Crawford & Co: Form 10-Q for the period ended Jun 30, 2010

Cautionary Statement Concerning Forward-Looking Statements

This report contains and incorporates by reference forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Statements contained in this report that are not statements of historical fact are forward-looking statements made pursuant to the “safe harbor” provisions. These statements are included throughout this report and relate to, among other things, discussions regarding reduction of our operating expenses in our Broadspire segment, anticipated contributions to our underfunded defined benefit pension plans, collectability of our billed and unbilled accounts receivable, projections regarding payments under existing earnout agreements, discussions regarding our continued compliance with the financial and other covenants contained in our financing agreements, and other long-term liquidity requirements. These statements also relate to our business strategies, goals and expectations concerning our market position, future operations, margins, case volumes, profitability, contingencies, and capital resources. The words “anticipate”, “believe”, “could”, “would”, “should”, “estimate”, “expect”, “intend”, “may”, “plan”, “goal”, “strategy”, “predict”, “project”, “will” and similar terms and phrases identify forward-looking statements in this report.

Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. Our operations and the forward-looking statements related to our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially affect our financial condition, results of operations and whether the forward-looking statements ultimately prove to be correct. Included among, but not limited to, the risks and uncertainties we face are:

• declines in the volume of cases referred to us for many of our service lines,
• changes in global economic conditions,
• changes in interest rates,
• changes in foreign currency exchange rates,
• changes in regulations and practices of various governmental authorities,
• changes in our competitive environment,
• changes in the financial condition of our clients,
• the performance of sublessors under certain subleases related to our leased properties,
• regulatory changes related to funding of defined benefit pension plans,
• the fact that our U.S. and U.K. defined benefit pension plans are significantly underfunded and our future funding obligations thereunder,
• changes in the degree to which property and casualty insurance carriers outsource their claims handling functions,
• changes in overall employment levels and associated workplace injury rates in the U.S.,
• unfavorable outcomes in any current or future legal proceedings, including our various arbitration proceedings relating to the acquisition of BMSI,
• our ability to identify new revenue sources not tied to the insurance underwriting cycle,
• our ability to develop or acquire information technology resources to support and grow our business,

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• our ability to attract and retain qualified personnel,
• renewal of existing major contracts with clients on satisfactory terms,
• our ability to collect amounts recoverable from our clients and others,
• continued availability of funding under our financing agreements,
• general risks associated with doing business outside the U.S.,
• our ability to comply with any applicable debtor or other covenant in our financing or other agreements,
• possible legislation or changes in market conditions that may curtail or limit growth in product liability and securities class actions,
• man-made disasters and natural disasters,
• our failure to complete the implementation of RiskTech on schedule,
• impairment of goodwill or our other indefinite-lived intangible assets, and

As a result, you should not place undue reliance on any forward-looking statements.

Actual results and trends in the future may differ materially from those suggested or implied by the forward-looking statements. Forward-looking statements speak only as of the date they are made and we undertake no obligation to publicly update any of these forward-looking statements in light of new information or future events.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with 1) our unaudited condensed consolidated financial statements and accompanying notes thereto for the three months and six months ended June 30, 2010 and 2009 contained in Item 1 of this Quarterly Report on Form 10-Q and 2) our Annual Report on Form 10-K for the year ended December 31, 2009. The financial statements of our subsidiaries comprising our International Operations segment, other than subsidiaries in Canada and the Caribbean, are included in our consolidated financial statements on a two-month delayed basis as permitted by U.S. generally accepted accounting principles (“GAAP”) in order to provide sufficient time for accumulation of their results.

Business Overview

Based in Atlanta, Georgia, Crawford & Company (www.crawfordandcompany.com (http://www.crawfordandcompany.com)) is the world’s largest independent provider of claims management solutions to the risk management and insurance industry, as well as to self-insured entities, with a global network of more than 700 locations in 63 countries. The Crawford System of Claims Solutionssm offers comprehensive, integrated claims services, business process outsourcing and consulting services for major product lines including property and casualty claims management, workers’ compensation claims and medical management, and legal settlement administration, including class action and bankruptcy administration, as well as risk management information services. Shares of the Company’s two classes of common stock are traded on the NYSE under the symbols CRDA and CRDB, respectively.

As discussed in more detail in subsequent sections of this MD&A, we have four operating segments: U.S. Property & Casualty, International Operations, Broadspire, and Legal Settlement Administration. Our four operating segments represent components of our Company for which separate financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing operating performance. U.S. Property & Casualty serves the U.S. property and casualty insurance company market, including the product warranties and inspections marketplace. International Operations serves the property and casualty insurance company markets outside of the U.S. Broadspire serves the self-insurance marketplace primarily within the U.S. Legal Settlement Administration serves the securities, bankruptcy, and other legal settlements markets primarily in the U.S.

Insurance companies, which represent the major source of our global revenues, customarily manage their own claims administration function but often rely on third parties for certain services which we provide, primarily including field investigation and the evaluation of property and casualty insurance claims. We also conduct inspections of building component products related to warranty and product performance claims.

Self-insured entities typically rely on us for a broader range of services. In addition to field investigation and evaluation of their claims, we also provide initial loss reporting services, loss mitigation services such as medical case management and vocational rehabilitation, risk management information services, and administration of trust funds established to pay claims.

We also perform legal settlement administration services related to securities, product liability, and other class action settlements and bankruptcies, including identifying and qualifying class members, determining and dispensing settlement payments, and administering settlement funds. Such services are generally referred to by us as class action services.

The claims management services market, both in the U.S. and internationally, is highly competitive and comprised of a large number of companies of varying size and that offer a varied scope of services. The demand from insurance companies and self-insured entities for services provided by independent claims service firms like us is largely dependent on industry-wide claims volumes, which are affected by, among other things, the insurance underwriting cycle, weather-related events, general economic activity, overall employment levels, and associated workplace injury rates. Accordingly, we are limited in our ability to predict case volumes that may be referred to us in the future. In addition, our ability to retain clients and maintain and increase case referrals is also dependent in part on our ability to continue to provide high-quality, competitively priced services.

We generally earn our revenues on an individual fee-per-claim basis for claims management services we provide to property and casualty insurance companies and self-insured entities. Accordingly, the volume of claim referrals to us is a key driver of our revenues. Generally, fees are earned on claims in the period the claim is assigned to us, although sometimes a portion or substantially all of the revenue generated by a specific claim assignment will be earned in subsequent periods. Industry-wide claims volume in general will vary depending upon the insurance underwriting cycle.

In the insurance industry, the underwriting cycle is often said to be in either a “soft” or “hard” market. A soft market generally results when insurance companies focus more on increasing their premium income and focus less on controlling underwriting risks. A soft market often occurs in conjunction with strong financial markets or in a period with a lack of catastrophe losses. Insurance companies often attempt to derive a significant portion of their earnings from their investment portfolios, and their focus may turn to collecting more premium income to invest under the assumption that increased investment income and gains will offset higher claim costs that usually result from relaxed underwriting standards. Due to competition in the industry during a soft market, insurance companies usually concentrate on growing their premium base by increasing the number of policies in-force instead of raising individual policy premiums. When the insurance underwriting market is soft, insurance companies are generally more aggressive in the risks they underwrite, and insurance premiums and policy deductibles typically decline. This usually results in an increase in industry-wide claim referrals which generally will increase claim referrals to us provided that we are able to maintain our existing market share. However, if a soft market coincides with a period of low catastrophic claims activity, industry-wide claim volumes may not increase.

A transition from a soft to a hard market is usually caused by one or two key factors, or sometimes a combination of both: weak financial markets or unacceptable losses from policy holders. When investments held by insurance companies begin to perform poorly, insurance companies typically turn their focus to attempting to better control underwriting risks and claim costs. However, even if financial markets perform well, the relaxed underwriting standards in a soft market can lead to unacceptable increases in the frequency and cost of claims, especially in geographic areas that are prone to frequent weather-related catastrophes. Either of these factors will usually lead the insurance industry to transition to a hard market. During a hard insurance underwriting market, insurance companies generally become more selective in the risks they underwrite, and insurance premiums and policy deductibles typically increase, sometimes quite dramatically. This usually results in a reduction in industry-wide claim volumes, which generally reduces claim referrals to us unless we are able to offset the decline in claim referrals with growth in our market share. During 2009 and into 2010, the insurance industry underwriting cycle could be characterized as a “soft” market. Because the underwriting cycle can change suddenly due to unforeseen events in the financial markets and catastrophic claims activity, we cannot predict what impact the current “soft” market may have on us in the future.

We are also impacted by decisions insurance companies and other clients may make to change the level of claims outsourced to independent claim service firms as opposed to those handled by their own in-house claims adjusters or contracted to other third party administrators, whether or not associated with insurance companies. Our ability to grow our market share in a highly fragmented and competitive market is primarily dependent on the delivery of superior quality service and effective sales efforts.

The legal settlement administration market is also highly competitive but comprised of a smaller number of specialized entities. The demand for legal settlement administration services is generally not directly tied to or affected by the insurance underwriting cycle. The demand for these services is largely dependent on the volume of securities and product liability class action settlements, the volume of Chapter 11 bankruptcy filings and the resulting settlements, and general economic conditions. Our revenues from legal settlement administration services are generally project-based and we earn these revenues as we perform individual tasks and deliver the outputs as outlined in each project.

Results of Operations

Executive Summary

Consolidated revenues before reimbursements declined 4.6% and 2.3% for the three-month and six-month periods ended June 30, 2010, compared to the same periods of 2009. Increases in revenues in our International Operations segment, due primarily to a weaker U.S. dollar, were offset by revenue declines in both the second quarter and the six months ended June 30, 2010, in our U.S. Property & Casualty and Broadspire segments. Excluding the impact of foreign currency translation, consolidated revenues before reimbursements during the second quarter of 2010 were 8.9% lower than revenues in the second quarter of 2009, and revenues in our International Operations segment decreased by 0.9% in the second quarter of 2010 compared to the second quarter of 2009. For the first six months of 2010, excluding the impact of foreign currency translation, consolidated revenues before reimbursements were 7.3% lower than revenues in the first six months of 2009, and revenues in our International Operations segment decreased by 0.1%, compared to the first six months of 2009.

Excluding noncash goodwill impairment charges of $ 7.3 million, or $(0.13) per share, in the second quarter of 2010, which are described more fully in Note 13 to the accompanying unaudited condensed consolidated financial statements, and $94.0 million, or $(1.81) per share, in the second quarter of 2009, net income attributable to Crawford & Company was $4.3 million and $5.9 million for the three months ended June 30, 2010 and 2009, respectively, and $7.4 million and $9.0 million for the six months ended June 30, 2010 and 2009, respectively. Including the goodwill impairment charge in the second quarter of 2010, the net (loss) income attributable to Crawford & Company was $(2.5) million for the quarter ended June 30, 2010, and $527,000 for the six months ended June 30, 2010. Including the goodwill impairment charge in the second quarter of 2009, net loss attributable to Crawford & Company was $(88.1) million and $(85.0) million for the quarter and six months ended June 30, 2009, respectively.

Consolidated net income for the three months ended June 30, 2010 included a pretax charge of $2.0 million, or $(0.02) per share, due to severance costs for administrative staff reductions. For the six months ended June 30, 2010, the total restructuring and other costs was $4.7 million, or $(0.05) per share, which included this restructuring charge plus a pretax loss of approximately $2.7 million on the sublease of the Broadspire facility in Plantation, Florida and the relocation of those operations to Sunrise, Florida, as described in more detail in Note 12 to the accompanying unaudited condensed consolidated financial statements. The restructuring charge recorded in the quarter and six months ended June 30, 2009 was $1.8 million, or $(0.02) per share, due to professional fees incurred in connection with a previously disclosed internal realignment of certain of our legal entities.

Selling, General, and Administrative (“SG&A”) expenses were 7.4% and 6.2% lower in the quarter and six months ended June 30, 2010, compared to the same periods of 2009. The decreases were due primarily to lower expenses associated with our self-insured risks lower expenses resulting from the termination of a computer systems hosting contract, and administrative cost control.

Operating Earnings (Loss) of our Operating Segments

We believe that a discussion and analysis of the operating earnings of our four operating segments is helpful in understanding the results of our operations. Operating earnings is the primary financial performance measure used by our senior management and chief operating decision maker (“CODM”) to evaluate the financial performance of our operating segments and make resource allocation decisions. Unlike net income, our operating earnings measure is not a standard performance measure found in GAAP. However, since it is our segment measure of profitability presented in conformity with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”)

Topic 280 “Segment Reporting,” it is not considered a non-GAAP financial measure requiring reconciliation pursuant to Securities and Exchange Commission (“SEC”) guidance contained in Regulation G and Item 10(e) of Regulation S-K. We believe this measure is useful to others in that it allows them to evaluate segment operating performance using the same criteria our management and CODM use. Operating earnings represent segment earnings excluding income tax expense, net corporate interest expense, amortization of customer-relationship intangible assets, stock option expense, certain other gains and expenses, and certain unallocated corporate and shared costs–all for reasons described below. Net income or loss attributable to noncontrolling interests has also been removed from operating earnings.

Income tax expense, net corporate interest expense, amortization of customer-relationship intangible assets, and stock option expense are recurring components of our net income or loss, but they are not considered part of our segment operating earnings because they are managed on a corporate-wide basis. Income tax expense is based on statutory rates in effect in each of the jurisdictions where we provide services, and vary throughout the world. Net corporate interest expense results from capital structure decisions made by management and affecting the Company as a whole. Amortization expense relates to non-cash amortization expense of customer-relationship intangible assets resulting from business combinations. Stock option expense represents the non-cash costs generally related to stock options and employee stock purchase plan expenses which are not allocated to our operating segments. None of these costs relate directly to the performance of our services or operating activities and, therefore, are excluded from segment operating earnings in order to better assess the results of each segment’s operating activities on a consistent basis.

Certain other gains and expenses may arise from events (expenses related to restructurings, losses on subleases, and goodwill impairment charges) that are not allocated to any particular segment since they historically have not regularly impacted our performance and are not expected to impact our future performance on a regular basis.

Unallocated corporate and shared costs represent expenses and credits related to our CEO and Board of Directors, certain provisions for bad debt allowances or subsequent recoveries such as those related to bankrupt clients, defined benefit pension costs or credits for our frozen U.S. defined benefit pension plan, and certain self-insurance costs and recoveries. These items are not allocated to our individual operating segments.

Additional discussion and analysis of our income taxes, net corporate interest expense, amortization of customer-relationship intangible assets, stock option expense, unallocated corporate and shared costs, and other gains and expenses follows the discussion and analysis of the results of operations of our four operating segments.

Segment Revenues

In the normal course of business, our operating segments incur certain out-of-pocket expenses that are thereafter reimbursed by our clients. Under GAAP, these out-of-pocket expenses and associated reimbursements are reported as revenues and expenses, respectively, in our consolidated results of operations. In the following discussion and analysis of segment results of operations, we do not include a gross-up of segment revenues and expenses for these pass-through reimbursed expenses. The amounts of reimbursed expenses and related revenues offset each other in our results of operations with no impact to our net income (loss) or operating earnings (loss). A reconciliation of revenues before reimbursements to consolidated revenues determined in accordance with GAAP is self-evident from the face of the accompanying unaudited condensed consolidated statements of operations. Unless noted in the following discussion and analysis, revenue amounts exclude reimbursements for out-of-pocket expenses.

Segment Expenses

Our discussion and analysis of segment operating expenses is comprised of two components. “Direct Compensation and Fringe Benefits” includes all compensation, payroll taxes, and benefits provided to our employees which, as a service company, represents our most significant and variable operating expense. “Expenses Other Than Direct Compensation and Fringe Benefits” includes outsourced services, office rent and occupancy costs, office operating expenses, cost of risk, amortization and depreciation expense other than amortization of customer-relationship intangible assets, and allocated corporate and shared costs. These costs are more fixed in nature as compared to direct compensation and fringe benefits.

Allocated corporate and shared costs are allocated to our four operating segments based primarily on usage. These allocated costs are included in the determination of segment operating earnings. If we change our allocation methods or change the types of costs that are allocated to our four operating segments, prior periods are adjusted to reflect the current allocation process.

Operating results for our U.S. Property & Casualty, International Operations, Broadspire, and Legal Settlement Administration segments reconciled to pretax (loss) income attributable to Crawford & Company and net (loss) income attributable to Crawford & Company, were as follows:

(in thousands, except percentages)

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U.S. PROPERTY & CASUALTY

Operating earnings for our U.S. Property & Casualty segment decreased from $6.2 million, or 11.3% of revenues before reimbursements, in the second quarter of 2009, to $3.3 million, or 7.0% of revenues before reimbursements, in the second quarter of 2010. For the six months ended June 30, segment operating earnings decreased from $12.4 million, or 11.2% of revenues before reimbursements, in 2009 to $8.4 million, or 8.7% of revenues before reimbursements, in 2010. The decline in U.S. Property & Casualty’s operating earnings was primarily due to the decline in revenues discussed below.

Revenues before Reimbursements

U.S. Property & Casualty revenues are primarily generated from the property and casualty insurance company markets, with additional revenues generated from the warranties and inspections marketplace and from our Contractor Connection direct repair network. U.S. Property & Casualty revenues before reimbursements by major service line for the three months and six months ended June 30, 2010 and 2009 were as follows:

( in thousands, except percentages)

The overall revenue decrease in the second quarter and first six months of 2010 in U.S. Property & Casualty was due to a decline in Claims Field Operations revenues caused by reduced property, casualty, vehicle and warranty services claims and declines in Catastrophe Services and Technical Services resulting from an overall decrease in weather-related events in 2010. These reductions were partially offset by increases in revenues from our direct repair network, Contractor Connection.

U.S. Property & Casualty’s 14.3% and 12.7% revenue decline in the second quarter and first six months of 2010 compared to the same periods in 2009 was due to a 3.1% and 6.4% decline, respectively, from changes in the mix of services provided and in the rates charged for those services, and a 11.2% and 6.3% decline, respectively, in segment unit volume, measured principally by cases received.

Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses included in total revenues for our U.S. Property & Casualty segment were unchanged, at $2.6 million for the second quarters of both 2010 and 2009. Reimbursements for the six-month periods decreased slightly in 2010, to $5.0 million for the six months ended June 30, 2010, from $5.2 million for the six months ended June 30, 2009.

Case Volume Analysis

U.S. Property & Casualty unit volumes by underlying case category, as measured by cases received, for the three months and six months ended June 30, 2010 and 2009 were as follows:

(whole numbers, except percentages )

The 2010 decrease in property and casualty claims was due primarily to lower industry-wide claims volumes, which have resulted in fewer claims referred to us from our clients. The 2010 decline in vehicle claims was due primarily to general economic conditions which we believe have resulted in fewer miles driven and thus fewer claims, and also due to decisions by certain insurance companies to reduce third-party adjuster involvement in handling vehicle-related claims. We expect the trend of reduced third-party adjuster involvement in vehicle claims to continue. The 2010 decrease in warranty services claims resulted from the expiration of several long-running class action contracts. This trend is expected to continue as we are not aware of any large new class action warranty claims that will replace the expiring contracts. The 2010 increase in workers’ compensation claims was due primarily to increased referrals for outside investigations from insurance carriers and internal referrals from our Broadspire segment.

The 2010 increase in Contractor Connection cases was due to the ongoing expansion of our contractor network and due to the trend of insurance carriers moving high-frequency, low-severity property claims directly to repair networks, which we expect to continue. The 2010 decreases in catastrophe services and technical services claims were due primarily to decreases in weather-related claims. We cannot predict the future trend of case volumes for a number of reasons, including the frequency and severity of weather-related claims and the occurrence of natural and man-made disasters, which are a significant source of claims for us and are generally not subject to accurate forecasting.

Direct Compensation and Fringe Benefits

The most significant expense in our U.S. Property & Casualty segment is the compensation of employees, including related payroll taxes and fringe benefits. U.S. Property & Casualty direct compensation and fringe benefits expense, as a percent of segment revenues before reimbursements, increased to 61.7% in the second quarter of 2010 compared to 59.7% in the comparable 2009 quarter. For the six-month period ended June 30, 2010, U.S. Property & Casualty direct compensation and fringe benefits expense, as a percent of segment revenues before reimbursements, was 60.5%, increasing from 59.3% in the comparable 2009 period.

These percentage increases were primarily due to lower utilization of our employees in the first six months of 2010 compared to the comparable period of 2009. There was an average of 1,478 full-time equivalent employees (including 68 catastrophe adjusters) in this segment during the first six months of 2010, compared to an average of 1,654 employees (including 95 catastrophe adjusters) during the comparable 2009 period.

U.S. Property & Casualty salaries and wages totaled $24.3 million and $27.6 million for the three months ended June 30, 2010 and 2009, respectively. For the first six months of 2010 and 2009, U.S. Property & Casualty salaries and wages totaled $48.2 million and $54.1 million, respectively. The overall decreases in the 2010 second quarter and year-to-date period compared to the same periods in 2009 were primarily a result of the lower number of full-time equivalent employees in the 2010 quarter and six-month period. Payroll taxes and fringe benefits for U.S. Property & Casualty totaled $4.7 million and $5.1 million in the second quarter of 2010 and 2009, respectively. For the six months ended June 30, 2010 and 2009, payroll taxes and fringe benefits for U.S. Property & Casualty totaled $9.9 million and $11.2 million, respectively. The overall decrease was due to the decreased number of employees in this segment, as well as a reduction in the employer match on employee contributions to the Company’s 401(k) plan.

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

U.S. Property & Casualty expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits were $14.7 million, or 31.3% of segment revenues before reimbursements, for the quarter ended June 30, 2010, decreasing from $15.9 million, or 29.0% of segment revenues before reimbursements, for the comparable quarter of 2009. For the six-month period ended June 30, 2010, these expenses were $29.6 million, or 30.8% of segment revenues before reimbursements, decreasing from $32.5 million, or 29.5% of segment revenues before reimbursements, in the comparable 2009 period. The amount of these expenses declined 7.4% and 8.7% for the three months and six months ended June 30, 2010, respectively, compared to the same periods in 2009 due to cost reductions as a result of the decline in revenue.

INTERNATIONAL OPERATIONS

Operating earnings in our International Operations segment decreased to $7.3 million and $13.9 million in the three months and six months ended June 30, 2010, compared to 2009’s second quarter and six months’ operating earnings of $8.5 million and $15.9 million, respectively. Operating margins declined from 8.8% and 8.5% for the three months and six months ended June 30, 2009, respectively, to 6.9% and 6.6% for the comparable 2010 periods.

Revenues before Reimbursements

Substantially all International Operations revenues are derived from the property and casualty insurance company market. Revenues before reimbursements by major region for the three months and six months ended June 30, 2010 and 2009 were as follows:

( in thousands, except percentages)

Compared to the three months and six months ended June 30, 2009, during the same periods in 2010 the U.S. dollar was weaker against most major foreign currencies, resulting in a positive net exchange rate impact of 11.2% and 12.8%, respectively. Excluding the positive impact of exchange rate fluctuations, International Operations’ revenues would have been $95.0 million and $186.3 million in the three months and six months ended June 30, 2010, reflecting a decline in revenues on a constant dollar basis of less than 1.0% for both periods.

International Operations unit volume, measured by cases received, increased 11.9% and 6.5% in the quarter and six months ended June 30, 2010 compared to the same periods in 2009. This overall increase was primarily due to higher case referrals during 2010 in the U.K., CEMEA (as defined in the table above), Asia/Pacific and the Americas regions, partially offset by decreases in case referrals in Canada, as discussed below. Average revenue per claim decreased 12.8% and 6.6% during the three months and six months ended June 30, 2010, respectively, due to changes in the mix of services provided and in the rates charged for those services.

Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses included in total revenues for our International Operations segment decreased to $6.9 million and $12.9 million for the three months and six months ended June 30, 2010, from $7.1 million and $14.1 million in the comparable 2009 periods.

Case Volume Analysis

International Operations unit volumes by region, measured by cases received, for the three months and six months ended June 30, 2010 and 2009 were as follows:

(whole numbers, except percentages)

The 2010 increase in the United Kingdom was due primarily to an increase in weather-related activity. The decrease in Canada was due primarily to a reduction in weather-related activity. The 2010 increase in CEMEA resulted primarily from growth in our claims management business in Holland, Finland, Denmark, and Sweden. The increase in Asia/Pacific was due to weather-related activity in Australia. The increase in the Americas was due primarily to an increase in high frequency, low severity claims in Brazil. We cannot predict the future trend of case volumes for a number of reasons, including the frequency and severity of weather-related claims and the occurrence of natural and man-made disasters, which are significant sources of claims for us and are generally not subject to accurate forecasting.

Direct Compensation and Fringe Benefits

As a percentage of revenues before reimbursements, direct compensation expenses, including related payroll taxes and fringe benefits, were 68.2% and 69.1% for the three months and six months ended June 30, 2010, compared to 68.3% and 69.6% for the comparable periods in 2009. These percentage decreases primarily reflected increased utilization of our staff as a result of the increase in the number of cases received. The dollar amount of these expenses increased to $72.2 million and $145.2 million for the quarter and six months ended June 30, 2010, from $65.5 million and $129.8 million for the comparable periods in 2009. The increase in the dollar amount was primarily due to a weaker U.S. dollar in the 2010 periods as the number of full-time equivalent employees decreased. There was an average of 4,192 full-time equivalent employees in this segment in the first six months of 2010 compared to an average of 4,315 in the comparable 2009 period.

Salaries and wages of International Operations segment personnel increased to $60.1 million for the three months ended June 30, 2010, from $55.2 million in the comparable 2009 period. For the six-month periods, salaries and wages of International Operations segment personnel increased to $120.3 million in 2010 from $108.7 million in 2009. Payroll taxes and fringe benefits for the International Operations segment totaled $12.1 million and $24.9 million for the second quarter and six months ended June 30, 2010, respectively, compared to $10.3 million and $21.1 million for the same periods in 2009. These increases were primarily related to a weaker U.S. dollar during the 2010 periods.

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

Expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits were 24.9% and 24.3% of International Operations’ revenues before reimbursements for the three months and six months ended June 30, 2010, up from 22.9% and 21.9% for the comparable periods in 2009, primarily due to foreign exchange gains recorded in 2009. The dollar amount of these expenses increased in the 2010 quarter to $26.3 million from $22.0 million in the second quarter of 2009 primarily due to a weaker U.S. dollar during the 2010 quarter. The amounts increased from $40.8 million in the six-month period ended June 30, 2009 to $51.1 million for the comparable period in 2010.

BROADSPIRE

As previously disclosed in the Company’s consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, the Company recorded a non-cash impairment charge of $94.0 million during the second quarter of 2009 related to our Broadspire segment. The Company also recorded an impairment charge of $7.3 million during the second quarter of 2010 related to our Broadspire segment. Substantially all of these impairment charges are not deductible for income tax purposes and are not reflected in Broadspire’s segment operating loss. They are also not included in the following discussion and analysis of Broadspire’s segment operating results.

Our Broadspire segment reported an operating loss of $1.8 million for the second quarter of 2010, compared to an operating loss of $0.6 million in the second quarter of 2009. For the six months ended June 30, 2010, Broadspire’s operating loss was $4.1 million, compared to $2.6 million for the comparable period in 2009. These declines were primarily due to lower workers’ compensation and casualty claim referrals as a result of lower U.S. employment levels and due to the loss of a significant client at the end of 2009.

Revenues before Reimbursements

Broadspire segment revenues are primarily derived from workers’ compensation and liability claims management, medical management for workers’ compensation, vocational rehabilitation, and risk management information services provided to the U.S. self-insured market place. Broadspire revenues before reimbursements by major service line for the three months and six months ended June 30, 2010 and 2009 were as follows:

( in thousands, except percentages)

Unit volumes for the Broadspire segment, measured principally by cases received, decreased 10.1% from the 2009 second quarter to the 2010 second quarter and 9.0% for the six months ended June 30, 2010 compared to the same period in 2009. Revenue also decreased 6.2% and 7.6% in the second quarter and first six months of 2010, respectively, compared to the same periods in 2009 due to changes in the mix of services provided and in the rates charged for those services. The combined result of these factors was a 16.3% and 16.6% decrease in Broadspire segment revenues before reimbursements for the second quarter and six months of 2010 compared to the comparable periods of 2009.

Reimbursed Expenses included in Total Revenues

Reimbursements for out-of-pocket expenses included in total revenues for the Broadspire segment were $0.8 million and $1.5 million for the three months and six months ended June 30, 2010, decreasing from $1.3 million and $2.6 million in the comparable 2009 periods. This decrease was primarily attributable to the corresponding decrease in revenues before reimbursements.

Case Volume Analysis

Broadspire unit volumes by major underlying case category, as measured by cases received, for the three months and six months ended June 30, 2010 and 2009 were as follows:

(whole numbers, except percentages)

The 2010 decline in workers’ compensation claims reflected a continuing decline in reported workplace injuries in the U.S primarily as a result of the overall continued lower level of employment due to the current economic climate, as well as the loss of a significant client discussed below. The U.S. market has experienced a decline in reported workplace injuries over the past decade resulting in a loss in revenue from our existing customer base. The 2010 declines in casualty claims were primarily due to reductions in claims from our existing clients as a result of the overall industry-wide reduction in claims volume, partially offset by net new business gains. The 2010 increases in other claims were primarily due to increases in health management services resulting from employers that added such services to their employee benefits programs. We cannot predict the future trend of case volumes as they are generally dependent on the timing and extent of job creation in the U.S. and the occurrence of casualty-related events which are not subject to accurate forecasting.

During 2009, we were notified by a significant client of our Broadspire segment that the client would not renew its existing contract with us upon the scheduled expiration of that contract in December 2009. For the three months and six months ended June 30, 2009, revenues related to this client totaled approximately $4.8 million and $10.6 million, or 6.6% and 7.2% of total segment revenues before reimbursements for the second quarter and six months of 2009.

Direct Compensation and Fringe Benefits

Our most significant expense in our Broadspire segment is the compensation of employees, including related payroll taxes and fringe benefits. Broadspire’s direct compensation and fringe benefits expense, as a percent of the related revenues before reimbursements, increased from 56.1% for the quarter ended June 30, 2009 to 57.9% in the 2010 second quarter. For the six months ended June 30, direct compensation and fringe benefits, as a percent of revenues before reimbursements increased from 56.7% in 2009 to 58.9% in 2010. This percentage increase primarily reflected increased capacity due to the decline in claims volume. Average full-time equivalent employees in this segment totaled 2,031 in the first six months of 2010, down from 2,292 in the comparable 2009 period.

Broadspire segment salaries and wages totaled $29.5 million and $60.0 million for the three months and six months ended June 30, 2010, respectively, decreasing 13.5% and 12.8%, respectively from $34.1 million and $68.8 million in the comparable 2009 periods. Payroll taxes and fringe benefits for the Broadspire segment totaled $5.9 million and $12.6 million in the three months and six months ended June 30, 2010, respectively, decreasing 13.2% and 16.0%, respectively, from 2009 expenses of $6.9 million and $15.0 million for the same comparable periods. These 2010 decreases were primarily the result of the reduction in the number of full-time equivalent employees as well as a reduction in the employer match on employee contributions to the Company’s 401(k) plan.

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

Broadspire segment expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits as a percent of revenues before reimbursements were 45.0% and 44.4% for the three months and six months ended June 30, 2010, compared to 44.7% and 45.0% in the comparable 2009 periods. The amount of these expenses declined 15.8% and 17.7% for the three months and six months ended June 30, 2010, respectively, compared to the same periods in 2009 due to cost reductions as a result of the decline in revenue.

LEGAL SETTLEMENT ADMINISTRATION

Our Legal Settlement Administration segment reported operating earnings of $5.6 million and $8.8 million for the three months and six months ended June 30, 2010, respectively, increasing from $4.3 million and $5.8 million in the comparable 2009 periods. The related segment operating margin increased from 16.5% for the three months ended June 30, 2009 to 22.9% in the comparable 2010 period, and from 14.0% for the six months ended June 30, 2009 to 19.7% in the comparable 2010 period.

Revenues before Reimbursements

Legal Settlement Administration revenues are primarily derived from securities, product liability and other legal settlement services, and bankruptcy administration. Legal Settlement Administration revenues before reimbursements decreased 6.4% to $24.3 million in the three months ended June 30, 2010 compared to $25.9 million in the comparable 2009 period. For the six-month period ended June 30, 2010, Legal Settlement Administration revenues before reimbursements increased 8.3% to $44.9 million, compared to $41.5 million in the same period in 2009. Legal Settlement Administration revenues are project-based and can fluctuate significantly in any period. During the three months and six months ended June 30, 2010, we were awarded 69 and 136 new assignments, compared to 68 and 140 during the comparable periods in 2009. At June 30, 2010 we had a backlog of projects awarded totaling approximately $56.5 million, compared to $62.8 million at June 30, 2009. Of the $56.5 million backlog at June 30, 2010, an estimated $41.3 million is expected to be recognized as revenues over the remainder of 2010.

Reimbursed Expenses included in Total Revenues

The nature and volume of work performed in our Legal Settlement Administration segment typically requires more reimbursable out-of-pocket expenditures than our other operating segments. Reimbursements for out-of-pocket expenses included in total revenues for Legal Settlement Administration in the second quarter were $7.6 million in 2010 and $11.0 million in 2009. For the six months ended June 30, 2010 and 2009, reimbursements totaled $14.2 million.

Transaction Volume

Legal Settlement Administration services are generally project based and not denominated by individual claims. Depending upon the nature of projects and their respective stages of completion, the volume of transactions or tasks performed by us in any period can vary, sometimes significantly.

Direct Compensation and Fringe Benefits

Legal Settlement Administration’s direct compensation expense, including related payroll taxes and fringe benefits, as a percent of revenues before reimbursements, was 44.3% in the three months ended June 30, 2010 compared to 37.9% in the comparable 2009 period. For the six-month period ended June 30, 2010, these expenses as a percent of revenues before reimbursements were 46.3%, compared to 43.0% in the same 2009 period. The dollar amount of these expenses increased to $10.7 million and $20.8 million for the second quarter and six months of 2010 compared to $9.8 million and $17.8 million for the comparable 2009 periods, due primarily to increases in incentive compensation and commission expenses, merit pay increases and an increase in the number of full-time equivalent employees in 2010. There was an average of 355 full-time equivalent employees in this segment in the first six months of 2010, compared to an average of 344 in the comparable 2009 period.

Legal Settlement Administration salaries and wages totaled $9.5 million and $18.0 million for the quarter and six months ended June 30, 2010, increasing 8.0% and 16.9% respectively, from $8.7 million and $15.4 million in the comparable 2009 periods. Payroll taxes and fringe benefits for Legal Settlement Administration totaled $1.2 million and $2.8 million for the three months and six months ended June 30, 2010, compared to $1.1 million and $2.4 million for the comparable 2009 periods.

Expenses Other than Reimbursements, Direct Compensation and Fringe Benefits

One of our most significant expenses in Legal Settlement Administration is outsourced services due to the variable, project-based nature of our work. Legal Settlement Administration expenses other than reimbursements, direct compensation and related payroll taxes and fringe benefits decreased as a percent of related revenues before reimbursements to 32.8% and 34.0% for the three months and six months ended June 30, 2010 from 45.6% and 43.0% for the comparable 2009 periods. The dollar amount of these expenses decreased to $8.0 million and $15.3 million for the second quarter and six months of 2010 compared to $11.8 million and $17.8 million for the comparable 2009 periods, due primarily to the decreased use of outsourced service providers in 2010 compared to the same periods in 2009.

EXPENSES AND CREDITS EXCLUDED FROM SEGMENT OPERATING EARNINGS

Income Taxes

Our consolidated effective income tax rate for financial reporting purposes may change periodically due to changes in enacted tax rates, fluctuations in the mix of income earned from our various domestic and international operations which are subject to income taxes at varied rates, our ability to utilize net operating loss and tax credit carryforwards, and amounts related to uncertain income tax positions. At June 30, 2010 we estimate that our effective annual income tax rate for 2010 will be approximately 22%.

Income tax expense on consolidated income totaled $1.8 million and $2.7 million for the six months ended June 30, 2010 and 2009, respectively. The decrease in income tax expense in 2010 compared to 2009 was due primarily to an internal restructuring of certain international operations in the second quarter of 2009 that resulted in an ongoing reduction in foreign taxes, which was partially offset by the expiration of a research and development tax credit and changes in certain discrete items.

Net Corporate Interest Expense

Net corporate interest expense consists of interest expense that we incur on our short- and long-term borrowings, partially offset by interest income we earn on available cash balances and short-term investments. These amounts vary based on interest rates, borrowings outstanding, interest rate swaps, and the amounts of invested cash and investments. Corporate interest expense totaled $3.9 million and $4.1 million for the three months ended June 30, 2010 and 2009, respectively. Interest income totaled $193,000 and $486,000 for the three months ended June 30, 2010 and 2009, respectively. Corporate interest expense totaled $8.1 million and $8.2 million for the six months ended June 30, 2010 and 2009, respectively. Interest income totaled $296,000 and $1,066,000 for the six months ended June 30, 2010 and 2009, respectively.

Amortization of Customer-Relationship Intangible Assets

Amortization of customer-relationship intangible assets represents the non-cash amortization expense for customer-relationship intangible assets acquired as part of our 2006 acquisitions of Broadspire Management Services, Inc. (“BMSI”) and Specialty Liability Services, Ltd. (“SLS”). Amortization expense associated with these intangible assets totaled approximately $1.5 million and $3.0 million for the second quarter and first six months of both 2010 and 2009. This amortization is included in SG&A expenses in our Condensed Consolidated Statements of Operations.

Stock Option Expense

Stock option expense, a component of stock-based compensation, is comprised of non-cash expenses related to stock options granted under our various stock option and employee stock purchase plans. Stock option expense is not allocated to our operating segments. Other stock-based compensation expense related to our executive stock bonus plan (performance shares and restricted shares) is charged to our operating segments and included in the determination of segment operating earnings or loss. Stock option expense of $187,000 and $391,000 was recognized during the three months and six months ended June 30, 2010, respectively, compared to $197,000 and $430,000 for the comparable periods in 2009, respectively.

Unallocated Corporate and Shared Costs

Certain unallocated costs and credits are excluded from the determination of segment operating earnings. For the three months and six months ended June 30, 2010 and 2009, unallocated corporate and shared costs primarily represented costs of our frozen U.S. defined benefit pension plan, expenses for our CEO and our Board of Directors, certain adjustments to our self-insured liabilities, and certain adjustments and recoveries to our allowances for doubtful accounts receivable. Unallocated corporate and shared costs were $1.4 million and $1.5 million for the three months and six months ended June 30, 2010, respectively, and $5.3 million and $7.3 million for the comparable periods in 2009. Our U.S. defined benefit pension plan expense was $1.9 million and $3.7 million for the three months and six months ended June 30, 2010, respectively, compared to $2.9 million and $5.7 million for the same periods of 2009. In addition, self-insurance expenses were $1.4 million and $2.7 million lower in the three months and six months ended June 30, 2010, respectively, compared to the same periods in 2009.

Restructuring and Other Costs

During the second quarter of 2010, the Company recorded a pretax charge of $2.0 million for severance costs related to reductions in administrative staff. Approximately $556,000 of this charge was paid prior to June 30, 2010 with the remainder expected to be paid during the third quarter of 2010. The Company terminated 146 employees. As a result, the Company expects annual pretax savings of approximately $9.6 million. For the six months ended June 30, 2010 we also recorded pretax expenses totaling $2.7 million for a loss incurred on the sublease of the Broadspire facility in Plantation, Florida and the relocation of those operations to Sunrise, Florida, as described in more detail in Note 12 to the accompanying unaudited condensed consolidated financial statements. For the six months ended June 30, 2009, we recorded pretax expenses totaling $1.8 million for professional fees incurred in connection with an internal realignment of certain of our legal entities in the U.S. and internationally. This realignment did not impact our segment financial reporting.

Goodwill Impairment Charge

On July 30, 2010, the independent auditor arbitrating the Broadspire Purchase Price Arbitration issued a decision and contingent determination in connection therewith, which is described more fully in Note 13 to the accompanying unaudited condensed consolidated financial statements. This decision and contingent determination purports to resolve certain issues being arbitrated thereunder, and provides certain additional guidance with respect to other issues, subject to further determinations. Although the Company is reserving all of its rights with respect to the issues purported to be resolved and has asked the arbitrator to reconsider certain aspects of the decision and contingent consideration, the Company made a payment of $6.1 million, plus interest on August 6, 2010, to Platinum in connection therewith representing additional purchase price consideration for the October 31, 2006 acquisition of Broadspire Management Services, Inc. All of the goodwill in the Broadspire segment was previously impaired and the fair value of the Broadspire segment does not support additional goodwill. Accordingly, the Company recorded an additional goodwill impairment charge of $7.3 million for the quarter and six months ended June 30, 2010. All but the interest portion of the charge is nondeductible for tax purposes.

LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION

At June 30, 2010, our working capital balance (current assets less current liabilities) was approximately $64.4 million, a decrease of $2.3 million from the working capital balance at December 31, 2009. Our cash and cash equivalents were $38.2 million at June 30, 2010, compared to $70.4 million at December 31, 2009.

Cash (Used in) Provided by Operating Activities

Cash used in operating activities was $29.6 million for the six months ended June 30, 2010, compared to cash provided by operating activities of $3.7 million for the comparable period of 2009. During the first six months of 2010, we made cash contributions of $15.1 million and $3.1 million, respectively, to our U.S. and U.K. defined benefit pension plans, compared to $5.1 million and $2.3 million, respectively, for the same period in 2009. Also contributing to the increase in cash used in operating activities in the 2010 period was a $25.3 million increase in accounts receivable and unbilled revenue. The Company’s operating cash needs typically peak during the first quarter and decline during the balance of the year, due in part to annual payments made in the first quarter of each year to fund defined contribution retirement plans and incentive compensation plans. Over the remaining months of 2010, we expect to use $6.2 million to fund our frozen U.S. defined benefit pension plan.

Cash Used in Investing Activities

Cash used in investing activities, primarily for acquisitions of property and equipment and for capitalized software, was $12.2 million in the six months ended June 30, 2010, compared to cash used in investing activities of $12.5 million in the comparable period of 2009.

Cash Provided by (Used in) Financing Activities

Cash provided by financing activities was $11.6 million for the six months ended June 30, 2010, compared to cash used in financing activities of $4.4 million for the comparable period of 2009. During 2010, we increased our short-term borrowings and book overdraft by $19.4 million, made a mandatory excess cash flow payment of $5.9 million to reduce the balance outstanding on our term note payable, and paid $700,000 of statutory employee withholding taxes on behalf of certain employees who elected to reduce the number of shares of common stock that would have otherwise been issued to them under employee stock-based compensation plans. During 2009, we paid $1.9 million of statutory employee withholding taxes on behalf of certain employees who elected to reduce the number of shares of common stock that would have otherwise been issued to them under employee stock-based compensation plans and paid loan costs of $944,000 in connection with an amendment to our Credit Agreement.

In April 1999, our Board of Directors authorized a discretionary share repurchase program of an aggregate of 3,000,000 shares of our Class A common stock and our Class B common stock. Through June 30, 2010, we have reacquired 2,150,876 shares of Class A and 143,261 shares of Class B common stock at an average cost of $10.99 and $12.21, respectively. We have not reacquired any shares since 2004 under this plan. We believe it is unlikely that we will repurchase shares under this program in the foreseeable future due to the underfunded status of our defined benefit pension plans and the covenants and related restrictions contained in our Credit Agreement.

Other Matters Concerning Liquidity and Capital Resources

As a component of our Credit Agreement, we maintain a committed $100.0 million revolving credit line with a syndicate of lenders in order to meet seasonal working capital requirements and other financing needs that may arise. This revolving credit line expires on October 30, 2013. As a component of this credit line, we maintain a letter of credit facility to satisfy certain contractual obligations. Including $19.3 million of undrawn letters of credit issued under the letter of credit facility, the balance of our unused line of credit totaled $62.8 million at June 30, 2010. Our short-term debt obligations typically peak during the first quarter of each year due in part to the annual payment of incentive compensation, contributions to retirement plans, and certain other recurring payments, and generally decline during the balance of the year. At June 30, 2010 and 2009, the outstanding balances under our revolving line of credit facility were $17.9 million and $32,000, respectively. Long-term borrowings outstanding, including current installments, totaled $174.2 million as of June 30, 2010, compared to $181.3 million at December 31, 2009. We have historically used the proceeds from our long-term borrowings to finance, among other things, business acquisitions.

We believe our current financial resources, together with funds expected to be generated from operations and existing and potential borrowing capabilities, will be sufficient to maintain our current operations for the next 12 months.

Financial Condition

Other significant changes in our unaudited Condensed Consolidated Balance Sheet as of June 30, 2010, compared to our Condensed Consolidated Balance Sheet as of December 31, 2009, were as follows:

• Cash and Cash Equivalents decreased $32.1 million, or $30.2 million net of currency exchange.
• Accounts Receivable and Unbilled Revenues increased $21.5 million, or $25.4 million net of currency exchange impacts. This increase was primarily due to an increase in our average number of days of revenue outstanding.
• Short-term Borrowings increased $17.9 million and Current Installments of Long-term Debt decreased by $5.9 million.
• Accrued Compensation and Related Costs decreased $11.0 million due primarily to the payment of annual incentive compensation and the funding of various retirement plans.
• Other Accrued Liabilities increased $8.9 million, primarily due to the additional purchase price consideration of $7.3 million from the Broadspire Purchase Price Arbitration, paid in August 2010.

Defined Benefit Pension Plan Funding

In June 2010, the “Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010” was signed into law. Among other things, the act provides two alternatives to extend the amortization period of the unfunded pension liability that is recognized in the calculation of the minimum required contribution. The act will require additional funding based on certain compensation, dividend and stock redemption thresholds. We are in the process of evaluating whether any of these requirements may apply. The amounts shown do not reflect any additional funding requirements which may be required.

We have revised the estimated annual minimum contributions we expect we will be required to make to our frozen U.S. defined benefit pension plan during the seven years after 2010 in order to meet the funding requirements under the new act as follows:

(in thousands)

Off-Balance Sheet Arrangements

At June 30, 2010, we were not a party to any off-balance sheet arrangements, other than operating leases, which we believe could materially impact our operations, financial condition, or cash flows.

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009, we have certain material obligations under operating lease agreements to which we are a party. In accordance with GAAP, these operating lease obligations and the related leased assets are not reported on our consolidated balance sheet. Other than reductions to the lease obligations resulting from scheduled lease payments, our obligations under these operating lease agreements have not changed materially since December 31, 2009.

We maintain funds in various trust accounts to administer claims for certain clients. These funds are not available for our general operating activities and, as such, have not been recorded in the accompanying unaudited condensed consolidated balance sheets. We have concluded that we do not have a material off-balance sheet risk related to these funds.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

New Accounting Standards Adopted

Additional information related to new accounting standards adopted during 2010 is provided in Note 2 to the accompanying unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.

Pending Adoption of New Accounting Standards

Additional information related to pending adoption of recently issued accounting standards is provided in Note 3 to the accompanying unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.

For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2009. Our exposures to market risk have not changed materially since December 31, 2009.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures can prevent all possible errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to possible errors or fraud may occur and not be detected.

As of the end of the period covered by this report, we performed an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon the foregoing, the Chief Executive Officer along with the Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at providing reasonable assurance that all information relating to the Company (including its consolidated subsidiaries) required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported in a timely manner.

Changes in Internal Control over Financial Reporting

We have identified no material changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.