ Security Capital ~~at a price of $9~~.~~50 per share.~~ WeIf ~~further announced~~the ~~that~~funds inare ~~connection~~transferred ~~with~~from ~~Revised~~Primrose ~~Offer Letter, a complaint seeking~~ to ~~enjoin~~Security ~~the~~Capital ~~proposed~~via ~~transaction~~a ~~was~~dividend, ~~filed in~~ the ~~Court~~minority stockholders’ of ~~Chancery~~Primrose ~~in the State~~would ofreceive ~~Delaware~~their ~~naming~~proportionate ~~Security~~share ~~Capital,~~(1.5%) ~~each member~~ of ~~our~~the ~~Board of Directors and CP-1 as defendants~~dividend. A ~~copy~~total of ~~the Revised~~980 ~~Offer~~Shares ~~Letter~~will ~~and~~be ~~our~~purchased ~~press release was attached as Exhibit 99.1 and~~from ~~99.2, respectively, to~~ the ~~Form 8-K.~~WC

2322

~~SIGNATURES~~Stockholders, and after the purchase is completed, the WC Stockholders’ interest in Security Capital will decrease from 20% to 13.2%. We anticipate settling with the WC Stockholders in September of 2005.

~~Pursuant~~Item ~~to the~~3. ~~requirements~~Quantitative ofand ~~the~~Qualitative ~~Securities~~Disclosures ~~Exchange~~about ~~Act~~Market ~~of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.~~Risk

	SECURITY CAPITAL CORPORATION
Date: August 16, 2004	By:	/s/ Brian D. Fitzgerald
	Brian D. Fitzgerald
	Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
Date: August 16, 2004	By:	/s/ William R. Schlueter
	William R. Schlueter
	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Risk Management

24Market risks relating to our operations result primarily from changes in the U.S. Prime interest rate or LIBOR. Our interest rate risk management objective is to lower our overall borrowing costs and to mitigate the impact of changing interest rates on our net income and cash flows. We seek to achieve our objective primarily through the use of interest rate swap agreements, which effectively convert variable rate debt to fixed rate debt. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Expense” above for a discussion of our interest rate swaps. At March 31, 2005, after the effect of the swaps, variable rate debt comprised 46% of total debt compared to 26% at December 31, 2004. The increase in the percentage of variable rate debt was due to the issuance of the Credit Agreement on March 31, 2005. We do not utilize interest rate swaps or other derivative financial instruments for trading or speculative purposes.

~~Index~~The outstanding interest rate swaps expose us to credit risk in the event that the counterparty to the agreements does not or cannot meet its obligations. The notional amount is used to measure interest to be paid or received and does not represent the amount of ~~Exhibits~~exposure to credit loss. The loss would be limited to the amount that would have been received, if any, over the remaining life of the swap agreements. The counterparty to the swaps is a major financial institution, which we expect to fully perform under the terms thereof.

Exhibit No.		Description
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
10.9		Amended and Restated Management Advisory Service Agreement dated January 1, 2004 between Security Capital Corporation and Capital Partners, Inc.
31.1		Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2004 under Section 302 of the Sarbanes-Oxley Act by Brian D. Fitzgerald, Chief Executive Officer of Security Capital Corporation
31.2		Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2004 under Section 302 of the Sarbanes-Oxley Act by William R. Schlueter, Senior Vice President and Chief Financial Officer of Security Capital Corporation
32		Certification of Quarterly Report on Form 10-Q for the period ended June 30, 2004 under Section 906 of the Sarbanes-Oxley Act by Brian D. Fitzgerald, Chief Executive Officer and William R. Schlueter, Senior Vice President and Chief Financial Officer of Security Capital Corporation

Market Risk Sensitive Instruments

25Including the effect of the interest rate swaps, the weighted average borrowing rate for our debt portfolio was 6.4% for the first quarter of 2005 compared to 8.9% for the first quarter of 2004. The interest rate during the 2004 period was affected by the fixed interest rate on the Note issued in January of 2004. Assuming a one percentage point increase in our weighted average borrowing rate, interest expense would have been higher by $57 and $194 for the quarters ended March 31, 2005 and March 31, 2004, respectively.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report were not effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company believes that no system of disclosure controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system are met, and no such controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

During the fourth quarter of 2004 and first quarter of 2005, the Company confronted a number of unique challenges that, taken together, put extraordinary and unforeseen demands on management and the Company’s system of disclosure controls and procedures, straining the Company’s disclosure, accounting and financial reporting resources at both WC and the corporate level. The extraordinary nature of the demands put on our control systems made it extremely difficult to record, process, summarize and report required information within the time periods specified in the SEC’s rules and forms. The adverse effect of these challenges and demands on our ability to record, process, summarize and report required information within the time periods specified in the SEC’s rules and forms continued throughout the first and second quarters of 2005.

Management believes that the Company responded appropriately to the unique control challenges faced by the Company over the last several months. In management’s view, no system of controls can be designed and implemented with sufficient capacity and resilience to accommodate an extraordinary and overwhelming confluence of events, such as those recently experienced by the Company, its management, and its directors.

(b) Change in Internal Control over Financial Reporting

During the first quarter of 2005, the Company took significant steps to increase and improve internal staffing, including the hiring of additional permanent and temporary accounting and financial reporting personnel, and its system of controls, especially as to related-party transactions and conflicts of interest. We have redistributed our Code of Conduct to all employees and have required them to recertify to

us, in writing, that they have read and understand the Code of Conduct and agree to be bound by its terms and conditions. We have drawn upon the help, guidance and expertise of our dedicated independent directors, most notably the Chairman of our Audit Committee, and will continue to utilize this valuable resource, where appropriate.

Shortly after the Company filed its 2004 Form 10-K on June 28, 2005, management formalized its Financial Reporting and Disclosure Committee (“FRDC”). The FRDC is comprised of the Chief Executive Officer (the “CEO”), Chief Operating Officer and Chief Financial Officer (the “CFO”) of each business unit and the lead accountants at each operating subsidiary. The objective of the FRDC is to provide the CEO and the CFO of the Company, and all other members, sufficient information to gain an understanding of the financial results for the period and to ensure that the information contained in the financial statements is complete, accurate and prepared in accordance with generally accepted accounting principles. The FRDC meets on a quarterly basis and each member of the FRDC is required to provide a certification to the CEO and CFO of Security Capital that, to the best of his or her knowledge, the organization’s financial statements are free from material misstatement and fairly present the results of operations, financial condition and cash flows of the organization for the period presented.

In addition to the formalization of the FRDC, in July of 2005 the Company initiated a comprehensive review and documentation of its internal control procedures, including its internal control over financial reporting (the “Internal Control Project”). The Internal Control Project is designed to identify areas of risk, and the controls and procedures currently in place to mitigate the risk, to determine if the controls and procedures are functioning effectively, to identify controls and procedures that could be improved and to develop and design improvements to the existing system of internal control. The Company has retained an outside consultant to assist in the Internal Control Project.

Management will continue to strive to enhance further its disclosure controls and procedures and to address its internal control over financial reporting systems for the Section 404 process ahead.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

CMI was party to a lawsuit brought by the Cleveland Bar Association that alleged that certain practices by CMI and its hearing representatives in Ohio constituted the unauthorized practice of law. CMI believes that its practices do not differ from any other Ohio workers’ compensation third-party administrator and do not constitute 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 constitute the unauthorized practice of law; CMI appealed these findings to the Ohio State Supreme Court (the “Supreme Court”). On December 15, 2004, the Supreme Court ruled that the activities engaged in by CMI did not constitute the unauthorized practice of law. However, in its decision, the Supreme Court remanded the matter back to the UPL Board to consider whether those activities which were the subject of the original suit were in violation of a recently enacted Industrial Commission resolution. Oral arguments on this issue were held on July 29, 2005. At this time, we are unable to evaluate the outcome of this matter.

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 order of consolidation, consolidating the three complaints into one class action. Plaintiffs have submitted their first request for the production of documents. At this time, we are unable to evaluate the possible outcome of the class action.

Since the announcement of the Initial Capital Partners Offer, Mr. Fitzgerald and Capital Partners have increased their offer to $10.60 per share, and offers to acquire the 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 had retained UBS Securities LLC to conduct a formal sale process for the Company, and that Mr. Fitzgerald and Capital Partners had declared their full support for the sale process and committed to sell the shares they control if appropriate value is achieved.

Item 6. Exhibits

31.1		Certification of Quarterly Report on Form 10-Q for the period ended March 31, 2005 by Brian D. Fitzgerald, Chairman of the Board, President and Chief Executive Officer of Security Capital Corporation under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Quarterly Report on Form 10-Q for the period ended March 31, 2005 by William R. Schlueter, Senior Vice President and Chief Financial Officer of Security Capital Corporation under Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Quarterly Report on Form 10-Q for the period ended March 31, 2005 under Section 906 of the Sarbanes-Oxley Act of 2002 by Brian D. Fitzgerald, Chairman of the Board, President and Chief Executive Officer, and William R. Schlueter, Senior Vice President and Chief Financial Officer, of Security Capital Corporation.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SECURITY CAPITAL CORPORATION

Date: September 1, 2005	By:	/s/ Brian D. Fitzgerald
		Brian D. Fitzgerald
		Chairman of the Board, President
		and Chief Executive Officer
		(Principal Executive Officer)

Date: September 1, 2005	By:	/s/ William R. Schlueter
		William R. Schlueter
		Senior Vice President and Chief Financial Officer
		(Principal Accounting Officer)

Index of Exhibits

Exhibit No.		Description

31.1		Certification of Quarterly Report on Form 10-Q for the period ended March 31, 2005 by Brian D. Fitzgerald, Chairman of the Board, President and Chief Executive Officer of Security Capital Corporation under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Quarterly Report on Form 10-Q for the period ended March 31, 2005 by William R. Schlueter, Senior Vice President and Chief Financial Officer of Security Capital Corporation under Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Quarterly Report on Form 10-Q for the period ended March 31, 2005 under Section 906 of the Sarbanes-Oxley Act of 2002 by Brian D. Fitzgerald, Chairman of the Board, President and Chief Executive Officer, and William R. Schlueter, Senior Vice President and Chief Financial Officer, of Security Capital Corporation.

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