-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SCS9BNLXNLy8rVQWbuPmp/c4WDLtWPJwedYTlgPp1it43a++2NK2oLiSBLXDjXkm Dd7sd/UQxIzfA1tBaA94qw== 0001113672-05-000151.txt : 20051109 0001113672-05-000151.hdr.sgml : 20051109 20051109171228 ACCESSION NUMBER: 0001113672-05-000151 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051109 DATE AS OF CHANGE: 20051109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRAWFORD & CO CENTRAL INDEX KEY: 0000025475 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 580506554 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10356 FILM NUMBER: 051190994 BUSINESS ADDRESS: STREET 1: 5620 GLENRIDGE DR NE CITY: ATLANTA STATE: GA ZIP: 30342 BUSINESS PHONE: 4042560830 MAIL ADDRESS: STREET 1: 5620 GLENRIDE DR CITY: ATLANTA STATE: GA ZIP: 30342 10-Q 1 g98147e10vq.txt CRAWFORD & COMPANY ================================================================================ United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______ to ______ COMMISSION FILE NUMBER 1-10356 CRAWFORD & COMPANY (Exact name of Registrant as specified in its charter) GEORGIA 58-0506554 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
5620 GLENRIDGE DRIVE, N.E. ATLANTA, GEORGIA 30342 (Address of principal executive offices) (Zip Code)
(404) 256-0830 (Registrant's telephone number, including area code) ---------- 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 X NO ----- ----- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO ----- ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X ----- ----- The number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 2005 was as follows: CLASS A COMMON STOCK, $1.00 PAR VALUE: 24,288,459 CLASS B COMMON STOCK, $1.00 PAR VALUE: 24,697,172 ================================================================================ CRAWFORD & COMPANY QUARTERLY REPORT ON FORM 10-Q SEPTEMBER 30, 2005 TABLE OF CONTENTS
Page ---- Part I. Financial Information Item 1. Financial Statements: Condensed Consolidated Statements of Income (unaudited) Nine Months ended September 30, 2005 and 2004................. 3 Condensed Consolidated Statements of Income (unaudited) Quarters ended September 30, 2005 and 2004.................... 4 Condensed Consolidated Balance Sheets September 30, 2005 (unaudited) and December 31, 2004.......... 5 Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months ended September 30, 2005 and 2004................. 7 Notes to Condensed Consolidated Financial Statements (unaudited)................................................... 8 Report of Independent Registered Public Accounting Firm.......... 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 35 Item 4. Controls and Procedures.......................................... 36 Part II. Other Information: Item 1. Legal Proceedings................................................ 37 Item 6. Exhibits......................................................... 38
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CRAWFORD & COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED ----------------------------- SEPTEMBER 30, SEPTEMBER 30, 2005 2004 ------------- ------------- REVENUES: Revenues before reimbursements $555,056 $527,741 Reimbursements 57,588 61,036 -------- -------- TOTAL REVENUES 612,644 588,777 -------- -------- COSTS AND EXPENSES: Cost of services provided, before reimbursements 438,538 407,599 Reimbursements 57,588 61,036 -------- -------- Cost of services 496,126 468,635 Selling, general, and administrative expenses 101,576 100,946 Special credit (gain on undeveloped parcel of land) -- (8,573) Corporate interest expense, net of interest income of $436 and $2,081, respectively 4,216 2,269 -------- -------- TOTAL COSTS AND EXPENSES 601,918 563,277 -------- -------- INCOME BEFORE INCOME TAXES 10,726 25,500 PROVISION FOR INCOME TAXES 3,797 8,046 -------- -------- NET INCOME $ 6,929 $ 17,454 ======== ======== NET INCOME PER SHARE: Basic $ 0.14 $ 0.36 Diluted $ 0.14 $ 0.36 ======== ======== WEIGHTED-AVERAGE SHARES OUTSTANDING: Basic 48,911 48,748 Diluted 49,416 48,829 ======== ======== CASH DIVIDENDS PER SHARE: Class A Common Stock $ 0.18 $ 0.18 Class B Common Stock $ 0.18 $ 0.18 ======== ========
(See accompanying notes to condensed consolidated financial statements) 3 CRAWFORD & COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED ----------------------------- SEPTEMBER 30, SEPTEMBER 30, 2005 2004 ------------- ------------- REVENUES: Revenues before reimbursements $184,720 $185,870 Reimbursements 21,500 31,638 -------- -------- TOTAL REVENUES 206,220 217,508 -------- -------- COSTS AND EXPENSES: Cost of services provided, before reimbursements 146,284 144,339 Reimbursements 21,500 31,638 -------- -------- Cost of services 167,784 175,977 Selling, general, and administrative expenses 34,181 33,160 Special credit (gain on undeveloped parcel of land) -- (8,573) Corporate interest expense, net of interest income of $193 and $56, respectively 1,334 1,466 -------- -------- TOTAL COSTS AND EXPENSES 203,299 202,030 -------- -------- INCOME BEFORE INCOME TAXES 2,921 15,478 PROVISION FOR INCOME TAXES 1,034 5,953 -------- -------- NET INCOME $ 1,887 $ 9,525 ======== ======== NET INCOME PER SHARE: Basic $ 0.04 $ 0.20 Diluted $ 0.04 $ 0.20 ======== ======== WEIGHTED-AVERAGE SHARES OUTSTANDING: Basic 48,978 48,796 Diluted 49,462 48,917 ======== ======== CASH DIVIDENDS PER SHARE: Class A Common Stock $ 0.06 $ 0.06 Class B Common Stock $ 0.06 $ 0.06 ======== ========
(See accompanying notes to condensed consolidated financial statements) 4 CRAWFORD & COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
(UNAUDITED) * SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 36,176 $ 43,571 Accounts receivable, less allowance for doubtful accounts of $19,512 in 2005 and $21,859 in 2004 168,502 173,123 Unbilled revenues, at estimated billable amounts 108,932 106,650 Prepaid expenses and other current assets 15,459 22,546 --------- --------- TOTAL CURRENT ASSETS 329,069 345,890 --------- --------- PROPERTY AND EQUIPMENT: Property and equipment, at cost 151,361 154,553 Less accumulated depreciation (116,228) (120,054) --------- --------- NET PROPERTY AND EQUIPMENT 35,133 34,499 --------- --------- OTHER ASSETS: Intangible assets arising from acquisitions, net 110,169 109,410 Capitalized software costs, net 32,572 32,894 Deferred income tax asset 32,150 32,172 Other 16,641 16,395 --------- --------- TOTAL OTHER ASSETS 191,532 190,871 --------- --------- TOTAL ASSETS $ 555,734 $ 571,260 ========= =========
* derived from the audited Consolidated Balance Sheet (See accompanying notes to condensed consolidated financial statements) 5 CRAWFORD & COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED (IN THOUSANDS)
(UNAUDITED) * SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: Short-term borrowings $ 35,968 $ 37,401 Accounts payable 40,778 41,730 Accrued compensation and related costs 46,552 46,308 Deferred revenues 20,875 22,682 Self-insured risks 16,949 17,489 Accrued income taxes 17,399 22,760 Other accrued liabilities 22,116 24,053 Current installments of long-term debt and capital leases 1,080 1,900 -------- -------- TOTAL CURRENT LIABILITIES 201,717 214,323 -------- -------- NONCURRENT LIABILITIES: Long-term debt and capital leases, less current installments 50,972 50,875 Deferred revenues 10,516 10,179 Self-insured risks 8,129 10,958 Minimum pension liabilities 76,488 73,893 Postretirement medical benefit obligation 5,213 5,544 Other 10,122 10,655 -------- -------- TOTAL NONCURRENT LIABILITIES 161,440 162,104 -------- -------- SHAREHOLDERS' INVESTMENT: Class A common stock, $1.00 par value; 50,000 shares authorized; 24,282 and 24,157 shares issued and outstanding in 2005 and 2004, respectively 24,282 24,157 Class B common stock, $1.00 par value; 50,000 shares authorized; 24,697 shares issued and outstanding in 2005 and 2004 24,697 24,697 Additional paid-in capital 6,255 5,606 Retained earnings 199,337 201,213 Accumulated other comprehensive loss (61,994) (60,840) -------- -------- TOTAL SHAREHOLDERS' INVESTMENT 192,577 194,833 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $555,734 $571,260 ======== ========
* derived from the audited Consolidated Balance Sheet (See accompanying notes to condensed consolidated financial statements) 6 CRAWFORD & COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (IN THOUSANDS)
NINE MONTHS ENDED ----------------------------- SEPTEMBER 30, SEPTEMBER 30, 2005 2004 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,929 $ 17,454 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 14,335 13,512 Deferred income taxes 22 (28) Stock-based compensation 181 -- Loss (gain) on sales of property and equipment, net 75 (8,435) Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable, net 3,858 (28,984) Unbilled revenues (2,771) (3,655) Accrued or prepaid income taxes (5,391) 9,827 Accounts payable and accrued liabilities (3,606) 250 Deferred revenues (1,802) 7,160 Accrued pension costs 386 (369) Prepaid expenses and other assets (990) 2,371 -------- -------- Net cash provided by operating activities 11,226 9,103 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property and equipment (10,869) (7,567) Capitalization of computer software costs (4,796) (5,214) Proceeds from 2004 sale of undeveloped land 7,562 2,028 Payment for prior acquisitions (121) (617) Proceeds from sales of property and equipment 516 178 -------- -------- Net cash used in investing activities (7,708) (11,192) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (8,805) (8,776) Proceeds from exercises of stock options and ESPP plans 593 683 Increase in short-term borrowings 2,280 1,928 Payments on short-term borrowings (3,240) (9,327) Payments on long-term debt and capital leases (1,397) (841) Capitalized loan costs -- 61 -------- -------- Net cash used in financing activities (10,569) (16,272) -------- -------- Effect of exchange rate changes on cash and cash equivalents (344) 444 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (7,395) (17,917) Cash and cash equivalents at beginning of period 43,571 45,805 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 36,176 $ 27,888 ======== ========
(See accompanying notes to condensed consolidated financial statements) 7 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The unaudited condensed consolidated financial statements of Crawford & Company (the "Company") included herein have been prepared pursuant to the rules and regulations of the United States ("U.S.") Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. The condensed consolidated balance sheet as of December 31, 2004 presented herein was derived from the audited consolidated balance sheet included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. The results of operations for the nine months ended September 30, 2005 are not necessarily indicative of the results to be expected during the balance of the year ending December 31, 2005. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. There have been no material changes to the Company's major accounting and reporting policies as disclosed in the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain previously reported amounts have been reclassified to conform to the current presentation. During 2002, the Company recorded in Other Comprehensive Income (Loss) a tax benefit of $4.165 million related to exercises of stock options. During the third quarter 2005, the Company reclassified this $4.165 million tax benefit from Accumulated Other Comprehensive Loss to Additional Paid-In Capital within Shareholders' Investment as required by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). This reclassification, which is a correction of a prior error, had no net impact on the Company's net income, shareholders' investment, or cash flows. This reclassification has been reflected in the Condensed Consolidated Balance Sheets presented herein for September 30, 2005 and December 31, 2004. 8 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Related to this reclassification, the following revisions have been made to the Company's Consolidated Statements of Shareholders' Investment and Consolidated Balance Sheets:
Accumulated Other Additional Paid-In Capital Comprehensive Loss -------------------------- ------------------------- Balance at, As originally As originally (in thousands) reported Revised reported Revised - --------------- ------------- ------- ------------- --------- December 31, 2002 $ 523 $4,688 $(81,481) $(85,646) December 31, 2003 840 5,005 (64,717) (68,882) December 31, 2004 1,441 5,606 (56,675) (60,840) March 31, 2005 1,673 5,838 (54,691) (58,856) June 30, 2005 1,719 5,884 (54,218) (58,383)
As previously reported in the notes to the Company's consolidated financial statements for the year ended December 31, 2004, the portion of Note 1, Major Accounting and Reporting Policies, related to Accumulated Other Comprehensive Loss, has been revised below to reflect this reclassification: AS REVISED:
(in thousands) 2004 2003 2002 - --------------- --------- --------- --------- Minimum pension liability $(107,281) $(103,741) $(113,109) Tax benefit on minimum pension liability 39,083 37,761 41,171 --------- --------- --------- Minimum pension liability, net of tax benefit (68,198) (65,980) (71,938) Cumulative translation adjustment 7,358 (2,902) (13,708) --------- --------- --------- Total accumulated other comprehensive (loss) $ (60,840) $ (68,882) $ (85,646) ========= ========= =========
2. NEW ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 123 (revised 2004), "Share Based Payments" ("SFAS 123R"), which is a revision of SFAS 123, "Accounting for Stock Compensation." SFAS 123R supersedes SFAS 123 and APB 25 and amends SFAS 95, "Statement of Cash Flows." Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires companies to measure compensation cost for all share-based payments based on the fair value of the shares, including employee stock options. Pro forma disclosure will not be permitted under SFAS 123R. When originally issued, SFAS 123R was to be effective for public companies for the first interim or annual period beginning after June 15, 2005. However, in April 2005 the SEC amended Regulation S-X to allow public companies that had not yet adopted SFAS 123R to delay adoption of the Standard until the beginning of the first annual period beginning after June 15, 2005. Accordingly, the Company expects to adopt SFAS 123R at the beginning of 2006. 9 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SFAS 123R permits public companies to adopt its requirements using one of two methods: 1) a "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date, and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date, or 2) a "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits companies to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented, or (b) prior interim periods of the year of adoption. The Company plans to adopt SFAS 123R using the "modified prospective" method. As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25's intrinsic value method. Under APB 25, the Company recognizes compensation cost for stock grants, but generally recognizes no compensation cost for its employee stock option and employee stock purchase plans due to the terms of those plans. Accordingly, the adoption of SFAS 123R's fair value method will have an impact on the Company's results of operations, although it will have no net impact on the Company's financial position. The future impact of adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS 123R in prior periods, the impact of that Standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share under "Accounting for Stock-Based Compensation" in Note 5 to these condensed consolidated financial statements. Based on stock-based compensation issued through September 30, 2005, adoption of SFAS 123R at the beginning of 2006, and use of the "modified prospective" method, the Company expects the adoption of SFAS 123R to reduce net income by approximately $912,000 in the year of adoption, or $0.02 per share. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current generally accepted accounting principles. Any additional impact on the Company's future net income or cash flows cannot be predicted at this time because it will depend on levels of share-based payments granted in the future and on employee exercises of stock options. In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154 provides guidance on the accounting for and reporting of accounting changes and errors corrections. SFAS 154 requires retrospective application for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS 154 also states that a correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction under SFAS 154 will involve adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS 154 to have a material impact on its consolidated financial statements. SFAS 123R, which the Company plans 10 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) to adopt at the beginning of 2006, contains explicit transitional guidance. Accordingly, the transition requirements of SFAS 154 will not apply to the Company's pending adoption of SFAS 123R. 3. NET INCOME PER SHARE Basic net income per share is computed based on the weighted-average number of total common shares outstanding during the respective periods. Diluted net income per share is computed based on the weighted-average number of total common shares outstanding plus the dilutive effect of outstanding stock options, shares issuable under employee stock purchase plans, and contingently issuable shares under the stock bonus program, if any, using the "treasury stock" method. Below is the calculation of basic and diluted net income per share for the quarters and nine months ended September 30, 2005 and 2004:
Quarter ended Nine months ended ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, (in thousands, except per share data) 2005 2004 2005 2004 - ------------------------------------- ------------- ------------- ------------- ------------- Net income available to common shareholders $ 1,887 $ 9,525 $ 6,929 $17,454 ======= ======= ======= ======= Weighted-average common shares outstanding - Basic 48,978 48,796 48,911 48,748 Dilutive effect of stock-based compensation 484 121 505 81 ------- ------- ------- ------- Weighted-average common shares outstanding - Diluted 49,462 48,917 49,416 48,829 ======= ======= ======= ======= Basic net income per share $ 0.04 $ 0.20 $ 0.14 $ 0.36 ======= ======= ======= ======= Diluted net income per share $ 0.04 $ 0.20 $ 0.14 $ 0.36 ======= ======= ======= =======
Additional options to purchase 3,260,715 shares of the Company's Class A common stock at exercise prices ranging from $7.00 to $19.50 per share were outstanding at September 30, 2005, but were not included in the computation of diluted net income per share because the options' exercise prices were greater than the average market price of the common shares. To include them would have been antidilutive. 4. COMPREHENSIVE INCOME (LOSS) For the quarters and nine months ended September 30, 2005 and 2004, comprehensive income (loss) for the Company consisted of the total of net income and foreign currency translation adjustments. Below is the calculation of comprehensive income (loss) for the quarters and nine months ended September 30, 2005 and 2004: 11 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Quarter ended Nine months ended ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, (in thousands) 2005 2004 2005 2004 - -------------- ------------- ------------- ------------- ------------- Net income $ 1,887 $ 9,525 $ 6,929 $17,454 Foreign currency translation adjustment (3,611) 4,213 (1,154) 3,827 -------- ------- ------- ------- Comprehensive income (loss) ($1,724) $13,738 $ 5,775 $21,281 ======== ======= ======= =======
5. ACCOUNTING FOR STOCK-BASED COMPENSATION As permitted by SFAS 123, the Company accounts for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of APB 25 and related interpretations. Accordingly, no compensation cost has been recognized for the Company's stock option plans because the exercise prices of the stock options equal the market prices of the underlying stock on the dates of grant. The Company's employee stock purchase plans are also considered noncompensatory under APB 25. The Company's executive stock bonus plan ("the Plan") is considered compensatory under APB 25. From the Plan's 2005 inception through September 30, 2005, the Company recognized pretax compensation cost of approximately $181,000 for the Plan. Compensation cost for the year ended December 31, 2005 is estimated to approximate the annualized amount recognized during the first nine months of 2005, but could vary based on potential changes in the quoted price of the Company's Class A common stock, achievement rates for the corporate and participant goals contained in the Plan, and participant attrition rates. Had compensation cost for all of the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with SFAS 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below: 12 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Quarter ended Nine months ended ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, (in thousands, except per share data) 2005 2004 2005 2004 - ------------------------------------- ------------- ------------- ------------- ------------- Net income as reported $1,887 $9,525 $ 6,929 $17,454 Add: Stock-based employee compensation expense included in reported net income, net of tax 53 -- 117 -- Less: Stock-based compensation expense using the fair value method, net of tax (355) (253) (1,092) (649) ------ ------ ------- ------- Pro forma net income $1,585 $9,272 $ 5,954 $16,805 ====== ====== ======= ======= Net income per share - basic: As reported $ 0.04 $ 0.20 $ 0.14 $ 0.36 ====== ====== ======= ======= Pro forma $ 0.03 $ 0.19 $ 0.12 $ 0.34 ====== ====== ======= ======= Net income per share - diluted: As reported $ 0.04 $ 0.20 $ 0.14 $ 0.36 ====== ====== ======= ======= Pro forma $ 0.03 $ 0.19 $ 0.12 $ 0.34 ====== ====== ======= =======
The fair value of options is estimated on the date of grant using the Black-Scholes option-pricing model. 13 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. RETIREMENT PLANS The Company and its subsidiaries sponsor various defined benefit and defined contribution retirement plans covering substantially all employees. Effective December 31, 2002, the Company elected to freeze its U.S. defined benefit pension plan and replace it with a discretionary, non-contributory defined contribution plan. Net periodic benefit cost related to the U.S. and United Kingdom ("U.K.") defined benefit pension plans for the quarters and nine months ended September 30, 2005 and 2004 included the following components:
Quarter ended Nine months ended ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, (in thousands) 2005 2004 2005 2004 - -------------- ------------- ------------- ------------- ------------- Service cost $ 514 $ 430 $ 1,543 $ 1,290 Interest cost 7,843 7,485 23,528 22,455 Expected return on assets (8,122) (7,757) (24,368) (23,270) Recognized net actuarial loss 1,875 1,757 5,626 5,270 ------- ------- -------- -------- Net periodic benefit cost $ 2,110 $ 1,915 $ 6,329 $ 5,745 ======= ======= ======== ========
The Company is not required to make any contributions to its frozen U.S. defined benefit pension plan during 2005. During the quarter and nine months ended September 30, 2005, cash contributions of approximately $756,000 and $2,766,000, respectively, were made to the Company's U.K. defined benefit pension plans. 7. SEGMENT INFORMATION The Company has two reportable segments, one which provides claims services through branch offices located in the United States ("U.S. Operations") and the other which provides similar services through branch or representative offices located in 62 other countries ("International Operations"). The Company's reportable segments represent components of the business for which separate financial information is available that is evaluated regularly by the chief decision maker in deciding how to allocate resources and in assessing performance. Inter-segment sales are recorded at cost and are not material. The Company measures segment profit based on operating earnings, defined as earnings before net corporate interest expense, income taxes, and special credits and charges. Financial information for the quarters and nine months ended September 30, 2005 and 2004 covering the Company's reportable segments is presented below: 14 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Quarter ended Nine months ended ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, (in thousands) 2005 2004 2005 2004 - -------------- ------------- ------------- ------------- ------------- REVENUES: U.S., before reimbursements $114,482 $123,466 $341,343 $342,372 International, before reimbursements 70,238 62,404 213,713 185,369 -------- -------- -------- -------- Total Revenues before Reimbursements 184,720 185,870 555,056 527,741 Reimbursements 21,500 31,638 57,588 61,036 -------- -------- -------- -------- TOTAL REVENUES $206,220 $217,508 $612,644 $588,777 ======== ======== ======== ======== SEGMENT OPERATING EARNINGS: U.S $ 1,236 $ 7,023 $ 4,882 $ 13,741 International 3,019 1,348 10,060 5,455 -------- -------- -------- -------- TOTAL SEGMENT OPERATING EARNINGS $ 4,255 $ 8,371 $ 14,942 $ 19,196 ======== ======== ======== ========
8. COMMITMENTS AND CONTINGENCIES The Company normally structures its acquisitions to include earnout payments, which are contingent upon the acquired entity reaching certain revenue and operating earnings targets. The amount of the contingent payments and length of the earnout period varies for each acquisition, and the ultimate payments when made will vary, as they are dependent on future events. Based on projected levels of revenues and operating earnings, additional payments after September 30, 2005 under existing earnout agreements would approximate $2.4 million through 2009, as follows:
2006 2007 2008 2009 ------- ------- ---------- -------- $78,000 $78,000 $2,011,000 $266,000
In the normal course of the claims administration services business, the Company is named as a defendant in suits by insureds or claimants contesting decisions made by the Company or its clients with respect to the settlement of claims. Additionally, clients of the Company have brought actions for indemnification on the basis of alleged negligence by the Company, its agents, or its employees in rendering service to clients. The majority of these claims are of the type covered by insurance maintained by the Company. However, the Company is self-insured for the deductibles under various insurance coverages. In the opinion of Company management, adequate reserves have been provided for such self-insured risks. The Company has received a subpoena from the State of New York, Office of the Attorney General, requesting various documents relating to the Company's operations. The subpoena 15 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) does not apply to the operations of the Company's international segment or the GCG class action administration unit. The Company has responded to the subpoena. The Company cannot predict when the Attorney General's investigation will be completed, its ultimate outcome or its effect on the Company's financial condition, results of operations, or cash flows. The Company is currently the subject of an audit under California Labor Code Sections 129 and 129.5 by the Audit Unit, Division of Workers' Compensation, Department of Industrial Relations, State of California ("Audit Unit"). The Audit Unit is auditing workers' compensation files which the Company handled on behalf of clients in its El Segundo, California office in 2001 and 2002. This audit relates to a previous audit that the Company underwent in El Segundo in 2000 wherein the Company agreed to the imposition of a civil penalty pursuant to California Labor Code Section 129.5 and submission to this current follow-up audit, among other items. With respect to this current audit, the Company cannot predict when it will be completed, its ultimate outcome, or its effect on the Company's financial condition, results of operations, or cash flows. 9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT The agreements related to the Company's $70.0 million revolving line of credit and $50.0 million, 6.08% senior notes payable were amended on September 30, 2005. Both agreements contain amended provisions requiring the Company to maintain certain defined leverage ratios, fixed charge coverage ratios, and minimum net worth thresholds, none of which are expected to restrict future operations. The expiration date of the revolving line of credit was extended to September 30, 2010, but no changes were made to the interest rate terms or the dollar amount of the revolving credit line. The interest rate and repayment terms of the $50.0 million, 6.08% senior notes payable were not amended. 16 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Crawford & Company: We have reviewed the condensed consolidated balance sheet of Crawford & Company as of September 30, 2005, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2005 and 2004, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2005 and 2004. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Crawford & Company as of December 31, 2004, and the related consolidated statements of income and cash flows for the year then ended (not presented herein) and in our report dated March 11, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Ernst & Young LLP Atlanta, Georgia November 8, 2005 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This quarterly report contains and incorporates by reference forward-looking statements within the meaning of that term in the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). We desire to take advantage of the "safe harbor" provisions of the 1995 Act. The 1995 Act provides a "safe harbor" for forward-looking statements to encourage companies to provide information without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected. Statements contained in this report that are not historical in nature are forward-looking statements made pursuant to the "safe harbor" provisions of the 1995 Act. These statements are included throughout this report, and in the documents incorporated by reference in this report, and relate to, among other things, projections of revenues, earnings, earnings per share, cash flows, capital expenditures, working capital or other financial items, output, expectations, or trends in revenues or expenses. These statements also relate to our business strategy, goals and expectations concerning our market position, future operations, margins, case volumes, profitability, contingencies, debt covenants, liquidity and capital resources. The words "anticipate", "believe", "could", "would", "should", "estimate", "expect", "intend", "anticipate", "may", "plan", "goal", "strategy", "predict", "project", "will" and similar terms and phrases identify forward-looking statements in this report and in the documents incorporated by reference in this report. Additional written and oral forward-looking statements may be made by us from time to time in information provided to the Securities and Exchange Commission, press releases, our website, or otherwise. 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 results of operations and whether the forward-looking statements ultimately prove to be correct. Included among, but not limited to, the risks and uncertainties outside our control are global economic conditions, interest rates, foreign exchange rates, regulations and practices of various governmental authorities, the competitive environment, financial conditions of our customers, man-made disasters and natural disasters. Actual results and trends in the future may differ materially from those suggested or implied by the forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events anticipated or unanticipated. All future written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by the cautionary statements made herein. 18 BUSINESS OVERVIEW Crawford & Company provides claims management services to insurance companies, self-insured entities and class action settlement funds. Major service lines include workers' compensation claims administration and healthcare management services, property and casualty claims management, class action services and risk management information services. Insurance companies, which represent the major source of our revenues, customarily manage their own claims administration function but require limited services which we provide, primarily field investigation and evaluation of property and casualty insurance claims. Self-insured entities typically require a broader range of services from us. In addition to field investigation and evaluation of their claims, we may also provide initial loss reporting services for their claimants, loss mitigation services such as medical case management and vocational rehabilitation, risk management information services, and administration of the trust funds established to pay their claims. Finally, we also perform the administrative functions related to securities, product liability, bankruptcy and other class action settlements, including identifying and qualifying class members, determining and dispensing settlement payments, and administering the settlement funds. The claims management services market, both in the United States ("U.S.") and internationally, is highly competitive and comprised of a large number of companies of varying size and 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 the insurance underwriting cycle, weather-related events, general economic activity, and overall employment levels and associated workplace injury rates. We generally earn our revenues on an individual fee per claim basis. Accordingly, the volume of claim referrals to us is a key driver of our revenues. When the insurance underwriting market is soft, insurance companies are generally more aggressive in the risks they underwrite, and insurance premiums and policy deductibles decline. This usually results in an increase in industry-wide claim referrals which will increase claim referrals to us provided we maintain at least our existing share of the overall claim services market. During a hard insurance underwriting market, as we have experienced since the September 11, 2001 terrorist attacks, insurance companies become very selective in the risks they underwrite, and insurance premiums and policy deductibles increase, sometimes dramatically. This results in a reduction in industry-wide claims volumes, which reduces claims referrals to us unless we can offset the decline in claim referrals with growth in our share of the overall claims services market. Our ability to grow our market share in such a highly fragmented, competitive market is primarily dependent on the delivery of superior quality service and effective, properly focused sales efforts. RESULTS OF CONSOLIDATED OPERATIONS Consolidated net income was approximately $1.9 million and $9.5 million for the quarters ended September 30, 2005 and 2004, respectively, and approximately $6.9 million and $17.5 million for the nine months ended September 30, 2005 and 2004, respectively. Net income in the 2004 third quarter included a special credit of $5.2 million, net of related income taxes, resulting from the sale of an undeveloped parcel of real estate during the quarter. There was no such land sale in 2005. 19 We evaluate our consolidated operations by segregating our operating earnings from the other components of net income. We define our operating earnings as net income excluding income taxes, net corporate interest expense, and special charges and credits. Operating earnings is a key performance measure our senior management and chief decision maker use to evaluate the operating performance of our business, set incentive compensation targets, and make resource allocation decisions. We believe this measure is useful to investors in that it allows them to evaluate our operating performance using the same criteria management uses. Following is a reconciliation of consolidated net income on a generally accepted accounting principles (GAAP) basis to operating earnings for the quarters and nine months ended September 30, 2005 and 2004 and the related margins as a percentage of revenues before reimbursements:
Quarter ended Nine months ended ----------------------------------------------- ----------------------------------------------- September 30, % September 30, % September 30, % September 30, % (in thousands) 2005 Margin 2004 Margin 2005 Margin 2004 Margin -------------- ------------- ------ ------------- ------ ------------- ------ ------------- ------ Net income $1,887 1.0% $ 9,525 5.1% $ 6,929 1.2% $17,454 3.3% Add/(deduct): Special credit -- -- (8,573) (4.6) -- -- (8,573) (1.6) Net corporate interest 1,334 0.7 1,466 0.8 4,216 0.8 2,269 0.4 Income taxes 1,034 0.6 5,953 3.2 3,797 0.7 8,046 1.5 ------ --- ------- ---- ------- --- ------- ---- Operating earnings $4,255 2.3% $ 8,371 4.5% $14,942 2.7% $19,196 3.6% ====== === ======= ==== ======= === ======= ====
Our operating earnings are evaluated at the segment level for our two reportable segments: U.S. Operations and International Operations. These two reportable segments represent components of our business for which separate financial information is available that is evaluated regularly. Net corporate interest expense and income taxes are recurring components of our net income, but they are not considered part of our operating earnings since they are managed on a corporate-wide basis. Net corporate interest expense results from capital structure decisions made by us, and income taxes are based on statutory rates in effect in each of the locations where we provide services and vary throughout the world. Neither of these costs relates directly to the performance of our services and are therefore excluded in order to accurately assess the results of our operating activities on a consistent basis. Special credits and charges represent nonrecurring events that are not considered part of our operating earnings since they historically have not impacted our operating performance and are not expected to impact our performance within the next two years. A discussion and analysis of our operating earnings by reportable segment follows the sections below on income taxes, net corporate interest expense, and special credits. Income Taxes During June 2004, we settled a tax credit refund claim with the Internal Revenue Service and recorded a receivable of $3.5 million, which is comprised of a tax refund of $1.7 million and associated interest of $1.8 million. Our effective tax rate was 35.4% of pretax income for the quarter and nine months ended September 30, 2005, compared to 38.4% of pretax income for the quarter and nine months ended September 30, 2004. Our effective tax rates for the 2004 periods exclude $1.7 million related to the tax credit refund claim discussed above. Taxes on income totaled $1.0 million and $3.8 million for the quarter and nine months ended September 30, 2005, respectively, as compared to $6.0 million and $8.0 million, including the expected tax refund, for the comparable 2004 periods. We perform a quarterly evaluation of our effective tax rate expected for the year. Based 20 on operating results through the first nine months of 2005 and a projection of operating results for the remainder of the year, we estimate that our effective tax rate will be 35.4% for the calendar year 2005. The change in our estimated effective tax rate for 2005 was primarily due to a change in the mix of income expected from our various international operations. Generally, it is our policy to consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested. The American Jobs Creation Act of 2004 ("the Act") allows a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. tax payer. This deduction is elective by the tax payer. Recently, the Treasury Department provided clarification on key elements of the repatriation provisions of the Act. After review of the Act and the related clarifications from the Treasury Department, we have concluded that no material changes are warranted to our current policy on undistributed earnings of our foreign subsidiaries. Net Corporate Interest Expense Net corporate interest expense increased to $1.3 million and $4.2 million for the quarter and nine months ended September 30, 2005, respectively, from $1.5 million and $2.3 million in the comparable 2004 periods. Net corporate interest expense for the 2004 year-to-date period included interest income of $1.8 million associated with the tax credit refund claim discussed above. Special Credits During September 2004, we completed the sale of an undeveloped parcel of real estate. We received net cash of $2.0 million and a $7.6 million first lien mortgage note receivable, at an effective interest rate of approximately 4% per annum, due in its entirety in 270 days. A pretax gain of $8.6 million was recognized on the sale. After reflecting income taxes, this special credit increased 2004 net income by $5.2 million, or $0.11 per share. The note receivable has been paid in its entirety. SEGMENT OPERATING EARNINGS We believe the discussion and analysis of our consolidated operating earnings is more meaningful when presented separately for our U.S. Operations and International Operations. Our reportable segments represent components of our business for which separate financial information is available that is evaluated regularly by our chief decision maker in deciding how to allocate resources and in assessing performance. In the normal course of our business, we sometimes pay for certain out-of-pocket expenses that are reimbursed to us by our clients. Under GAAP, these out-of-pocket expense reimbursements are reported as revenues and expenses in our Condensed Consolidated Statements of Income. In some of the discussion and analysis that follows, we do not believe it is informative to include the GAAP-required gross up of our revenues and expenses for these reimbursed expenses. The amounts of reimbursed expenses and related revenues offset each other in our Condensed Consolidated Statements of Income with no net impact to our net income. Except where noted, revenue amounts exclude reimbursements for out-of-pocket expenses. Expense amounts exclude reimbursed out-of-pocket expenses, special credits and charges, net corporate interest expense, and income taxes. 21 Our discussion and analysis of operating expenses is comprised of two components. Compensation and Fringe Benefits include all compensation, payroll taxes, and benefits provided to our employees which, as a service company, represents our most significant and variable expense. Expenses Other than Reimbursements, Compensation and Fringe Benefits include outsourced services, office rent and occupancy costs, other office operating expenses, amortization and depreciation, and cost of risk. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes. Operating results for our U.S. and international operations for the quarters and nine months ended September 30, 2005 and 2004 were as follows:
Quarter ended Nine months ended ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, (in thousands) 2005 2004 2005 2004 - -------------- ------------- ------------- ------------- ------------- REVENUES: U.S., before reimbursements $114,482 $123,466 $341,343 $342,372 International, before reimbursements 70,238 62,404 213,713 185,369 -------- -------- -------- -------- Total revenue before reimbursements 184,720 185,870 555,056 527,741 Reimbursements 21,500 31,638 57,588 61,036 -------- -------- -------- -------- TOTAL REVENUES $206,220 $217,508 $612,644 $588,777 COMPENSATION & FRINGE BENEFITS: U.S $ 72,552 $ 71,922 $218,868 $208,397 % of Revenues before reimbursements 63.4% 58.2% 64.1% 60.9% International 48,547 43,829 149,014 129,065 % of Revenues before reimbursements 69.1% 70.2% 69.7% 69.6% -------- -------- -------- -------- TOTAL $121,099 $115,751 $367,882 $337,462 % of Revenues before reimbursements 65.6% 62.3% 66.3% 64.0% EXPENSES OTHER THAN COMPENSATION & FRINGE BENEFITS: U.S., before reimbursements $ 40,694 $ 44,521 $117,593 $120,234 % of Revenues before reimbursements 35.5% 36.1% 34.5% 35.1% International, before reimbursements 18,672 17,227 54,639 50,849 % of Revenues before reimbursements 26.6% 27.6% 25.6% 27.5% -------- -------- -------- -------- Total, before reimbursements 59,366 61,748 172,232 171,083 % of Revenues before reimbursements 32.1% 33.2% 31.0% 32.4% Reimbursements 21,500 31,638 57,588 61,036 -------- -------- -------- -------- TOTAL $ 80,866 $ 93,386 $229,820 $232,119 % of Total revenues 39.2% 42.9% 37.5% 39.4% -------- -------- -------- -------- OPERATING EARNINGS (1): U.S $ 1,236 $ 7,023 $ 4,882 $ 13,741 % of Revenues before reimbursements 1.1% 5.7% 1.4% 4.0% International 3,019 1,348 10,060 5,455 % of Revenues before reimbursements 4.3% 2.2% 4.7% 2.9% -------- -------- -------- -------- TOTAL $ 4,255 $ 8,371 $ 14,942 $ 19,196 % of Revenues before reimbursements 2.3% 4.5% 2.7% 3.6%
(1) Earnings before special credit, net corporate interest expense and income taxes. 22 U.S. OPERATIONS REVENUES BEFORE REIMBURSEMENTS U.S. revenues before reimbursements by market type, for the quarters and nine months ended September 30, 2005 and 2004 were as follows:
Quarter ended Nine months ended ---------------------------------------- ---------------------------------------- September 30, September 30, September 30, September 30, (in thousands) 2005 2004 Variance 2005 2004 Variance - -------------- ------------- ------------- -------- ------------- ------------- -------- Insurance companies $ 50,291 $ 58,000 (13.3%) $152,259 $156,822 (2.9%) Self-insured entities 37,562 39,483 (4.9%) 115,722 120,245 (3.8%) Class action services 26,629 25,983 2.5% 73,362 65,305 12.3% -------- -------- -------- -------- Total U.S. Revenues before Reimbursements $114,482 $123,466 (7.3%) $341,343 $342,372 (0.3%) ======== ======== ======== ========
Revenues before reimbursements from insurance companies decreased 13.3% from $58.0 million in the 2004 third quarter to $50.3 million in the 2005 third quarter, which reflects a $5.7 million decline in catastrophe-related revenues from the 2004 period when we were responding to the hurricanes which struck the southeastern United States. Revenues before reimbursements from insurance companies decreased 2.9% to $152.3 million for the nine months ended September 30, 2005, compared to $156.8 million for the 2004 period, reflecting lower catastrophe-related revenues and a continued softening in our U.S. insurance company referrals for high-frequency, low-severity claims. Due to the timing, location, and nature of the damages caused by hurricanes Katrina and Rita at the end of the 2005 third quarter, claims from these hurricanes are not expected to have an impact until the fourth quarter 2005. Revenues from self-insured clients decreased 4.9% and 3.8% from the third quarter and nine months ended September 30, 2004, respectively, to $37.6 million and $115.7 million in the comparable 2005 periods, due primarily to a reduction in claim referrals from our existing clients, only partially offset by net new business gains. See the following analysis of U.S. cases received. Class action services revenues, including administration and inspection services, increased 2.5% and 12.3% from the 2004 third quarter and nine-month periods, respectively, to $26.6 million and $73.4 million in the corresponding 2005 periods. Class action services revenues can fluctuate significantly depending on the timing and size of project awards. REIMBURSEMENTS INCLUDED IN TOTAL REVENUES Reimbursements for out-of-pocket expenses included in total revenues for our U.S. operations were $14.2 million and $36.4 million for the quarter and nine months ended September 30, 2005, respectively, declining from $24.9 million and $41.8 million in the comparable 2004 periods. These declines are primarily attributable to our class action services unit which had higher out-of-pocket costs in the 2004 third quarter related to noticing work performed on certain class action settlements. Case Volume Analysis Excluding the impact of class action services, which has project-based revenues that are not denominated by individual cases, U.S. unit volume, measured principally by cases received, decreased 20.4% in the third quarter of 2005 compared to the same 2004 quarter. This decrease was partially offset by a 12.6% revenue increase from changes in the mix of services provided 23 and in the rates charged for those services, resulting in a net 7.8% decrease in U.S. revenues before reimbursements for the third quarter of 2005, excluding revenues from class action services. Referrals of high-frequency, low-severity claims declined in the 2005 third quarter compared to the 2004 third quarter, primarily due to the high volume of property claims in the 2004 third quarter associated with the hurricanes which struck the southeastern United States in 2004. This decrease in high-frequency, low-severity claims has increased our average revenue per claim in the 2005 third quarter. Growth in class action services increased U.S. revenues by 0.5% in the quarter ended September 30, 2005, compared to the same quarter in 2004. For the nine month period ended September 30, 2005, U.S. unit volume decreased 10.3%, compared to the same 2004 period. This decrease was partially offset by a 7.6% revenue increase from changes in the mix of services provided and in the rates charged for those services, resulting in a net 2.7% decrease in U.S. revenues before reimbursements for the first nine months of 2005, excluding revenues from class action services. The decrease in referrals of high-frequency, low-severity claims has increased our average revenue per claim in the 2005 year-to-date period. Growth in class action services increased U.S. revenues before reimbursements by 2.4% in the 2005 nine-month period, compared to the same period in 2004. Excluding the impact of class action services, U.S. unit volume by major service line, as measured by cases received, for the quarters and nine months ended September 30, 2005 and 2004 was as follows:
Quarter ended Nine months ended ---------------------------------------- ---------------------------------------- September 30, September 30, September 30, September 30, (whole numbers) 2005 2004 Variance 2005 2004 Variance - --------------- ------------- ------------- -------- ------------- ------------- -------- Casualty 48,111 53,760 (10.5%) 141,899 155,439 (8.7%) Property 58,228 90,238 (35.5%) 150,280 180,296 (16.6%) Vehicle 32,186 38,371 (16.1%) 95,990 106,420 (9.8%) Workers' Compensation 35,716 37,388 (4.5%) 108,716 115,208 (5.6%) Other 4,982 5,531 (9.9%) 16,369 15,105 8.4% ------- ------- ------- ------- TOTAL U.S. CASES RECEIVED 179,223 225,288 (20.4%) 513,254 572,468 (10.3%) ======= ======= ======= =======
Conservative underwriting by insurance companies, including significant increases in policy deductibles, and the absence of significant catastrophic claims activity during 2005, contributed to an industry-wide decline in property and casualty claims frequency during the 2005 third quarter and year-to-date periods. Due to the timing, location, and nature of the damages caused by hurricanes Katrina and Rita at the end of the 2005 third quarter, claims from these hurricanes are not expected to have an impact until the fourth quarter 2005. During the 2004 periods, property claims were impacted significantly by the four hurricanes that struck Florida and other southeastern states during August and September of 2004. The decline in vehicle claims during the quarter and nine months ended September 30, 2005 was due to a decline in referrals of high-frequency, low-severity claims from our insurance company clients. The declines in workers' compensation and casualty claims during the quarter and nine months ended September 30, 2005 were due to a reduction in claims from our existing clients and reflects continued weakness in the growth of U.S. employment levels and associated workplace injuries. COMPENSATION AND FRINGE BENEFITS Our most significant expense is the compensation of employees, including related payroll taxes and fringe benefits. U.S. compensation expense as a percent of revenues before reimbursements increased to 63.4% in the third quarter of 2005 as compared to 58.2% in the same 2004 quarter. 24 For the nine month period ended September 30, 2005, U.S. compensation expense as a percent of revenues before reimbursements increased to 64.1% compared to 60.9% in the 2004 period. These increases primarily reflect an increase in capacity in our U.S. claims management operations and spending in support of improving our work product, training and developing our employees, and growing our market share. There was an average of 4,210 full-time equivalent employees in the first nine months of 2005, compared to an average of 4,200 in the same 2004 period. U.S. salaries and wages totaled $60.7 million and $177.8 million for the quarter and nine months ended September 30, 2005, respectively, increasing 2.0% for the quarter and 4.4% for the nine month period, from $59.5 million and $170.3 million in the comparable 2004 periods, primarily as a result of merit salary increases granted during the period. Payroll taxes and fringe benefits for U.S. operations totaled $11.8 million and $41.1 million in the third quarter and first nine months of 2005, respectively. These costs decreased 5.6% for the quarter but increased 7.9% for the nine month period, from 2004 costs of $12.5 million and $38.1 million for the comparable periods. The decline in the 2005 third quarter is primarily related to lower costs in our self-insured workers' compensation programs. The increase for the 2005 year-to-date period is primarily due to higher costs in our self-insured workers' compensation programs during the first six months of 2005 and increased expenses in our employee medical group benefit programs. EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS U.S. expenses other than reimbursements, compensation and related payroll taxes and fringe benefits were 35.5% of revenues before reimbursements for the quarter ended September 30, 2005, down from 36.1% for the same quarter in 2004. U.S. expenses other than reimbursements, compensation and related payroll taxes and fringe benefits were 34.5% of revenues before reimbursements for the nine-month period ended September 30, 2005, down from 35.1% for the same period in 2004. These decreases are primarily due to lower self-insured professional indemnity costs. REIMBURSED EXPENSES Reimbursed out-of-pocket expenses in our U.S. operations were $14.2 million and $36.4 million for the quarter and nine months ended September 30, 2005, respectively, declining from $24.9 million and $41.8 million in the comparable 2004 periods. These declines are primarily attributable to our class action services unit which had higher out-of-pocket costs in the 2004 third quarter related to noticing work performed on certain class action settlements. INTERNATIONAL OPERATIONS REVENUES BEFORE REIMBURSEMENTS Substantially all international revenues were derived from the insurance company market. Revenues before reimbursements from our international operations increased 12.6%, from $62.4 million in the third quarter of 2004 to $70.2 million in the 2005 third quarter. Revenues before reimbursements for the first nine months of 2005 totaled $213.7 million, a 15.3% increase from $185.4 million reported in the first nine months of 2004. International unit volume, measured principally by cases received, increased 23.4% and 20.8% in the current quarter and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. Our third quarter 25 2004 acquisition of the net assets of Cabinet Mayousseir, Cabinet Tricaud, and TMA in France increased international revenues by 1.1% in the nine months ended September 30, 2005. Revenues per claim decreased 14.9% and 12.2% during the quarter and nine months ended September 30, 2005, respectively, due to changes in the mix of services provided and in the rates charged for those services. Growth in high-frequency, low-severity claim referrals in the United Kingdom ("U.K.") and Continental Europe, Middle East and Africa ("CEMEA") from new contracts entered into during 2004 and 2005 reduced the average revenue per claim during the first nine months of 2005. Revenues before reimbursements reflect a 4.1% and 5.6% increase during the quarter and nine months ended September 30, 2005, respectively, due to the positive effect of a weak U.S. dollar, primarily as compared to the British pound and the euro. REIMBURSEMENTS INCLUDED IN TOTAL REVENUES Reimbursements for out-of-pocket expenses included in total revenues for our international operations increased to $7.3 million and $21.2 million for the quarter and nine months ended September 30, 2005, respectively, from $6.7 million and $19.2 million in the same 2004 periods. These increases were primarily due to a decline in the value of the U.S. dollar against other major currencies, primarily the British pound and the euro. Case Volume Analysis International unit volume by region for the quarters and nine months ended September 30, 2005 and 2004 was as follows:
Quarter ended Nine months ended -------------------------------- -------------------------------- September September September September (whole numbers) 30, 2005 30, 2004 Variance 30, 2005 30, 2004 Variance - --------------- --------- --------- -------- --------- --------- -------- United Kingdom 31,910 27,075 17.9% 105,094 78,384 34.1% Americas 35,891 31,820 12.8% 92,829 84,487 9.9% CEMEA 32,611 21,759 49.9% 79,866 64,070 24.7% Asia/Pacific 9,697 8,545 13.5% 29,780 27,588 7.9% ------- ------ ------- ------- TOTAL INTERNATIONAL CASES RECEIVED 110,109 89,199 23.4% 307,569 254,529 20.8% ======= ====== ======= =======
The increases in the Americas were primarily due to flood-related claims activity in Canada during the 2005 third quarter. The increases in CEMEA were primarily due to weather-related claims in Sweden received from two new clients. The increases in Asia/Pacific were due to weather-related claims in Australia and Taiwan. The increases in the U.K. during the 2005 third quarter and year-to-date period were due to claims received from new contracts entered into during 2004 and 2005. COMPENSATION AND FRINGE BENEFITS As a percent of revenues before reimbursements, compensation expense, including related payroll taxes and fringe benefits, decreased to 69.1% for the quarter ended September 30, 2005 from 70.2% for the same quarter in 2004. For the nine-month period ended September 30, 2005, compensation, payroll taxes and fringe benefits increased slightly as a percentage of revenues before reimbursements to 69.7% from 69.6% in 2004. The decrease in the 2005 third quarter is primarily a result of a reduction in operating capacity in our Canadian operations where we are responding to an influx of flood-related losses. There was an average of 3,228 full-time 26 equivalent employees in the first nine months of 2005 compared to an average of 3,137 in the same 2004 period. Salaries and wages of international personnel increased to $40.7 million for the quarter ended September 30, 2005, from $36.8 million in the same 2004 quarter. For the nine-month periods, salaries and wages increased to $125.0 million in 2005 from $108.3 million in 2004. Payroll taxes and fringe benefits for international operations totaled $7.8 million and $24.1 million for the quarter and nine months ended September 30, 2005, respectively, compared to $7.0 million and $20.8 million for the same periods in 2004. The increases in these costs were largely the result of staffing increases in the U.K. and CEMEA to handle claims referred under new contracts entered into during 2004 and 2005, and a decline in the value of the U.S. dollar against other major currencies, primarily the British pound and the euro. EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS Expenses other than compensation and related payroll taxes and fringe benefits were 26.6% and 25.6% of international revenues before reimbursements for the quarter and nine months ended September 30, 2005, respectively, down from 27.6% and 27.5% for the same periods in 2004, primarily due to a reduction of operating capacity within our U.K. and Canadian units. REIMBURSED EXPENSES Reimbursed out-of-pocket expenses in our international operations increased to $7.3 million and $21.2 million for the quarter and nine months ended September 30, 2005, respectively, from $6.7 million and $19.2 million in the same 2004 periods. These increases were primarily due to a decline in the value of the U.S. dollar against other major currencies, primarily the British pound and the euro. LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION At September 30, 2005, our working capital balance (current assets less current liabilities) was $127.4 million, a decrease from the December 31, 2004 balance of $131.6 million. Cash and Cash Equivalents totaled $36.2 million at September 30, 2005 and $43.6 million at December 31, 2004. Cash was generated primarily from operating activities. Cash provided by operations during the nine months ended September 30, 2005 totaled $11.2 million and reflected collections of accounts receivable generated from the hurricane-related claims administered in late 2004 and early 2005. The principal uses of cash were for acquisitions of property and equipment, dividends paid to shareholders, and investments in computer software. Cash dividends paid to shareholders were 127.1% of net income in the first nine months of 2005, compared to 50.3% for the same period in 2004. Our Board of Directors declares cash dividends to shareholders each quarter based on an assessment of current and projected earnings and cash flows. During the first nine months of 2005, we did not repurchase any of the Company's Class A or Class B common stock. As of September 30, 2005, there are 705,863 shares eligible for repurchase under the discretionary 1999 share repurchase program authorized by our Board of Directors. We believe it is unlikely that we will repurchase shares under this program in the foreseeable future due to the funded status of our defined benefit pension plans. 27 We maintain a $70.0 million committed revolving credit line with a syndication of banks in order to meet seasonal working capital requirements and other financing needs that may arise. This committed revolving credit line was renewed on September 30, 2005 and the expiration date of the credit line was extended to September 2010. The renewal did not change the dollar amount of the credit line or interest rate terms. As a component of this credit line, we maintain a letter of credit facility to satisfy certain of our own contractual obligations. Including $13.7 million committed under the letter of credit facility, the balance of our unused line of credit totaled $22.4 million at September 30, 2005. Our short-term debt obligations typically peak during the first quarter and generally decline during the balance of the year. Short-term borrowings outstanding, including bank overdraft facilities, as of September 30, 2005 totaled $36.0 million, decreasing from $37.4 million at December 31, 2004. Long-term borrowings outstanding, excluding current installments, as of September 30, 2005 totaled $51.0 million compared to $50.9 million at December 31, 2004. We have historically used the proceeds from our long-term borrowings to finance business acquisitions, primarily in our international segment. Refer to the Debt Covenants discussion under the Factors that May Affect Future Results section of this report for a further discussion of our borrowing capabilities. We believe that our current financial resources, together with funds generated from operations and existing and potential borrowing capabilities, will be sufficient to maintain our current operations for the next twelve months. We have not engaged in any hedging activities to compensate for the effect of exchange rate fluctuations on the operating results of our foreign subsidiaries. Foreign currency denominated debt serves to hedge the currency exposure of our net investment in foreign operations. Shareholders' investment at September 30, 2005 was $192.6 million, compared with $194.8 million at December 31, 2004. This decrease was a result of net income and a positive foreign currency translation adjustment, which were offset by dividends paid to shareholders during the first nine months of 2005. APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations addresses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates and judgments based upon historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of these evaluations form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies for revenue recognition, allowance for doubtful accounts, valuation of goodwill and other long-lived assets, defined benefit pension plans, determination of our effective tax rate, and self-insured reserves require significant judgments and estimates in the preparation of the condensed consolidated financial statements. Changes in these underlying estimates could potentially materially affect consolidated results of operations, financial position and cash flows in the period of change. Although some variability 28 is inherent in these estimates, the amounts provided for are based on the best information available to us and we believe these estimates are reasonable. We have discussed the development and selection of the following critical accounting policies and estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our related disclosure in this Management's Discussion and Analysis of Financial Condition and Results of Operations. REVENUE RECOGNITION Our revenues are primarily comprised of claims processing or program administration fees. Fees for professional services are recognized in unbilled revenues at the time such services are rendered at estimated collectible amounts. Substantially all unbilled revenues are billed within one year. Out-of-pocket costs incurred in administering a claim are passed on to our clients and included in our revenues. Deferred revenues represent the estimated unearned portion of fees related to future services under certain fixed-fee service arrangements. Deferred revenues are recognized based on the estimated rate at which the services are provided. These rates are primarily based on an historical evaluation of actual claim closing rates by major lines of coverage. Additionally, recent claim closing rates are evaluated to ensure that current claim closing history does not indicate a significant deterioration or improvement in the longer-term historical closing rates used. Our fixed-fee service arrangements typically call for us to handle claims on either a one- or two-year basis, or for the lifetime of the claim. In cases where we handle a claim on a non-lifetime basis, we typically receive an additional fee on each anniversary date that the claim remains open. For service arrangements where we provide services for the life of the claim, we are only paid one fee for the life of the claim, regardless of the ultimate duration of the claim. As a result, our deferred revenues for claims handled for one or two years are not as sensitive to changes in claim closing rates since the revenues are ultimately recognized in the near future and additional fees are generated for handling long-lived claims. Deferred revenues for lifetime claim handling are considered more sensitive to changes in claim closing rates since we are obligated to handle these claims to their ultimate conclusion with no additional fees for long-lived claims. Based upon our historical averages, we close approximately 99% of all cases referred under lifetime claim service arrangements within the first five years from the date of referral. Also, within that five-year period, the percentage of claims remaining open in any one particular year has remained relatively consistent from period to period. Each quarter we evaluate our historical claim closing rates by major line of insurance coverage and make adjustments as necessary. Any changes in estimates are recognized in the period in which they are determined. The estimate for deferred revenues is a critical accounting estimate for our U.S. segment. ALLOWANCE FOR DOUBTFUL ACCOUNTS We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments and adjustments clients may make to invoiced amounts. Losses resulting from the inability of clients to make required payments are accounted for as bad debt expense, while adjustments to invoices made by clients are accounted for as reductions to revenues. These allowances are established by using historical write-off information to project future experience and by considering the 29 current credit worthiness of our clients, any known specific collection problems, and our assessment of current property and casualty insurance industry conditions. Each quarter we evaluate the adequacy of the assumptions used in determining these allowances and make adjustments as necessary. Changes in estimates are recognized in the period in which they are determined. The estimate for the allowance for doubtful accounts is a critical accounting estimate for both our U.S. and international segments. VALUATION OF GOODWILL AND OTHER LONG-LIVED ASSETS We regularly evaluate whether events and circumstances have occurred which indicate that the carrying amounts of goodwill and other long-lived assets (primarily property and equipment, deferred income tax assets, and capitalized software) may warrant revision or may not be recoverable. When factors indicate that such assets should be evaluated for possible impairment, we perform an impairment test in accordance with SFAS 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), for goodwill, SFAS 109, "Accounting for Income Taxes" ("SFAS 109"), for deferred income tax assets, and SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), for other long-lived assets. We perform an annual impairment analysis of goodwill in accordance with SFAS 142 where we compare the book value of our operating segments to the estimated market value of those units as determined by discounting future projected cash flows. The estimated market values of our segments are based upon certain assumptions made by management. If the growth or weighted average cost of capital assumptions used to calculate the market value of our operating segments changed, impairment could result. The valuation of goodwill and other long-lived assets is a critical accounting estimate for both our U.S. and international segments. DEFINED BENEFIT PENSION PLANS We sponsor various defined benefit pension plans in the U.S. and U.K. which cover a substantial number of employees in each location. Our U.S. defined benefit retirement plan was frozen on December 31, 2002 to new employees and for additional accrual of benefits for existing participants. Our U.K. defined benefit retirement plans have also been frozen for new employees, but existing participants may still accrue additional benefits. Benefits payable under our U.S. defined benefit retirement plan are generally based on career compensation, while the U.K. plans are generally based on an employee's final salary. Our funding policy is to make cash contributions in amounts sufficient to maintain the plans on an actuarially sound basis, but not in excess of deductible amounts permitted under applicable income tax regulations. Plan assets are invested in equity and fixed income securities, with a target allocation of approximately 60 percent to equity securities and 40 percent to fixed income investments. The estimated liability for our defined benefit pension plans is sensitive to changes in the underlying assumptions for the expected return on plan assets and the discount rate used to determine the present value of projected benefits payable under the plans. The estimates for our defined benefit pension plans are critical accounting estimates for both our U.S. and international segments. 30 DETERMINATION OF EFFECTIVE TAX RATE We account for certain income and expense items differently for financial reporting and income tax purposes. Provisions for deferred taxes are made in recognition of these temporary differences. The most significant differences relate to minimum pension liability, unbilled and deferred revenues, self-insurance, and depreciation and amortization. For financial reporting purposes, in accordance with the liability method of accounting for income taxes as specified in SFAS 109, the provision for income taxes is the sum of income taxes both currently payable and deferred. Currently payable income taxes represent the liability related to our income tax returns for the current year, while the net deferred tax expense or benefit represents the change in the balance of deferred tax assets or liabilities as reported on the Condensed Consolidated Balance Sheets. The changes in deferred tax assets and liabilities are determined based upon changes between the basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities for income tax purposes, measured by the statutory tax rates that management estimates will be in effect when these differences reverse. In addition to estimating the future tax rates applicable to the reversal of tax differences, management must also make certain assumptions regarding whether tax differences are permanent or temporary. If the differences are temporary, management must estimate the timing of their reversal, and whether taxable income in future periods will be sufficient to fully recognize any gross deferred tax assets. Other factors which influence the effective tax rate include changes in the composition of taxable income from the countries in which we operate and our ability to recover prior net operating losses in certain of our international subsidiaries. The estimate for income taxes is a critical accounting estimate for both our U.S. and international segments. SELF-INSURANCE LIABILITIES We self-insure certain insurable risks consisting primarily of professional liability, employee medical and disability, workers' compensation, and auto liability. Insurance coverage is obtained for catastrophic property and casualty exposures (including professional liability on a claims-made basis) as well as those risks required to be insured by law or contract. The estimated liability is calculated based on historical claim payment experience, the expected life of the claims, and the liabilities previously established on the claims. In addition, liabilities are established for losses that have occurred but have not been reported and for the adverse development of reserves on reported losses. Provision for claims under the self-insured program is made based on our estimate of the aggregate liability for claims incurred. The liability for claims incurred under our self-insured workers' compensation and employee disability programs is discounted at the prevailing risk-free rate for government issues of an appropriate duration. All other self-insurance liabilities are undiscounted. Each quarter we evaluate the adequacy of the assumptions used in developing these losses and make adjustments as necessary. Changes in estimates are recognized in the period in which they are determined. We believe the provision for self-insured losses is adequate to cover the ultimate net cost of losses incurred; however, this provision is an estimate and amounts ultimately settled may be significantly greater or less than the provision established. The estimate for self-insured liabilities is a critical accounting estimate for our U.S. segment. 31 FACTORS THAT MAY AFFECT FUTURE RESULTS FORWARD LOOKING STATEMENTS Certain information presented in "Management's Discussion and Analysis of Financial Condition and Results of Operations" may include forward-looking statements, the accuracy of which is subject to a number of risks, uncertainties and assumptions. Our Annual Report on Form 10-K for the year ended December 31, 2004 discusses such risks, uncertainties and assumptions and other key factors that could cause actual results to differ materially from those expressed in such forward-looking statements. LEGAL PROCEEDINGS As disclosed in Note 8, "Commitments and Contingencies," to the condensed consolidated financial statements, we have potential exposure to certain legal and regulatory matters. CONTINGENT PAYMENTS We normally structure acquisitions to include earnout payments, which are contingent upon the acquired entity reaching certain revenue and operating earnings targets. The amount of the contingent payments and length of the earnout period varies for each acquisition, and the ultimate payments when made will vary, as they are dependent on future events. Based on projected levels of revenues and operating earnings, additional payments after September 30, 2005 under existing earnout agreements would approximate $2.4 million through 2009, as follows: 2006 - $78,000; 2007 - $78,000; 2008 - $2,011,000; and 2009 - $266,000. At September 30, 2005, we have committed $13.7 million under letters of credit to satisfy certain of our own contractual requirements. As noted in our discussion of Debt Covenants, these letters of credit commitments are a component of our $70.0 million Amended Revolving Credit Agreement. DEBT COVENANTS In October 2003, we entered into a committed $70.0 million revolving credit line pursuant to a revolving credit agreement (the "Revolving Credit Agreement") and issued $50.0 million in 6.08% senior notes pursuant to a notes purchase agreement (the "Notes Purchase Agreement"). As of September 30, 2005, there was $33.9 million outstanding on the revolving credit line with an average variable interest rate of 4.7%. In addition, letters of credit of $13.7 million were also committed under this revolving credit line. The $50.0 million senior notes have scheduled principal repayments of approximately $5.6 million beginning October 2006 and continuing semi-annually through 2009 with the final payment due October 2010. The stock of Crawford & Company International, Inc. is pledged as security under these agreements and our U.S. subsidiaries have guaranteed our obligations under these agreements. On September 30, 2005, we executed a First Amended and Restated Credit Agreement ("Amended Revolving Credit Agreement") to our existing $70.0 million Revolving Credit Agreement dated October, 2003. The Amended Revolving Credit Agreement does not change the dollar amount of the credit line or interest rate terms. The expiration date is extended to September 29, 2010. 32 On September 30, 2005, we also executed a Waiver and Amendment (the "Amended Note Purchase Agreement") to our original Note Purchase Agreement of October, 2003 involving our $50.0 million 6.08% senior notes payable. The Amended Note Purchase Agreement does not change the interest rate, payment schedule, or maturity date of the 6.08% senior notes. Both the original Revolving Credit Agreement (see Exhibit 10.2, incorporated by reference) and the original Note Purchase Agreement (see Exhibit 10.4, incorporated by reference) contained various provisions which required us to maintain defined leverage ratios, fixed charge coverage ratios, and minimum net worth thresholds. As a result of the amended agreements, the material provisions in the original agreements have been modified at September 30, 2005 as follows: 1) We must maintain, on a rolling four quarter basis, a leverage ratio of consolidated debt to earnings before interest expense, income taxes, depreciation, amortization, certain non-recurring charges, and capitalization of internally developed software costs ("EBITDA") of no more than 2.75 times EBITDA. This ratio is reduced to 2.50 times EBITDA effective for the quarter ended September 30, 2006, and to 2.25 times EDITDA effective for the quarter ended September 30, 2007. 2) We must also maintain, on a rolling four quarter basis, a fixed charge coverage ratio of EBITDA plus lease expenses ("EBITDAR") to total fixed charges, consisting of interest expense and lease expense, of no less than 1.5 times fixed charges through the quarter ended September 30, 2007. Effective the quarter ended December 31, 2007, this ratio changes to no less than 1.75 times fixed charges. 3) We are also required to maintain a minimum net worth equal to $167,200,000 plus 50% of our cumulative positive consolidated net income earned after June 30, 2005, plus 100% of the net proceeds from any equity offering, subject to terms and conditions. For purposes of determining minimum net worth, any non-cash adjustments after June 30, 2005 related to our pension liabilities, goodwill, or foreign currency translation are excluded. 4) During 2006, we are authorized to pay dividends to holders of our common stock up to an amount not to exceed the sum of 2005 consolidated net income plus $4,000,000. All other original provisions regarding the payments of dividends during the terms of these original and amended agreements remain unchanged. We were in compliance with these debt covenants as of September 30, 2005. If we do not meet the covenant requirements in the future, we would be in default under these agreements. In such an event, we would need to obtain a waiver of the default or repay the outstanding indebtedness under the agreements. If we could not obtain a waiver on satisfactory terms, we could be required to renegotiate this indebtedness. Any such renegotiations could result in less favorable terms, including higher interest rates and accelerated payments. Based upon our annualized operating results for the first nine months of 2005, we expect to remain in compliance with the financial covenants contained in the Amended Revolving Credit Agreement and the Amended Notes Purchase Agreement throughout 2005. However, there can be no assurance that our actual financial results will match our planned results or that we will not violate the covenants. 33 RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 123 (revised 2004), "Share Based Payments" ("SFAS 123R"), which is a revision of SFAS 123, "Accounting for Stock Compensation." SFAS 123R supersedes SFAS 123 and Accounting Principles Board ("APB") Opinion 25 "Accounting for Stock Issued to Employees" ("APB 25") and amends SFAS 95, "Statement of Cash Flows." Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires companies to measure compensation cost for all share-based payments based on the fair value of the shares, including employee stock options. Pro forma disclosure will not be permitted under SFAS 123R. When originally issued, SFAS 123R was to be effective for public companies for the first interim or annual period beginning after June 15, 2005. However, in April 2005 the SEC amended Regulation S-X to allow public companies that had not yet adopted SFAS 123R to delay adoption of the Statement until the beginning of the first annual period beginning after June 15, 2005. Accordingly, we expect to adopt SFAS 123R at the beginning of 2006. SFAS 123R permits public companies to adopt its requirements using one of two methods: 1) a "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date, and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date, or 2) a "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits companies to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented, or (b) prior interim periods of the year of adoption. We plan to adopt SFAS 123R using the "modified prospective" method. As permitted by SFAS 123, we currently account for share-based payments to our employees using APB 25's intrinsic value method. Under APB 25, we recognize compensation cost for stock grants, but we generally recognize no compensation cost for our employee stock option and employee stock purchase plans due to the terms of those plans. Accordingly, the adoption of SFAS 123R's fair value method will have an impact on our results of operations, although it will have no net impact on our financial position. The future impact of adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123R in prior periods, the impact of that Standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share under "Accounting for Stock-Based Compensation" in Note 5 to the condensed consolidated financial statements. Based on stock-based compensation issued through September 30, 2005, adoption of SFAS 123R at the beginning of 2006, and use of the "modified prospective" method, we expect the adoption of SFAS 123R to reduce net income by approximately $912,000 in the year of adoption, or $0.02 per share. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current generally accepted accounting principles. Any additional impact on our future net income or cash flows cannot be predicted at this time because it will depend on levels of share-based payments granted in the future and on employee exercises of stock options. 34 In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154 provides guidance on the accounting for and reporting of accounting changes and errors corrections. SFAS 154 requires retrospective application for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. SFAS 154 also states that a correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction under SFAS 154 will involve adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS 154 to have a material impact on our consolidated financial statements. SFAS 123R, which we plan to adopt at the beginning of 2006, contains explicit transitional guidance. Accordingly, the requirements of SFAS 154 will not apply to our pending adoption of SFAS 123R. PENDING LEGISLATION We are aware of possible future Congressional legislation that may impact the Pension Benefit Guaranty Corporation ("PBGC") and the Employee Retirement Income Security Act of 1974 ("ERISA") as they relate to defined benefit pension plans in the U.S. Our frozen U.S. defined benefit pension plan is regulated by both the PBGC and ERISA. We understand that this pending legislation, if enacted, could significantly alter future pension funding requirements and actuarial formulas used by sponsors of defined benefit pension plans that are regulated by the PBGC and ERISA. Our plan, including the related critical accounting policies and estimates, could be impacted by any such future legislation. This pending legislation has not been finalized or enacted into law. Accordingly, we cannot yet estimate the potential impact, if any, this possible legislation may have on our financial position, results of operations, or cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVES We have not entered into any transactions using derivative financial instruments or derivative commodity instruments as of September 30, 2005. FOREIGN CURRENCY EXCHANGE Our international operations expose us to foreign currency exchange rate changes that can impact translations of foreign-denominated assets and liabilities into U.S. dollars and future earnings and cash flows from transactions denominated in different currencies. Revenues before reimbursements from our international operations were 38.5% and 35.1% of total consolidated revenues before reimbursements for the nine months ending September 30, 2005 and 2004, respectively. Except for borrowing in foreign currencies, we have not engaged in any hedging activities to compensate for the effect of exchange rate fluctuations on the net assets or operating results of our foreign subsidiaries. We measure currency earnings risk related to our international operations based on changes in foreign currency rates using a sensitivity analysis. The sensitivity analysis measures the potential loss in earnings based on a hypothetical 10% change in currency exchange rates. Exchange rates and currency positions as of September 30, 2005 were used to perform the sensitivity analysis. 35 Such analysis indicates that a hypothetical 10% change in foreign currency exchange rates would have increased or decreased pretax income by approximately $698,000, or $0.01 per share, during the first nine months of 2005, had the U.S. dollar exchange rate increased or decreased relative to the currencies with which we had exposure. INTEREST RATES We are exposed to interest rate fluctuations on certain of our variable rate borrowings. Depending on general economic conditions, we use variable rate debt for short-term borrowings and fixed rate debt for long-term borrowings. At September 30, 2005, we had $36.0 million in short-term borrowings outstanding, including bank overdraft facilities, with an average variable interest rate of 4.7%. If the average interest rate increased or decreased by 1%, the impact to pretax income for the nine months ended September 30, 2005 would have been approximately $283,000, or less than $0.01 per share. Changes in the projected benefit obligations of our defined benefit pension plans are largely dependent on changes in prevailing interest rates as of the measurement dates we use to value these obligations under SFAS 87. If our assumption for the discount rate changed by 0.25%, representing either an increase or decrease in the rate, the projected benefit obligation of our U.S. and U.K. defined benefit plans would have changed by approximately $19.0 million. The impact of this change to pretax income for the nine months ended September 30, 2005 would have been approximately $1,346,000, or $0.02 per share. CREDIT RISK We process payments for claims settlements, primarily on behalf of our self-insured clients. The liability for the settlement cost of claims processed, which is generally pre-funded, remains with the client. Accordingly, we do not incur significant credit risk in the performance of these services. ITEM 4. CONTROLS AND PROCEDURES 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 applied 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 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 36 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 our disclosure controls and procedures are effective at providing reasonable assurance that all material information relating to the Company (including consolidated subsidiaries) required to be included in our Exchange Act reports is reported in a timely manner. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING We have identified no 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. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Subsequent to our filing of Form 10-K for the year ended December 31, 2004, developments identified below have occurred in the following legal proceedings. For other information on legal matters, see Note 8, "Commitments and Contingencies" to the condensed consolidated financial statements included in this Form 10-Q. We previously disclosed that we had received a subpoena from the State of New York, Office of the Attorney General, requesting various documents relating to our operations. We received notice that the subpoena does not apply to the operations of our international division or our GCG class action administration unit. We previously disclosed that we had received notice and anticipated that we would be the subject of an audit by the Audit Unit, Division of Workers' Compensation, Department of Industrial Relations, State of California ("Audit Unit"). We are now being audited by the Audit Unit. The Audit Unit is auditing workers' compensation files which we handled on behalf of certain clients in our El Segundo, California office in 2001 and 2002. We previously disclosed that we had received and complied with two federal grand jury subpoenas which we understood were both issued as part of a conflicts of interest investigation involving a public entity client of one of our New York offices for Risk Management Services and Healthcare Management. These subpoenas did not relate to our billing practices. The Department of Justice has advised our attorneys that this federal investigation is closed insofar as it relates to us or any other individuals. 37 ITEM 6. EXHIBITS See Index to Exhibits beginning on page 40. 38 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. CRAWFORD & COMPANY (Registrant) Date: November 9, 2005 /s/ Thomas W. Crawford ---------------------------------------- Thomas W. Crawford President and Chief Executive Officer (Principal Executive Officer) and Director Date: November 9, 2005 /s/ John F. Giblin ---------------------------------------- John F. Giblin Executive Vice President - Finance (Principal Financial Officer) Date: November 9, 2005 /s/ W. Bruce Swain, Jr. ---------------------------------------- W. Bruce Swain, Jr. Senior Vice President and Controller (Principal Accounting Officer) 39 INDEX TO EXHIBITS
Exhibit No. Description Page - ------- ----------- ---- 3.1 Restated Articles of Incorporation of the Registrant, as amended April 23, 1991 (incorporated by reference to Exhibit 4.1 to the Registrant's Form S-8 filed with the Securities and Exchange Commission on June 6, 2005) - 3.2 Restated By-laws of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 2004) - 10.1 First Amended and Restated Credit Agreement, dated as of September 30, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed with the Securities and Exchange Commission on October 5, 2005) - 10.2 Revolving Credit Agreement, dated as of September 30, 2003 (incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for year ended December 31, 2004) - 10.3 Waiver and Amendment to Note Purchase Agreement, dated as of September 30, 2005 (incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K filed with the Securities and Exchange Commission on October 5, 2005) - 10.4 Note Purchase Agreement, dated as of September 30, 2003 (incorporated by reference to Exhibit 10.12 to the Registrant's Form 10-K for the year ended December 31, 2004) - 15.1 Letter from Ernst & Young LLP 42 31.1 Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 43 31.2 Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 44 32.1 Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 45
40 INDEX TO EXHIBITS, continued
Exhibit No. Description Page - ------- ----------- ---- 32.2 Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 46
41 EX-15.1 2 g98147exv15w1.txt EX-15.1 LETTER FROM ERNST & YOUNG LLP Exhibit 15.1 To the Shareholders and Board of Directors of Crawford & Company: We are aware of the incorporation by reference in the previously filed Registration Statement File Nos. 33-47536, 33-36116, 333-02051, 333-24425, 333-24427, 333-43740, 333-87465, 333-87467, and 333-125557 of Crawford & Company's Form 10-Q for the quarter ended September 30, 2005, which includes our report dated November 8, 2005 related to the unaudited condensed consolidated interim financial statements. /s/ Ernst & Young LLP Atlanta, Georgia November 8, 2005 42 EX-31.1 3 g98147exv31w1.txt EX-31.1 SECTION 302 CERTIFICATION OF THE CEO Exhibit 31.1 SECTION 302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Thomas W. Crawford, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Crawford & Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: November 9, 2005 /s/ Thomas W. Crawford ---------------------------------------- Thomas W. Crawford President and Chief Executive Officer (Principal Executive Officer) 43 EX-31.2 4 g98147exv31w2.txt EX-31.2 SECTION 302 CERTIFICATION OF THE CFO Exhibit 31.2 SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, John F. Giblin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Crawford & Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: November 9, 2005 /s/ John F. Giblin ---------------------------------------- John F. Giblin Executive Vice President - Finance (Principal Financial Officer) 44 EX-32.1 5 g98147exv32w1.txt EX-32.1 SECTION 906 CERTIFICATION OF THE CEO Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Crawford & Company (the "Company") on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas W. Crawford, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 9, 2005 /s/ Thomas W. Crawford ---------------------------------------- Thomas W. Crawford President and Chief Executive Officer 45 EX-32.2 6 g98147exv32w2.txt EX-32.2 SECTION 906 CERTIFICATION OF THE CFO Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Crawford & Company (the "Company") on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John F. Giblin, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 9, 2005 /s/ John F. Giblin ---------------------------------------- John F. Giblin Executive Vice President - Finance Chief Financial Officer 46 -----END PRIVACY-ENHANCED MESSAGE-----