1 ================================================================================ 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 June 30, 2000 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 [ ] The number of shares outstanding of each of the issuer's classes of common stock, as of July 31, 2000 was as follows: CLASS A COMMON STOCK, $1.00 PAR VALUE: 23,771,768 CLASS B COMMON STOCK, $1.00 PAR VALUE: 24,697,172 ================================================================================ 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CRAWFORD & COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA) SIX MONTHS ENDED -------------------------- JUNE 30, JUNE 30, 2000 1999 -------------------------- REVENUES $361,868 $342,448 COSTS AND EXPENSES: Cost of services provided, less reimbursed expenses of $16,015 in 2000 and $17,993 in 1999 263,521 249,984 Selling, general, and administrative expenses 60,593 56,501 Corporate interest, net 2,063 1,507 Amortization of goodwill 1,561 1,189 - ------------------------------------------------------------------------------------------ TOTAL COSTS AND EXPENSES 327,738 309,181 - ------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 34,130 33,267 PROVISION FOR INCOME TAXES 13,106 12,765 - ------------------------------------------------------------------------------------------ NET INCOME $ 21,024 $ 20,502 ========================================================================================== NET INCOME PER SHARE: BASIC $ 0.43 $ 0.41 DILUTED $ 0.43 $ 0.41 ========================================================================================== WEIGHTED-AVERAGE SHARES OUTSTANDING: BASIC 49,235 50,205 DILUTED 49,353 50,297 ========================================================================================== CASH DIVIDENDS PER SHARE: CLASS A COMMON STOCK $ 0.275 $ 0.26 CLASS B COMMON STOCK $ 0.275 $ 0.26 ========================================================================================== (See accompanying notes to condensed consolidated financial statements) 2 3 CRAWFORD & COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER ENDED -------------------------- JUNE 30, JUNE 30, 2000 1999 -------------------------- REVENUES $184,436 $169,827 COSTS AND EXPENSES: Cost of services provided, less reimbursed expenses of $7,926 in 2000 and $10,125 in 1999 135,528 122,470 Selling, general, and administrative expenses 29,877 28,962 Corporate interest, net 1,196 796 Amortization of goodwill 800 628 - ------------------------------------------------------------------------------------------ TOTAL COSTS AND EXPENSES 167,401 152,856 - ------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 17,035 16,971 PROVISION FOR INCOME TAXES 6,542 6,507 - ------------------------------------------------------------------------------------------ NET INCOME $ 10,493 $ 10,464 ========================================================================================== NET INCOME PER SHARE: BASIC $ 0.22 $ 0.21 DILUTED $ 0.22 $ 0.21 ========================================================================================== WEIGHTED-AVERAGE SHARES OUTSTANDING: BASIC 48,436 49,814 DILUTED 48,543 49,876 ========================================================================================== CASH DIVIDENDS PER SHARE: CLASS A COMMON STOCK $ 0.1375 $ 0.13 CLASS B COMMON STOCK $ 0.1375 $ 0.13 ========================================================================================== (See accompanying notes to condensed consolidated financial statements) 3 4 CRAWFORD & COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) JUNE 30, DECEMBER 31, 2000 1999 - --------------------------------------------------------------------------------------------- ASSETS - --------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 16,801 $ 17,716 Accounts receivable, less allowance for doubtful accounts of $18,930 in 2000 and $20,182 in 1999 152,983 141,841 Unbilled revenues, at estimated billable amounts 91,888 91,039 Prepaid expenses and other current assets 16,336 17,240 - -------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 278,008 267,836 - -------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT: Property and equipment, at cost 158,297 166,552 Less accumulated depreciation (112,567) (117,661) - -------------------------------------------------------------------------------------------- NET PROPERTY AND EQUIPMENT 45,730 48,891 - -------------------------------------------------------------------------------------------- OTHER ASSETS: Intangible assets arising from acquisitions, net 83,042 80,566 Prepaid pension cost 48,756 49,995 Capitalized software costs, net 23,312 18,449 Other 12,284 8,291 - -------------------------------------------------------------------------------------------- TOTAL OTHER ASSETS 167,394 157,301 - -------------------------------------------------------------------------------------------- TOTAL ASSETS $ 491,132 $ 474,028 ============================================================================================ (See accompanying notes to condensed consolidated financial statements) 4 5 CRAWFORD & COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED (IN THOUSANDS) (UNAUDITED) JUNE 30, DECEMBER 31, 2000 1999 - --------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' INVESTMENT - --------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Short-term borrowings $ 48,362 $ 38,914 Accounts payable 28,711 29,575 Accrued compensation and related costs 21,770 23,825 Accrued restructuring costs 929 973 Self-insured risks 13,480 11,360 Other accrued liabilities 37,255 30,044 Deferred revenues 25,835 22,836 Current installments of long-term debt 236 463 - -------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 176,578 157,990 - -------------------------------------------------------------------------------------------- NONCURRENT LIABILITIES: Long-term debt, less current installments 36,923 16,053 Deferred income taxes 6,737 6,571 Deferred revenues 13,442 13,644 Postretirement medical benefit obligation 7,785 7,756 Self-insured risks 9,401 10,241 Other 10,312 11,494 - -------------------------------------------------------------------------------------------- TOTAL NONCURRENT LIABILITIES 84,600 65,759 - -------------------------------------------------------------------------------------------- SHAREHOLDERS' INVESTMENT: Class A Common Stock, $1.00 par value; 50,000 shares authorized; 23,692 and 25,892 shares issued in 2000 and 1999, respectively 23,692 25,892 Class B Common Stock, $1.00 par value; 50,000 shares authorized; 24,707 and 24,826 shares issued in 2000 and 1999, respectively 24,707 24,826 Additional paid-in-capital 0 22,309 Retained earnings 192,242 185,975 Cumulative translation adjustment (10,687) (8,723) - -------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' INVESTMENT 229,954 250,279 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 491,132 $ 474,028 ============================================================================================ (See accompanying notes to condensed consolidated financial statements) 5 6 CRAWFORD & COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (IN THOUSANDS) SIX MONTHS ENDED -------------------------- JUNE 30, JUNE 30, 2000 1999 -------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 21,024 $ 20,502 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 9,979 8,267 Deferred income taxes 208 0 Loss on sales of property and equipment 381 133 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable, net (12,966) (1,010) Unbilled revenues (3,093) (1,765) Accrued income taxes 8,298 6,455 Accounts payable and accrued liabilities (1,525) (1,383) Accrued restructuring costs (1,211) (5,772) Deferred revenues 3,059 3,346 Prepaid expenses and other assets (2,217) 4,290 - ------------------------------------------------------------------------------------------ Net cash provided by operating activities 21,937 33,063 - ------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property and equipment, net (4,726) (8,090) Capitalization of software costs (5,748) (3,202) Acquisition of businesses, net of cash acquired (5,244) (10,048) - ------------------------------------------------------------------------------------------ Net cash used in investing activities (15,718) (21,340) - ------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (13,608) (13,049) Repurchase of common stock (26,173) (12,845) Proceeds from exercise of stock options 435 112 Increase in short-term borrowings 12,063 15,156 Proceeds from long-term borrowings 21,000 0 Payments on long-term debt (249) (727) - ------------------------------------------------------------------------------------------ Net cash used in financing activities (6,532) (11,353) - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash and cash equivalents (602) (264) - ------------------------------------------------------------------------------------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (915) 106 Cash and cash equivalents at beginning of period 17,716 8,423 - ------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,801 $ 8,529 ========================================================================================== (See accompanying notes to condensed consolidated financial statements) 6 7 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The unaudited condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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. 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. These condensed financial statements should be read in conjunction with the financial statements and related notes contained in the Company's annual report on Form 10-K for the fiscal year ended December 31, 1999. 2. The results of operations for the quarter and six months ended June 30, 2000 are not necessarily indicative of the results to be expected during the balance of the year ending December 31, 2000. 3. On March 3, 2000, the Company completed the acquisition of Greentree Investigations, Inc. ("Greentree") for a cash payment of $900,000. The Company acquired assets with a fair value of $1,611,601, including goodwill related to the purchase of $1,108,526, and assumed liabilities of $711,601. The purchase price may be increased based on future earnings of Greentree through April 3, 2005. This transaction was accounted for by the purchase method of accounting. 4. On March 9, 2000, the Company repurchased 1,900,000 shares of the Company's Class A Common Stock from a subsidiary of the Swiss Reinsurance Group ("Swiss Re") at a cost of $11.00 per share. The shares were originally issued in June of 1998 in connection with the acquisition of Swiss Re's 40% minority interest in Crawford's international subsidiaries. This share repurchase was financed by a $21 million, five-year term loan with a fixed interest rate of 7.7%. 5. During the quarter and six months ended June 30, 2000, the Company utilized $618,000 and $1.2 million, respectively, of its restructuring reserves for payments due to employee separations and lease terminations. As of June 30, 2000, remaining restructuring reserves were $3.9 million, $3.0 million of which is included in other noncurrent liabilities. The noncurrent portion of accrued restructuring costs consists primarily of long-term lease obligations related to various United Kingdom offices, which the Company has vacated and is currently attempting to sublease, and extended payments being made under employee separation agreements. Management periodically reviews the restructuring reserves and believes the remaining reserves are adequate to complete its plan. 6. 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 using the "treasury stock" method. 7 8 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Below is the calculation of basic and diluted net income per share for the quarter and six months ended June 30, 2000 and 1999: Quarter ended Six months ended ---------------------- ---------------------- June 30, June 30, June 30, June 30, (In thousands, except per share data) 2000 1999 2000 1999 - --------------------------------------------- -------- -------- -------- -------- Net income available to common shareholders $ 10,493 $ 10,464 $ 21,024 $ 20,502 ======== ======== ======== ======== Weighted-average shares outstanding - Basic 48,436 49,814 49,235 50,205 Dilutive effect of stock options 107 62 118 92 -------- -------- -------- -------- Weighted-average shares outstanding - Diluted 48,543 49,876 49,353 50,297 ======== ======== ======== ======== Basic net income per share $ 0.22 $ 0.21 $ 0.43 $ 0.41 ======== ======== ======== ======== Diluted net income per share $ 0.22 $ 0.21 $ 0.43 $ 0.41 ======== ======== ======== ======== Additional options to purchase 3,984,160 shares of Class A Common Stock at $11.02 to $19.50 per share were outstanding at June 30, 2000 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. 7. Comprehensive income for the Company consists of net income and foreign currency translation adjustments. Below is the calculation of comprehensive income for the quarter and six months ended June 30, 2000 and 1999. Quarter ended Six months ended ---------------------- ---------------------- June 30, June 30, June 30, June 30, 2000 1999 2000 1999 -------- -------- -------- -------- Net income $ 10,493 $ 10,464 $ 21,024 $ 20,502 Less: Foreign currency translation adjustment 2,185 775 1,964 1,584 -------- -------- -------- -------- Comprehensive income $ 8,308 $ 9,689 $ 19,060 $ 18,918 ======== ======== ======== ======== 8. The Company has two reportable segments, one which provides claims services through branch offices located in the United States ("Domestic Operations") and the other which provides similar services through branch or representative offices located in 64 other countries ("International Operations"). Intersegment sales are recorded at cost and are not material. The Company measures segment profit based on operating income, defined as income before taxes, net corporate interest, and amortization of goodwill. 8 9 CRAWFORD & COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Financial information for the quarter and six months ended June 30, 2000 and 1999 covering the Company's reportable segments is presented below: Quarter ended Six months ended ---------------------- ---------------------- June 30, June 30, June 30, June 30, (In thousands) 2000 1999 2000 1999 -------- -------- -------- -------- REVENUES: Domestic $134,571 $126,148 $262,963 $254,443 International 49,865 43,679 98,905 88,005 -------- -------- -------- -------- TOTAL REVENUES $184,436 $169,827 $361,868 $342,448 OPERATING INCOME: Domestic $ 13,480 $ 15,509 $ 26,909 $ 29,008 International 5,551 2,886 10,845 6,955 -------- -------- -------- -------- TOTAL OPERATING INCOME $ 19,031 $ 18,395 $ 37,754 $ 35,963 9. In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivatives Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments. SFAS 133, which will be effective for the Company in 2001, requires that entities recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Except for borrowing in foreign currencies, the Company does not presently engage in any hedging activities to compensate for the effect of exchange rate fluctuations on the net assets or operating results of its foreign subsidiaries. As a result, the new standard is not expected to have a significant effect on the Company's consolidated results of operations, financial position, or cash flows. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion analyzing the Company's results reported by its two reportable segments: domestic operations and international operations. Expense amounts discussed are excluding net corporate interest and amortization of goodwill. RESULTS OF OPERATIONS Operating results for the Company's domestic and international operations for the quarter and six months ended June 30, 2000 and 1999 are as follows: Quarter ended Six months ended ----------------------- ----------------------- June 30, June 30, June 30, June 30, 2000 1999 2000 1999 -------- -------- -------- -------- (in thousands) REVENUES: Domestic $134,571 $126,148 $262,963 $254,443 International 49,865 43,679 98,905 88,005 -------- -------- -------- -------- TOTAL $184,436 $169,827 $361,868 $342,448 COMPENSATION & FRINGE BENEFITS: Domestic $ 80,459 $ 75,896 $158,689 $156,720 % of Revenues 59.8% 60.2% 60.4% 61.6% International 30,687 28,006 61,365 55,111 % of Revenues 61.6% 64.1% 62.0% 62.6% -------- -------- -------- -------- TOTAL $111,146 $103,902 $220,054 $211,831 % of Revenues 60.3% 61.2% 60.8% 61.9% EXPENSES OTHER THAN COMPENSATION & FRINGE BENEFITS: Domestic $ 40,632 $ 34,743 $ 77,365 $ 68,715 % of Revenues 30.2% 27.5% 29.4% 27.0% International 13,627 12,787 26,695 25,939 % of Revenues 27.3% 29.3% 27.0% 29.5% -------- -------- -------- -------- TOTAL $ 54,259 $ 47,530 $104,060 $ 94,654 % of Revenues 29.4% 28.0% 28.8% 27.6% OPERATING INCOME (1): Domestic $ 13,480 $ 15,509 $ 26,909 $ 29,008 % of Revenues 10.0% 12.3% 10.2% 11.4% International 5,551 2,886 10,845 6,955 % of Revenues 11.1% 6.6% 11.0% 7.9% -------- -------- -------- -------- TOTAL $ 19,031 $ 18,395 $ 37,754 $ 35,963 % of Revenues 10.3% 10.8% 10.4% 10.5% -------- -------- -------- -------- (1) Income before taxes, net corporate interest, and amortization of goodwill. 10 11 DOMESTIC OPERATIONS REVENUES Domestic revenues from insurance companies, self-insured entities, and class action services totaled $134.6 million for the second quarter of 2000, an increase of 6.7% from the $126.1 million reported for the same period in 1999. Revenues from insurance companies increased 6.1% to $71.1 million for the second quarter of 2000, due primarily to an increase in managed care revenues resulting from the Company's recent strategic partnership with the Commercial Insurance Division of CNA. A surge in claim referrals related to the severe weather experienced in the Midwestern and Southwestern United States also contributed to this increase. Revenues from self-insured entities increased 3.4% to $50.0 million in the second quarter of 2000, continuing the trend that began in the fourth quarter of 1999. The insurance market continues to harden, which generally leads to higher insurance premiums, making self-insurance more attractive to Crawford's corporate clients. Revenues from class action services increased 24.6% to $13.5 million in the quarter ended June 30, 2000 due to the award of several new class action administration and inspection contracts to the Company. Domestic revenues for the first six months of 2000 totaled $263.0 million, a 3.3% increase from 1999 revenues of $254.4 million. Revenues from insurance companies decreased 1.8% to $135.3 million for the six months ended June 30, 2000 due to a decline in claim referrals. Revenues from self-insured entities increased 3.8% to $100.6 million in the six months ended June 30, 2000. Revenues from class action services increased 36.2% to $27.1 million for the six months ended June 30, 2000. Claims Volume Analysis Excluding the impact of class action services and acquired revenues, domestic unit volume, measured principally by cases received, decreased 1.8% in the second quarter of 2000 compared to the same period in 1999. This decrease was offset by a 5.4% revenue increase from changes in the mix of services provided and in the rates charged for those services, resulting in a net 3.6% increase in domestic revenues in the second quarter, excluding revenues from class action services and acquired revenues. New class action services contracts increased domestic revenues by 2.0% in the second quarter compared to the prior year period. The Company's acquisitions of PRISM Network Inc. in August 1999 and Greentree in March 2000 increased domestic revenues over the prior year quarter by 1.1% for the quarter ended June 30, 2000. Domestic unit volume, measured principally by cases received, and excluding the impact of class action services and acquired revenues, decreased 8.8% in the first six months of 2000. This decrease was partially offset by an 8.1% revenue increase from changes in the mix of services provided and in the rates charged for those services, resulting in a net 0.7% decline in domestic revenues in the first six months of 2000, excluding revenues from class action services and acquired revenues. New class action services contracts increased domestic revenues by 2.8% in the six months ended June 30, 2000, compared to the prior year period. The Company's acquisitions of PRISM Network Inc. in August 1999 and Greentree in March 2000 increased domestic revenues over the prior year period by 1.2% for the six months ended June 30, 2000. 11 12 COMPENSATION AND FRINGE BENEFITS The Company's most significant expense is the compensation of its employees, including related payroll taxes and fringe benefits. Domestic compensation expense as a percent of revenues decreased to 59.8% in the second quarter of 2000 as compared to 60.2% in the 1999 quarter and to 60.4% for the six months ended June 30, 2000 from 61.6% in the 1999 period. These decreases are due primarily to the Company's outsourcing of certain information technology functions. Domestic salaries and wages increased to $69.5 million and $135.5 million for the quarter and six months ended June 30, 2000, respectively, from $64.8 million and $132.9 million in the comparable 1999 periods. These increases resulted primarily from merit salary increases and higher compensation expense in the Company's class action and medical bill auditing units. Payroll taxes and fringe benefits for domestic operations totaled $10.9 million and $23.2 million in the second quarter and first six months of 2000, respectively, decreasing 1.6% and 2.4% from 1999 costs of $11.1 million and $23.8 million for the comparable periods. These decreases are due to lower pension expense in 2000 due to higher interest rates and favorable investment returns. EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS Domestic expenses other than compensation and related payroll taxes and fringe benefits approximated 30.2% and 29.4% of revenues for the quarter and six months ended June 30, 2000, respectively, up from 27.5% and 27.0% of revenues for the same periods in 1999. These increases are due primarily to higher professional fees (related to outsourced functions in certain information technology and medical bill auditing units) and higher costs related to the Company's self-insurance program. INTERNATIONAL OPERATIONS REVENUES Revenues from the Company's international operations increased from $43.7 million for the second quarter of 1999 to $49.9 million for the second quarter of 2000. Revenues from the first six months of 2000 totaled $98.9 million, a 12.4% increase from the $88.0 million reported in the first six months of 1999. These increases are largely due to increased referrals from new claims handling agreements entered into during the 1999 fourth quarter. Revenues are net of 4.8% and 4.0% declines during the quarter and six months ended June 30, 2000, respectively, due to the negative effect of a strong U.S. dollar. COMPENSATION AND FRINGE BENEFITS As a percent of revenues, compensation expense, including related payroll taxes and fringe benefits, decreased to 61.6% for the quarter ended June 30, 2000 from 64.1% for the same period in 1999. For the six-month period, compensation and fringe benefits decreased slightly as a percentage of revenue from 62.6% in 1999 to 62.0% in 2000. These decreases are due to the Company's increased use of existing service delivery capacity resulting from the growth in revenues. 12 13 Salaries and wages of international personnel decreased in the quarter ended June 30, 2000 to 53.3% of revenue from 55.3% for the comparable period in 1999. For the six-month period, salaries and wages decreased slightly as a percentage of revenues from 53.8% in 1999 to 53.5% in 2000. Payroll taxes and fringe benefits decreased as a percent of revenue to 8.3% and 8.5% for the quarter and six months ended June 30, 2000, respectively, compared to 8.8% for the same periods in 1999. EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS Expenses other than compensation and related payroll taxes and fringe benefits were 27.3% and 27.0% of international revenues for the quarter and six months ended June 30, 2000, respectively, down from 29.3% and 29.5% for the same periods in 1999. These decreases are due to the Company's increased use of existing service delivery capacity resulting from the growth in revenues. FINANCIAL CONDITION At June 30, 2000 current assets exceeded current liabilities by approximately $101.4 million, a decrease of $8.4 million from the working capital balance at December 31, 1999. Cash and cash equivalents at June 30, 2000 totaled $16.8 million, a decrease of $0.9 million from the balance at the end of 1999. Cash was generated primarily from operating activities and short-term and long-term borrowings, while the principal uses of cash were for repurchases of common stock, dividends paid to shareholders, investments in computer software, and acquisitions of businesses. During the first six months of 2000, the Company repurchased 2,226,000 shares of its Class A Common Stock and 133,000 shares of its Class B Common Stock at an average per share cost of $11.02 and $12.28, respectively. As of June 30, 2000, 745,900 shares remain to be repurchased under share repurchase programs authorized by the Company's Board of Directors. The Company maintains credit lines with banks in order to meet seasonal working capital requirements and other financing needs that may arise. Short-term borrowings outstanding as of June 30, 2000 totaled $48.4 million, as compared to $38.9 million at the end of 1999. In March 2000, the Company obtained a five-year, $21 million term loan with a fixed interest rate of 7.7% to finance the repurchase of 1.9 million shares of its Class A Common Stock. This new loan increased the Company's long-term debt to $36.9 million as of June 30, 2000, compared to $16.1 million at December 31, 1999. The Company believes that its current financial resources, together with funds generated from operations and existing and potential borrowing capabilities, will be sufficient to maintain its current operations. The Company does not engage in any hedging activities to compensate for the effect of exchange rate fluctuations on the operating results of its foreign subsidiaries. Foreign currency denominated debt is maintained primarily to hedge the currency exposure of the Company's net investment in foreign operations. Shareholders' investment at June 30, 2000 was $230.0 million, compared with $250.3 million at December 31, 1999. The decrease is primarily a result of the Company's share repurchase activity in the first six months of 2000. 13 14 FACTORS THAT MAY AFFECT FUTURE RESULTS FOREIGN CURRENCY EXCHANGE The Company's international operations expose the Company to foreign currency exchange rate changes that could impact translations of foreign-denominated assets and liabilities into U.S. dollars, and future earnings and cash flows from transactions denominated in different currencies. The Company's revenues from its international operations were 27.3% of total revenues for the six months ended June 30, 2000. Except for borrowing in foreign currencies, the Company does not presently engage in any hedging activities to compensate for the effect of exchange rate fluctuations on the net assets or operating results of its foreign subsidiaries. NEW CLAIMS MANAGEMENT SYSTEM During 1998, the Company began the development of a new claims management system. As of June 30, 2000, approximately $18.9 million of internal and external costs have been capitalized in connection with this development project. The server-based system is designed to streamline and automate the claims intake, assignment, management, and reporting functions. The first phase of deployment for the system is scheduled for the second half of 2000. The Company believes the system will increase its competitive advantages. However, if the system fails to function as planned, it could adversely affect the Company's competitive position and results of operations. 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 and assumptions. The Company's Form 10-K for the year ended December 31, 1999, discusses such risks and assumptions and other key factors that could cause actual results to differ materially from those expressed in such forward-looking statements. 14 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK DERIVATIVES The Company has not entered into any transactions using derivative financial instruments or derivative commodity instruments. FOREIGN CURRENCY The operating results of the Company's foreign subsidiaries are affected by fluctuations in foreign currency exchange rates. Fluctuations in foreign currency exchange rates affect the shareholders' investment of the Company. Amounts invested in the Company's foreign subsidiaries are considered to be permanently invested and are translated into U.S. dollars at the exchange rates in effect at the end of the respective periods. The resulting translation adjustments are recorded in shareholders' investment as cumulative translation adjustments. The cumulative translation adjustment reduced shareholders' investment $2.0 million during the first six months of 2000. INTEREST RATES The Company is exposed to interest rate fluctuations on its borrowings. Depending on general economic conditions, the Company has typically used variable rate debt for short-term borrowings and fixed rate debt for long-term borrowings. At June 30, 2000, the Company had $48.4 million in short-term loans outstanding with an average variable interest rate of 5.60%. Long-term debt consisted of the following (in thousands): Description Interest Rate Amount Maturity - -------------------------------------------------------------------------------------------- Term Loans 6.8% $15,000 September 2004, interest payable quarterly 7.7% 21,000 March 2005, interest payable quarterly Mortgages secured by buildings 7.3% - 7.8% 832 Various dates through 2003 Capital lease obligations 327 ------- Total Debt 37,159 Less Current Installments (236) ------- Total Long-term debt $36,923 ======= With the exception of the capital lease obligations, the above loans carry a fixed rate of interest. 15 16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Crawford & Company: We have reviewed the accompanying condensed consolidated balance sheet of CRAWFORD & COMPANY (a Georgia corporation) AND SUBSIDIARIES as of June 30, 2000, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2000 and 1999 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, 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 financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Crawford & Company and subsidiaries as of December 31, 1999 and the related statements of income, retained earnings and cash flows for the year then ended (not presented separately herein), and, in our report, dated January 28, 2000, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Arthur Andersen LLP Atlanta, Georgia August 11, 2000 16 17 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On April 25, 2000, the Registrant held its Annual Meeting of Shareholders. At the Annual Meeting, the Class B Shareholders, the only class entitled to vote at the meeting, voted on (i) the election of ten (10) Directors for a one-year term; (ii) amendment of the 1997 Key Employee Stock Option Plan; and (iii) ratification of the selection of Arthur Andersen LLP as the Registrant's auditor for the year ending December 31, 2000. The results of that voting are as follows: ELECTION OF DIRECTORS For Withheld --- -------- Forrest L. Minix 23,963,197 203,811 J. Hicks Lanier 23,967,531 199,477 Charles Flather 23,966,731 200,277 Linda K. Crawford 23,965,796 201,212 Jesse C. Crawford 23,968,726 198,282 Larry L. Prince 23,966,731 200,277 John A. Williams 23,966,581 200,427 E. Jenner Wood, III 23,920,366 246,642 Archie Meyers, Jr. 23,966,146 200,862 Grover L. Davis 23,967,531 199,477 AMEND 1997 KEY EMPLOYEE STOCK OPTION PLAN For Against Abstain Broker No Vote ---------- --------- ------- -------------- 20,585,196 1,640,213 94,351 1,847,248 RATIFICATION OF APPOINTMENT OF AUDITORS For Against Abstain ---------- ------- ------- 24,146,189 6,590 14,229 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 15.1 Letter from Arthur Andersen LLP 27.1 Financial Data Schedule (For SEC use only) (b) Reports on Form 8-K: The Company did not file any reports on Form 8-K during the period covered by this report. 17 18 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: August 11, 2000 /s/ Archie Meyers, Jr. ------------------------------------ Archie Meyers, Jr. Chairman and Chief Executive Officer (Principal Executive Officer) Date: August 11, 2000 /s/ John F. Giblin ------------------------------------ John F. Giblin Executive Vice President - Finance (Principal Financial Officer) Date: August 11, 2000 /s/ W. Bruce Swain ------------------------------------ W. Bruce Swain Senior Vice President and Controller (Principal Accounting Officer) 18 19 INDEX TO EXHIBITS Exhibit No. Description Sequential Page No. 15.1 Letter from Arthur Andersen LLP 20 27.1 Financial Data Schedule (For SEC use only) 19