1
EXHIBIT 13.1
Annual Report Financial
2000 CRAWFORD & COMPANY
FINANCIAL REVIEW
18 Management's Discussion and Analysis
23 Consolidated Statements of Income
24 Consolidated Balance Sheets
26 Consolidated Statements of Shareholders' Investment
27 Consolidated Statements of Cash Flows
28 Notes to Consolidated Financial Statements
38 Report of Management
38 Report of Independent Public Accountants
39 Selected Financial Data
40 Quarterly Financial Data (Unaudited)
IBC Shareholder Information
PAGE 17
2
2000 ANNUAL REPORT CRAWFORD & COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated net income was $25,348,000 for 2000 as compared to $39,264,000 in
1999 and $27,465,000 in 1998.
Consolidated net income decreased in 2000 primarily due to the write-down of
internal use software (see Note 9 of the consolidated financial statements).
The following is a discussion and analysis of the consolidated
financial condition and results of operations of Crawford & Company by its two
reportable segments: domestic operations and international operations. Expense
amounts discussed are excluding the write-down of capitalized internal use
software, year 2000 expenses, restructuring charges, amortization of good will,
net corporate interest, minority interest, and income taxes. This discussion
should be read in conjunction with the Company's consolidated financial
statements and the accompanying footnotes.
RESULTS OF OPERATIONS
Operating results for the Company's domestic and international operations were
as follows:
% Change From Prior Year
(Years Ended December 31) 2000 1999 1998 2000 1999
------------------------------------------------------------------------------------------------------------------------
(in thousands)
Revenues:
Domestic $ 519,150 $ 523,342 $ 499,260 (0.8)% 4.8%
International 193,024 178,584 168,011 8.1% 6.3%
-------------------------------------------------------------------------------------------
Total 712,174 701,926 667,271 1.5% 5.2%
Compensation & Benefits:
Domestic 316,398 318,450 313,918 (0.6)% 1.4%
% of Revenues 60.9% 60.8% 62.9%
International 123,331 112,892 104,239 9.2% 8.3%
% of Revenues 63.9% 63.2% 62.1%
-------------------------------------------------------------------------------------------
Total 439,729 431,342 418,157 1.9% 3.2%
% of Revenues 61.8% 61.5% 62.7%
Expenses Other than Compensation & Benefits:
Domestic 154,207 140,324 122,602 9.9% 14.5%
% of Revenues 29.7% 26.8% 24.6%
International 52,669 55,783 60,370 (5.6)% (7.6)%
% of Revenues 27.3% 31.3% 35.9%
-------------------------------------------------------------------------------------------
Total 206,876 196,107 182,972 5.5% 7.2%
% of Revenues 29.0% 27.9% 27.4%
Operating Income:(1)
Domestic 48,545 64,568 62,740 (24.8)% 2.9%
% of Revenues 9.4% 12.4% 12.5%
International 17,024 9,909 3,402 71.8% 191.3%
% of Revenues 8.8% 5.5% 2.0%
-------------------------------------------------------------------------------------------
Total 65,569 74,477 66,142 (12.0)% 12.6%
% of Revenues 9.2% 10.6% 9.9%
(1) Income before special charges, year 2000 expense, amortization of
goodwill, net corporate interest, minority interest, and taxes.
3
DOMESTIC OPERATIONS
Years Ended December 31, 2000 and 1999
Revenues
Domestic revenues by market type for 2000 and 1999 are as follows:
(in thousands) 2000 1999 Variance
- --------------------------------------------------------------------
Insurance companies $ 273,177 $ 273,994 (0.3)%
Self-insured entities 195,936 196,363 (0.2)%
Class action services 50,037 52,985 (5.6)%
- ------------------------------------------------------
Total Domestic Revenues $ 519,150 $ 523,342 (0.8)%
======================================================
Revenues from insurance companies decreased 0.3% to $273.2 million in
2000 compared to 1999, due to a lack of severe weather during the fourth quarter
of the year. Revenues from self-insured entities decreased 0.2% to $195.9
million in 2000, due primarily to a decline in claim referrals. Revenues from
class action services decreased 5.6% to $50.0 million in 2000. The Company has a
strong backlog of class action administration contract awards that will
contribute to its revenues in 2001.
Excluding the impact of class action services and acquired revenues,
domestic unit volume, measured principally by cases received, decreased 6.4%
from 1999 to 2000. This decrease was partially offset by a 4.7% revenue increase
from changes in the mix of services provided and in the rates charged for those
services, resulting in a net 1.7% decline in domestic revenues from 1999 to
2000, excluding revenues from class action services and acquired revenues. The
Company's domestic insurance company referrals for high frequency, low severity
claims have declined during the year as the Company's insurance company clients
have chosen to handle these claims telephonically to improve short-term
operating margins. This has resulted in an increase in the Company's average
revenue per claim. The decline in class action services decreased domestic
revenues by 0.6% in 2000. The Company's acquisitions of PRISM Network Inc.
("PRISM") in August 1999 and Greentree Investigations, Inc. ("Greentree") in
March 2000 (included in non-class action revenues) increased domestic revenues
by 1.5% in 2000.
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 increased slightly to 60.9% in 2000 as compared
to 60.8% in 1999.
Domestic salaries and wages remained constant at $271.8 million in
2000, compared to 1999. Payroll taxes and fringe benefits for domestic
operations totaled $44.6 million in 2000, decreasing 4.4% from 1999 costs of
$46.7 million. This decrease is due to lower pension expense in 2000, resulting
from 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 increased as a percent of revenues to 29.7% in 2000 from 26.8% in 1999.
This increase is due primarily to higher professional fees related to the
outsourcing of certain information technology functions, higher costs related to
the Company's self-insurance program, and increased bad debt expense.
Years Ended December 31, 1999 and 1998
Revenues
Domestic revenues by market type for 1999 and 1998 are as follows:
(in thousands) 1999 1998 Variance
- -------------------------------------------------------------------
Insurance companies $ 273,994 $ 291,889 (6.1)%
Self-insured entities 196,363 188,150 4.4%
Class action services 52,985 19,221 175.7%
- ------------------------------------------------------
Total Domestic Revenues $ 523,342 $ 499,260 4.8%
======================================================
Domestic revenues from insurance companies decreased 6.1% during 1999,
to $274.0 million, due to continued sluggish claim referrals. This decline was
partially offset by an increase in revenues from self-insured entities of 4.4%
to $196.4 million in 1999, as the insurance market began to harden. Revenues
from class action services increased to $53.0 million in 1999, due to the
acquisition of The Garden City Group ("GCG") in January 1999. The increase in
domestic revenues from the GCG and PRISM acquisitions contributed $35.4 million
of revenues in 1999.
PAGE 19
4
2000 ANNUAL REPORT CRAWFORD & COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Excluding the impact of the GCG and PRISM acquisitions, domestic unit
volume, measured principally by cases received, decreased 6.9% from 1998 to
1999. This decrease was partially offset by changes in the mix of services
provided and in the rates charged for those services, which had the combined
effect of increasing revenues by approximately 4.6% in 1999 compared to 1998.
The Company's acquisitions of GCG and PRISM increased domestic revenues by 7.1%
in 1999.
Compensation and Fringe Benefits
The Company's most significant expense is the compensation of its employees,
including related payroll taxes and fringe benefits. As a percent of revenues,
domestic compensation expense decreased, from 62.9% of revenues in 1998 to 60.8%
of revenues in 1999. This decrease is due to the outsourcing of certain
functions in the Company's class action administration and medical bill auditing
units.
Domestic salaries and wages increased slightly, from $270.8 million in
1998 to $271.8 million in 1999. Payroll taxes and fringe benefits for domestic
operations increased from $43.1 million in 1998 to $46.7 million in 1999, as a
result of an increase in pension expense. Pension expense in 1998 was lower due
to favorable investment returns in prior years.
Expenses Other than Compensation and Fringe Benefits
Domestic expenses other than compensation and related payroll taxes and fringe
benefits increased as a percent of revenues to 26.8% in 1999 from 24.6% in 1998.
These increases are primarily due to higher professional fees (related to
outsourced functions in the Company's class action administration and medical
bill auditing units) and higher net interest costs as a result of increased
borrowings and lower cash balances in 1999.
INTERNATIONAL OPERATIONS
Years Ended December 31, 2000 and 1999
Revenues
Revenues from the Company's international operations totaled $193.0 million in
2000, an 8.1% increase from the $178.6 million reported in 1999. This increase
is largely due to increased referrals from new claims handling agreements
entered into during the 1999 fourth quarter. Several small strategic
acquisitions in Holland and France contributed 2.1% of the revenue increase for
2000. Revenues are net of a 5.2% decline 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, increased slightly to 63.9% in 2000 from 63.2% in 1999.
Salaries and wages of international personnel increased as a percent of
revenues, from 54.0% in 1999 to 55.6% in 2000. This increase is due to higher
incentive compensation expense, which is based on growth in international
earnings. Payroll taxes and fringe benefits decreased as a percent of revenues
from 9.2% in 1999 to 8.3% in 2000. This decrease is due to lower pension expense
in 2000 resulting from higher interest rates and favorable investment returns.
Expenses Other than Compensation and Fringe Benefits
Expenses other than compensation and related payroll taxes and fringe benefits
decreased as a percent of revenues from 31.3% in 1999 to 27.3% in 2000. The
decline is due primarily to reduced bad debt expense due to the collection of
old, outstanding amounts.
Years Ended December 31, 1999 and 1998
Revenues
Revenues from the Company's international operations totaled $178.6 million in
1999, a 6.3% increase from $168.0 million in 1998. This increase is due to the
July 1998 acquisition of Adjusters Canada Incorporated ("ACI"), which more than
offset the reduced claims frequency experienced in 1999. Revenues are net of a
1.0% decline 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, increased from 62.1% in 1998 to 63.2% in 1999, primarily
due to an increase in pension expense.
Salaries and wages of international personnel increased as a percent of
revenues, from 53.4% in 1998 to 54.0% in 1999. Payroll taxes and fringe benefits
also increased as a percent of revenues, from 8.7% in 1998 to 9.2% in 1999.
5
Expenses Other than Compensation and Fringe Benefits
Expenses other than compensation and related payroll taxes and fringe benefits
decreased as a percent of revenues from 35.9% in 1998 to 31.3% in 1999. These
expenses comprise a higher percentage of revenues than the Company's domestic
operations due primarily to higher automobile and occupancy costs. The decline
in these expenses is due to lower professional fees in 1999, as significant fees
were incurred in 1998 related to the restructuring of the Company's United
Kingdom ("U.K.") operations and expense reduction measures put in place in 1999.
Minority Interest
Minority interest benefit of $1.2 million was recorded in 1998. The minority
interest benefit reflects Swiss Reinsurance Company's ("Swiss Re") 40% share in
the losses of Crawford-THG Limited through May 1998. In June 1998, the Company
acquired Swiss Re's 40% interest, and Crawford-THG Limited became a wholly-
owned subsidiary.
SPECIAL CHARGES AND YEAR (2000) EXPENSE
In December 2000, the Company announced the termination of its contract with
Tenfold Corporation, a software development company. In connection with the
cancellation of the contract, the Company wrote down the carrying value of costs
related to internal use software formerly under development by Tenfold. The
non-cash charge, net of related income tax benefits, totaled $10.3 million, or
$0.21 per share.
During 1999, the Company completed its project to remediate its
computer systems to address the Year 2000 issue. The Year 2000 issue, which was
common to most organizations, concerns the inability of information systems to
properly distinguish the year 2000 from the year 1900. During 1999 and 1998,
year 2000 expenses, net of related income tax benefits, were $3.2 million or
$0.06 per share, and $4.4 million or $0.09 per share, respectively. There were
no such expenses during 2000.
During the third quarter of 1998, the Company restructured its U.K. and
Canadian operations and realigned senior management after the resignation of its
former chairman and chief executive officer. These restructuring programs
resulted in the elimination of approximately 350 staff positions and the closing
of 67 offices. After reflecting income tax benefits, restructuring charges
reduced the Company's 1998 net income by $9.7 million, or $0.19 per share.
During 2000, the Company utilized $2.4 million of lease and employee
separation reserves. As of December 31, 2000, remaining lease and employee
separation reserves were $2.8 million.
FINANCIAL CONDITION
At December 31, 2000, current assets exceeded current liabilities by
approximately $106.1 million, a decrease of $3.8 million from the working
capital balance at December 31, 1999. Cash and cash equivalents at the end of
2000 totaled $22.1 million, increasing from $17.7 million 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 dividends paid
to shareholders, repurchases of common stock, investments in computer software,
acquisitions of property and equipment, and acquisitions of businesses.
During 2000, the Company repurchased and retired 2,256,376 shares of
its Class A Common Stock and 143,261 shares of its Class B Common Stock at an
average per share cost of $11.01 and $12.21, respectively. As of December 31,
2000, 705,863 shares remain to be repurchased under the 1999 share repurchase
program 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 December 31, 2000, totaled $44.4
million, increasing from $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 $36.7 million,
excluding current installments, as of December 31, 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.
PAGE 21
6
2000 ANNUAL REPORT CRAWFORD & COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF 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 its net investment in foreign operations.
Shareholders' investment at the end of 2000 was $217.8 million,
compared with $250.3 million at the end of 1999. The decrease is primarily a
result of the Company's share repurchase activity in 2000 and dividends paid to
shareholders.
MARKET RISK
Derivatives
The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments.
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 27.1% and 25.4% of total revenues at December
31, 2000 and 1999, respectively. 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.
The Company measures currency earnings risk related to its
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 December 31, 2000, were used to perform the
sensitivity analysis. Such analysis indicates that a hypothetical 10% change in
foreign currency exchange rates would have decreased pretax income by
approximately $1.3 million during 2000, had the U.S. dollar exchange rate
increased relative to the currencies with which we had exposure.
Interest Rates
The Company is exposed to interest rate fluctuations on certain of its variable
rate borrowings. Depending on general economic conditions, the Company uses
variable rate debt for short-term borrowings and fixed rate debt for long-term
borrowings. At December 31, 2000, the Company had $44.4 million in short-term
loans outstanding with an average variable interest rate of 5.8%.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain of the statements contained in this and other sections of this Annual
Report are forward-looking. While management believes that these statements are
accurate, the Company's business is dependent upon general economic conditions
and various conditions specific to its industry. Future trends and these factors
could cause actual results to differ materially from the forward-looking
statements that have been made. In particular, the following issues and
uncertainties should be considered in evaluating the Company's prospects:
Contingencies
In the normal course of the claims administration services business, the Company
is named as a defendant in suits by insured or claimants contesting decisions 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 on the part of the Company, its agents, or
employees in rendering service to clients. The majority of these claims is of
the type covered by insurance maintained by the Company; however, the Company is
self-insured for the deductibles under its various insurance coverages. In the
opinion of the Company, adequate reserves have been provided for such
self-insured risks.
The Company has received federal grand jury subpoenas requesting
certain business and financial records of the Company dating back to 1992. The
Company has been advised that the subpoenas were issued in connection with an
investigation into the Company's billings for services in its Domestic Claims
Management and Healthcare Management Services branch offices. The Company is
cooperating fully with the investigation. It is not possible to determine what
effects, if any, this investigation might ultimately have on the Company's
financial position or results of operations.
7
2000 ANNUAL REPORT CRAWFORD & COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Revenues $ 712,174 $ 701,926 $ 667,271
Costs and Expenses:
Costs of services provided, less reimbursed expenses of $33,294
in 2000, $38,109 in 1999, and $35,327 in 1998 525,773 514,094 494,493
Selling, general, and administrative expenses 120,832 113,355 106,636
Special charges (Notes 8 and 9) 16,740 -- 14,873
Year 2000 expense -- 5,181 7,201
Corporate interest, net 4,476 2,762 (526)
Amortization of goodwill 3,203 2,790 1,911
- ----------------------------------------------------------------------------------------------------------------------
671,024 638,182 624,588
- ----------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Minority Interest 41,150 63,744 42,683
Provision for Income Taxes 15,802 24,480 16,395
- ----------------------------------------------------------------------------------------------------------------------
Income Before Minority Interest 25,348 39,264 26,288
Minority Interest in Loss of Joint Venture -- -- 1,177
- ----------------------------------------------------------------------------------------------------------------------
Net Income $ 25,348 $ 39,264 $ 27,465
======================================================================================================================
Net Income Per Share:
Basic $ 0.52 $ 0.78 $ 0.55
======================================================================================================================
Diluted $ 0.52 $ 0.78 $ 0.54
======================================================================================================================
Weighted-Average Shares Outstanding:
Basic 48,845 50,380 50,341
======================================================================================================================
Diluted 48,933 50,498 50,938
======================================================================================================================
Cash Dividends Per Share:
Class A Common Stock $ 0.55 $ 0.52 $ 0.50
======================================================================================================================
Class B Common Stock $ 0.55 $ 0.52 $ 0.50
======================================================================================================================
The accompanying notes are an integral part of these statements.
PAGE 23
8
2000 ANNUAL REPORT CRAWFORD & COMPANY
CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 1999
- -----------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 22,136 $ 17,716
Accounts receivable, less allowance for doubtful accounts
of $17,335 in 2000 and $20,182 in 1999 137,378 141,841
Unbilled revenues, at estimated billable amounts 87,067 91,039
Prepaid expenses and other current assets 17,144 17,240
- -----------------------------------------------------------------------------------------------------
Total current assets 263,725 267,836
- -----------------------------------------------------------------------------------------------------
Property and Equipment, at cost:
Land 2,415 2,425
Buildings and improvements 20,337 20,280
Furniture and fixtures 61,935 65,000
Data processing equipment 61,157 71,678
Automobiles 3,998 5,730
- -----------------------------------------------------------------------------------------------------
149,842 165,113
Less accumulated depreciation (107,045) (117,016)
- -----------------------------------------------------------------------------------------------------
Net property and equipment 42,797 48,097
- -----------------------------------------------------------------------------------------------------
Other Assets:
Intangible assets arising from acquisitions, less accumulated
amortization of $18,291 in 2000 and $15,068 in 1999 82,599 80,566
Prepaid pension cost 47,633 49,995
Capitalized software costs, net 12,498 19,243
Other 9,099 8,291
- -----------------------------------------------------------------------------------------------------
Total other assets 151,829 158,095
- -----------------------------------------------------------------------------------------------------
$ 458,351 $ 474,028
=====================================================================================================
The accompanying notes are an integral part of these balance sheets.
9
2000 ANNUAL REPORT CRAWFORD & COMPANY
CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 1999
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Short-term borrowings $ 44,420 $ 38,914
Accounts payable 25,628 29,575
Accrued compensation and related costs 25,366 23,825
Deferred revenues 23,353 22,836
Self-insured risks 10,379 11,360
Accrued income taxes 12,922 11,605
Other accrued liabilities 15,355 19,412
Current installments of long-term debt 216 463
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 157,639 157,990
- --------------------------------------------------------------------------------------------------------------------
Noncurrent Liabilities:
Long-term debt, less current installments 36,662 16,053
Deferred revenues 13,598 13,644
Self-insured risks 11,346 10,241
Deferred income taxes 3,941 6,571
Postretirement medical benefit obligation 7,785 7,756
Other 9,613 11,494
- --------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 82,945 65,759
- --------------------------------------------------------------------------------------------------------------------
Shareholders' Investment:
Class A Common Stock, $1.00 par value, 50,000 shares authorized;
23,754 and 25,892 shares issued and outstanding in 2000 and 1999, respectively 23,754 25,892
Class B Common Stock, $1.00 par value, 50,000 shares authorized;
24,697 and 24,826 shares issued and outstanding in 2000 and 1999, respectively 24,697 24,826
Additional paid-in capital -- 22,309
Retained earnings 183,664 185,975
Accumulated other comprehensive income (14,348) (8,723)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' investment 217,767 250,279
- --------------------------------------------------------------------------------------------------------------------
$ 458,351 $ 474,028
====================================================================================================================
PAGE 25
10
2000 ANNUAL REPORT CRAWFORD & COMPANY
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' INVESTMENT
Common Stock Accumulated
------------------------ Additional Other Total
Class A Class B Paid-In Retained Comprehensive Shareholders'
Nonvoting Voting Capital Earnings Income Investment
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Balance at 12/31/97 $ 23,916 $ 25,477 $ -- $ 174,973 $ (9,361) $ 215,005
Comprehensive income:
Net income -- -- -- 27,465 -- 27,465
Translation adjustment -- -- -- -- 612 612
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 28,077
Dividends paid -- -- -- (25,126) -- (25,126)
Shares repurchased (780) (333) (14,327) (4,354) -- (19,794)
Shares issued in connection
with options and benefits 699 24 7,656 -- -- 8,379
Shares issued for acquisition (Note 7) 1,900 -- 31,231 -- -- 33,131
- --------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/98 25,735 25,168 24,560 172,958 (8,749) 239,672
Comprehensive income:
Net income -- -- -- 39,264 -- 39,264
Translation adjustment -- -- -- -- 26 26
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 39,290
Dividends paid -- -- -- (26,247) -- (26,247)
Shares repurchased (861) (354) (12,589) -- -- (13,804)
Shares issued in connection
with options and benefits 98 12 1,385 -- -- 1,495
Shares issued for acquisition (Note 7) 920 -- 8,953 -- -- 9,873
- --------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/99 25,892 24,826 22,309 185,975 (8,723) 250,279
Comprehensive income:
Net income -- -- -- 25,348 -- 25,348
Translation adjustment -- -- -- -- (5,625) (5,625)
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 19,723
Dividends paid -- -- -- (26,939) -- (26,939)
Shares repurchased (2,256) (143) (23,479) (720) -- (26,598)
Shares issued in connection
with options and benefits 118 14 1,170 -- -- 1,302
- --------------------------------------------------------------------------------------------------------------------------------
Balance at 12/31/00 $ 23,754 $ 24,697 $ -- $ 183,664 $(14,348) $ 217,767
================================================================================================================================
The accompanying notes are an integral part of these statements.
11
2000 ANNUAL REPORT CRAWFORD & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash Flows From Operating Activities:
Net income $ 25,348 $ 39,264 $ 27,465
Reconciliation of net income to net cash provided by operating activities:
Minority interest in loss of joint venture -- -- (1,177)
Depreciation and amortization 20,149 17,137 14,798
Write-down of capitalized internal use software 16,740 -- --
Deferred income taxes (18) 779 (9,662)
Loss on sales of property and equipment 550 479 300
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net (379) (6,209) (13,513)
Unbilled revenues (586) (1,870) 6,138
Prepaid or accrued income taxes (1,174) 4,073 3,713
Accounts payable and accrued liabilities (1,851) 13,226 (7,453)
Accrued restructuring charges (2,381) (8,374) 4,490
Deferred revenues 682 4,475 943
Prepaid expenses and other assets (1,453) 5,668 (5,106)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 55,627 68,648 20,936
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Acquisitions of property and equipment (9,332) (20,377) (13,814)
Acquisitions of businesses, net of cash acquired (7,776) (9,555) (16,259)
Capitalization of software costs (12,405) (8,194) (11,852)
Proceeds from sales of property and equipment 683 1,348 1,516
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (28,830) (36,778) (40,409)
- ----------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Dividends paid (26,939) (26,247) (25,126)
Repurchase of common stock (26,598) (13,804) (19,794)
Proceeds from exercise of stock options 1,302 1,495 8,379
Increase in short-term borrowings, net of repayments 10,217 2,676 10,887
Proceeds from long-term borrowings 21,000 15,000 --
Payments on long-term debt (403) (910) (1,079)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (21,421) (21,790) (26,733)
- ----------------------------------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents (956) (787) (751)
- ----------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 4,420 9,293 (46,957)
- ----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Year 17,716 8,423 55,380
- ----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 22,136 $ 17,716 $ 8,423
============================================================================================================================
The accompanying notes are an integral part of these statements.
PAGE 27
12
2000 ANNUAL REPORT CRAWFORD & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 MAJOR ACCOUNTING AND
REPORTING POLICIES
Nature of Operations and Industry Concentration
The Company is the world's largest independent provider of claims and risk
management, loss adjustment, healthcare management, class action administration,
and risk information services to insurance companies, self-insured corporations,
and governmental entities. Substantial portions of the Company's revenues and
accounts receivable are derived from domestic claims services provided to the
property and casualty insurance industry.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant intercompany
transactions. The financial statements of the Company's international
subsidiaries outside North America and the Caribbean are included in the
Company's consolidated financial statements on a two-month delayed basis in
order to provide sufficient time for accumulation of their results.
Prior Year Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Management's Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Fair Value of Financial Instruments
The fair value of financial instruments classified as current assets or
liabilities, including cash and cash equivalents, receivables, accounts payable,
and short-term borrowings, approximates carrying value due to the short-term
maturity of the instruments. The fair value of long-term debt approximates
carrying value based on the effective interest rates compared to current
market rates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and marketable securities with
original maturities of three months or less.
Long-Lived Assets
Long-lived assets consist of property and equipment, capitalized software, and
goodwill. Management periodically evaluates the recoverability of long-lived
assets. Long-lived assets with a carrying value in excess of associated expected
operating cash flows are considered to be impaired and are written down to fair
value.
Property and Equipment
The Company depreciates the cost of property and equipment over the estimated
useful lives of the related assets, primarily using the straight-line method.
The estimated useful lives for the principal property and equipment
classifications are as follows:
Classification Estimated Useful Lives
-------------------------------------------------------
Furniture and fixtures 3-10 years
Data processing equipment 3-5 years
Automobiles 3-4 years
Buildings and improvements 7-40 years
Depreciation expense on property and equipment was $14,882,000,
$13,078,000, and $11,740,000 for 2000, 1999, and 1998, respectively.
Capitalized Software
Capitalized software reflects costs related to internally developed or
purchased software that are capitalized and amortized on a straight-line basis
over periods ranging from three to ten years. Capitalized software amortization
expense was $2,064,000, $1,269,000, and $1,147,000 for 2000, 1999, and 1998,
respectively.
Goodwill
Goodwill arises from acquisitions and is amortized over 15 to 40 years using the
straight-line method. Goodwill amortization expense was $3,203,000,
$2,790,000, and $1,911,000 for 2000, 1999, and 1998, respectively.
13
Self-Insured Risks
The Company self-insures 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. Provision for claims
under the self-insured program is made based on the Company's estimate of the
aggregate liability for claims incurred and is discounted at the prevailing
risk-free rate based on the average expected life of the claim for workers'
compensation and long-term disability claims. At December 31, 2000 and 1999,
accrued self-insured risks totaled $21,725,000 and $21,601,000, respectively,
including current liabilities of $10,379,000 and $11,360,000, respectively.
Revenue Recognition
Revenue is recognized in unbilled revenues as services are provided. Deferred
revenues represent the estimated unearned portion of fees derived from certain
fixed-rate claim service agreements.
Income Taxes
The Company accounts 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 prepaid pension cost, unbilled and deferred revenues,
self-insurance, and employee compensation.
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
using the "treasury stock" method.
Below is the calculation of basic and diluted net income per share:
(in thousands, except per share data) 2000 1999 1998
- --------------------------------------------------------------------------------
Net income available
to common shareholders $25,348 $39,264 $27,465
================================================================================
Weighted-average common
shares outstanding-Basic 48,845 50,380 50,341
Dilutive effect of stock options 88 118 597
- --------------------------------------------------------------------------------
Weighted-average common
shares outstanding-Diluted 48,933 50,498 50,938
- --------------------------------------------------------------------------------
Basic net income per share $ 0.52 $ 0.78 $ 0.55
================================================================================
Diluted net income per share $ 0.52 $ 0.78 $ 0.54
================================================================================
Additional options to purchase 4,198,800 shares of Class A Common stock
at $10.83 to $19.50 per share were outstanding at December 31, 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.
Comprehensive Income
Comprehensive income for the Company consists of the total of net income and
foreign currency translation adjustments. The Company reports comprehensive
income in the Consolidated Statements of Shareholders' Investment.
For operations outside the United States that prepare financial
statements in currencies other than the U.S. dollar, results from operations and
cash flows are translated at average exchange rates during the period, and
assets and liabilities are translated at end-of-period exchange rates. The
resulting cumulative translation adjustment is reported as Accumulated Other
Comprehensive Income in the Consolidated Balance Sheets.
New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and
Hedging Activities," in 1998 and SFAS 138 as an amendment to SFAS 133 in 2000.
SFAS 133 and 138 establish accounting and
PAGE 29
14
2000 ANNUAL REPORT CRAWFORD & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reporting standards for derivative instruments. SFAS 133 and 138, which are
effective for the Company beginning January 1, 2001, require 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
will not have a material impact on the Company's consolidated results of
operations, financial position, or cash flows.
In December 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101, which was adopted by the Company in the fourth quarter of
2000 retroactively to January 1, 2000, provides guidance on applying generally
accepted accounting principles to revenue recognition issues in financial
statements. The adoption of this SAB did not have a material impact on the
Company's consolidated results of operations, financial position, or cash flows.
NOTE 2 RETIREMENT PLANS
The Company and its subsidiaries sponsor various defined contribution and
defined benefit retirement plans covering substantially all employees.
Employer contributions under the Company's defined contribution plans are
determined annually based on employee contributions, a percentage of each
covered employee's compensation, and the profitability of the Company. The cost
of these plans totaled $5,198,000, $5,129,000, and $6,007,000 in 2000, 1999, and
1998, respectively.
Certain retirees and a fixed number of long-term employees are entitled
to receive postretirement medical benefits under the Company's various medical
benefit plans. There has been no material activity or expenses associated with
the postretirement medical benefit plans since 1998. The postretirement medical
benefits obligation was $7.8 million for 2000 and 1999.
Benefits payable under the Company's defined benefit plans are
generally based on career compensation. The Company's 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 primarily in equity and fixed
income securities.
The following schedule reconciles the funded status of the defined
benefit plans with amounts reported in the Company's balance sheets at December
31, 2000 and 1999.
(in thousands) 2000 1999
- --------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning
of year $ 371,564 $ 393,439
Service cost 11,385 13,474
Interest cost 27,551 25,281
Actuarial gain (9,412) (41,549)
Benefits paid (17,138) (16,686)
Foreign currency effects (10,934) (2,395)
- --------------------------------------------------------------------
Benefit obligation at end
of year 373,016 371,564
- --------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at
beginning of year 425,187 394,087
Actual return on plan assets 55,140 46,998
Employer contributions 3,122 3,060
Benefits paid (17,038) (16,571)
Foreign currency effects (13,929) (2,387)
- --------------------------------------------------------------------
Fair value of plan assets at
end of year 452,482 425,187
- --------------------------------------------------------------------
Funded status of plan 79,466 53,623
Unrecognized actuarial gain (32,140) (1,440)
Unrecognized prior service cost 194 101
Unrecognized net transition asset (2,608) (4,594)
- --------------------------------------------------------------------
Net prepaid benefit cost 44,912 47,690
Less pension obligation included
in other accrued liabilities 2,721 2,305
- --------------------------------------------------------------------
Prepaid pension cost included
in other assets $ 47,633 $ 49,995
====================================================================
Assumptions used in accounting for the plans were:
2000 1999
- --------------------------------------------------------------------
Discount rate 7.5% 7.5%
Expected return on plan assets 9.3% 9.3%
Rate of compensation increase 4.5% 4.5%
=====================================================================
15
Net periodic benefit cost related to the defined benefit plans in 2000,
1999, and 1998 included the following components:
(in thousands) 2000 1999 1998
- -----------------------------------------------------------------------------
Service cost $11,385 $13,474 $13,243
Interest cost 27,551 25,281 25,912
Expected return on assets (32,020) (29,982) (34,990)
Amortization (425) (391) (563)
Recognized net actuarial
(gain) loss (116) 2,196 156
- -----------------------------------------------------------------------------
Net periodic benefit cost $ 6,375 $10,578 $ 3,758
=============================================================================
NOTE 3 INCOME TAXES
Income (loss) before provisions for income taxes and minority interest consists
of the following:
(in thousands) 2000 1999 1998
- ----------------------------------------------------
U.S. $27,753 $57,780 $53,660
Foreign 13,397 5,964 (10,977)
- ----------------------------------------------------
$41,150 $63,744 $42,683
====================================================
The provisions (credits) for income taxes consist of the following:
(in thousands) 2000 1999 1998
- -----------------------------------------------------------------------
Current:
U.S. federal and state $14,607 $23,663 $ 24,328
Foreign 1,213 38 1,729
Deferred (18) 779 (9,662)
- -----------------------------------------------------------------------
$15,802 $24,480 $ 16,395
=======================================================================
Cash payments for income taxes were $16,345,000 in 2000, $20,763,000 in
1999, and $21,493,000 in 1998.
The provisions for income taxes are reconciled to the federal statutory
rate of 35% as follows:
(in thousands) 2000 1999 1998
- ------------------------------------------------------------------------
Federal income taxes at
statutory rate $ 14,403 $22,310 $ 14,939
State income taxes, net of
federal benefit 1,471 2,279 1,387
Other (72) (109) 69
- -----------------------------------------------------------------------
$ 15,802 $24,480 $ 16,395
=======================================================================
The Company does not provide for additional U.S. and foreign income
taxes on undistributed earnings of foreign subsidiaries because they are
considered to be permanently reinvested. At December 31, 2000, such
undistributed earnings totaled $48,005,000. If the earnings were not considered
permanently reinvested, deferred income taxes would have been provided. Such
taxes, if ultimately paid, may be recoverable as foreign tax credits in the
United States.
Deferred income taxes consist of the following at
December 31, 2000 and 1999:
(in thousands) 2000 1999
- --------------------------------------------------------------------
Accrued compensation $ 7,038 $ 6,642
Accrued restructuring costs 707 1,538
Self-insured risks 7,770 7,443
Deferred revenues 11,787 11,709
Postretirement benefits 2,990 2,978
Other 1,370 2,162
- --------------------------------------------------------------------
Gross deferred tax assets 31,662 32,472
- --------------------------------------------------------------------
Unbilled revenues 15,873 13,644
Depreciation and amortization 3,472 4,935
Prepaid pension cost 18,291 19,198
Other 1,165 1,852
- --------------------------------------------------------------------
Gross deferred tax liabilities 38,801 39,629
- --------------------------------------------------------------------
Net deferred tax liabilities (7,139) (7,157)
Less noncurrent net deferred
tax liabilities (3,941) (6,571)
- --------------------------------------------------------------------
Current net deferred tax liability $ (3,198) $ (586)
====================================================================
NOTE 4 LEASE COMMITMENTS
The Company and its subsidiaries lease office space, certain computer equipment,
and its automobile fleet under operating leases. License and maintenance costs
related to the leased vehicles are paid by the Company. Rental expense for all
operating leases consists of the following:
(in thousands) 2000 1999 1998
- -------------------------------------------------------------------
Office space $28,152 $28,412 $29,603
Automobile 11,358 11,218 12,306
Computer equipment 417 527 604
- -------------------------------------------------------------------
$39,927 $40,157 $42,513
===================================================================
PAGE 31
16
2000 ANNUAL REPORT CRAWFORD & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2000, future minimum payments under non-cancelable
operating leases with terms of more than 12 months were as follows: 2001 -
$26,079,000; 2002 - $22,123,000; 2003 - $17,113,000; 2004 - $14,041,000; 2005 -
$10,381,000; and thereafter - $31,004,000.
NOTE 5 LONG-TERM DEBT AND
SHORT-TERM BORROWINGS
Long-term debt consists of the following at December 31,
2000 and 1999:
(in thousands) 2000 1999
- --------------------------------------------------------------------
Term loan payable to bank due
September 2004, interest payable
quarterly at 6.8% $ 15,000 $ 15,000
Term loan payable to bank due
March 2005, interest payable
quarterly at 7.7% 21,000 --
Mortgages payable, secured by buildings,
due on various dates through 2003
at interest rates ranging from 6.2% to 7 597 832
Capital lease obligations 281 684
- --------------------------------------------------------------------
Total debt 36,878 16,516
Less: current installments (216) (463)
- --------------------------------------------------------------------
Total long-term debt $ 36,662 $ 16,053
====================================================================
The Company leases certain computer and office equipment under capital
leases with terms ranging from 24 to 60 months.
The term loans payable contain various provisions which, among other
things, require the Company to maintain defined fixed charge coverage and
leverage ratios and limit the incurrence of certain liens, encumbrances, and
disposition of assets in excess of defined amounts, none of which are expected
to restrict future operations.
The Company maintains credit lines with banks in order to meet seasonal
working capital requirements and other financing needs that may arise. The
balance of unused lines of credit totaled $26,765,000 at December 31, 2000.
Short-term borrowings totaled $44,420,000 and $38,914,000 at December 31, 2000
and 1999, respectively. The weighted average interest rate on short-term
borrowings was 5.8% during 2000 and 5.2% during 1999. Cash paid for interest was
$5,996,000, $3,961,000, and $2,263,000 for 2000, 1999, and 1998, respectively.
NOTE 6 SEGMENT AND
GEOGRAPHIC INFORMATION
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 special charges, year
2000 expense, amortization of goodwill, net corporate interest, minority
interest, and taxes.
Financial information as of December 31, 2000, 1999, and 1998 covering
the Company's reportable segments is presented below:
(in thousands) Domestic International Consolidated
2000 Operations Operations Totals
- --------------------------------------------------------------------------
Revenues $519,150 $193,024 $712,174
Operating income 48,545 17,024 65,569
Depreciation and amortization 14,127 6,022 20,149
Capital expenditures 15,267 6,470 21,737
Assets 268,109 190,242 458,351
1999
- --------------------------------------------------------------------------
Revenues $523,342 $178,584 $701,926
Operating income 64,568 9,909 74,477
Depreciation and amortization 11,429 5,708 17,137
Capital expenditures 23,419 5,152 28,571
Assets 263,677 210,351 474,028
1998
- --------------------------------------------------------------------------
Revenues $499,260 $168,011 $667,271
Operating income 62,740 3,402 66,142
Depreciation and amortization 9,719 5,079 14,798
The Company's most significant international operations are in the United
Kingdom ("U.K."). Revenues in the U.K. were $74,283,000, $73,925,000, and
$79,874,000 in 2000, 1999, and 1998, respectively. Assets related to these
operations were $102,912,000 and $111,931,000 as of December 31, 2000 and 1999,
respectively.
17
NOTE 7 ACQUISITIONS
The Company's annual acquisitions for the years presented were not material
individually, or in the aggregate, to the Company's financial statements. The
Company considers the purchase price allocation of all acquisitions to be
preliminary for the 12 months following the acquisition date and are subject
to change during that period.
In November 2000, the Company acquired all of the outstanding shares of
Resin, a Brazil based company, for a total purchase price of $557,000. The
Company acquired assets with a fair value of $828,000, including goodwill
related to the purchase of $369,000, and assumed liabilities of $271,000. The
purchase price may be increased based on future earnings of Resin. The
transaction was accounted for by the purchase method of accounting. Resin's
operating results will be included in the consolidated statements of income
January 1, 2001, due to a two-month lag in reporting international results.
In July 2000, the Company acquired the assets and liabilities of
Sudexa, a France based company, for a total purchase price of $2.6 million. The
Company acquired assets with a fair value of $3.6 million, including goodwill
related to the purchase of $1.4 million, and assumed liabilities of $991,000.
The transaction was accounted for by the purchase method of accounting. Sudexa's
operating results are included in the consolidated statements of income from
September 2000, due to a two-month lag in reporting international results.
On March 3, 2000, the Company acquired certain assets and assumed
certain liabilities of Greentree Investigations, Inc. ("Greentree") for a total
purchase price of $942,000. The Company acquired assets with a fair value of
$1.7 million, including goodwill related to the purchase of $1.2 million, and
assumed liabilities of $712,000. The purchase price may be increased based on
future earnings of Greentree through April 3, 2005. The transaction was
accounted for by the purchase method of accounting. Greentree's operating
results are included in the consolidated statements of income from the
acquisition date.
In November 1999, the Company acquired the assets and liabilities of
HDS Taxatie en Contra-Expertise BV ("HDS"), a Holland based company, for a total
purchase price of $1.7 million. The Company acquired assets with a fair value of
$2.1 million, including goodwill related to the purchase of $765,000, and
assumed liabilities of $400,000. The transaction was accounted for by the
purchase method of accounting. HDS' operating results are included in the
consolidated statements of income from January 1, 2000, due to a two-month lag
in reporting international results.
On August 9, 1999, the Company acquired all of the outstanding shares
of PRISM Network, Inc. ("PRISM") by issuing 920,000 shares of Crawford Class A
Common Stock for a total purchase price of approximately $9.9 million. The
Company acquired assets with a fair value of $12.2 million, including goodwill
related to the purchase of $9.7 million, and assumed liabilities of
approximately $2.3 million. The transaction was accounted for by the purchase
method of accounting. PRISM's operating results are included in the consolidated
statements of income from the acquisition date.
On January 6, 1999, the Company acquired all of the outstanding shares
of The Garden City Group ("GCG") for an initial purchase price of $7.6 million.
The Company acquired assets with a fair value of $11.1 million, including
goodwill related to the initial purchase of $5.4 million, and assumed
liabilities of approximately $3.5 million. This transaction was accounted for by
the purchase method of accounting. GCG's operating results are included in the
consolidated statements of income from the acquisition date. In 2000 and 1999,
the Company made additional payments to the former owners of GCG pursuant to the
purchase agreement. Such additional purchase price was approximately $5.8
million, which was recorded as additional goodwill. The purchase price may be
further increased based on future earnings of GCG through December 31, 2001.
PAGE 33
18
2000 ANNUAL REPORT CRAWFORD & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 31, 1998, the Company acquired all of the outstanding shares
of Adjusters Canada Incorporated ("ACI") for $16.3 million in cash. The Company
acquired assets with a fair value of $30.1 million, including goodwill related
to the purchase of $13.8 million, and assumed liabilities of approximately $13.8
million. This transaction was accounted for by the purchase method of
accounting. ACI's operating results are included in the consolidated statements
of income from the acquisition date. The initial purchase price may be increased
based on future earnings of ACI through October 31, 2001.
In December 1996, the Company entered into an agreement with Swiss
Reinsurance Company ("Swiss Re") to merge both companies' claims services firms
outside the United States into Crawford-THG Limited ("Crawford-THG"), in which
the Company had a 60% controlling interest after this initial transaction. The
merger was accounted for as a partial sale of the Company's 100%-owned
subsidiary, Crawford & Company International, Ltd. to Swiss Re and a partial
acquisition of Swiss Re's 100% owned subsidiary, Thomas Howell Group, by the
Company. No gain or loss was recognized on the partial sale. Swiss Re's 40%
interest in the equity and net loss of the joint venture is reflected as
minority interest through May 31, 1998.
On June 1, 1998, the Company acquired Swiss Re's 40% interest in
Crawford-THG in exchange for 1.9 million shares of the Company's Class A Common
Stock. Crawford-THG became a wholly-owned subsidiary of the Company. This
transaction was accounted for by the purchase method of accounting. The shares
issued were valued at $33.1 million, which approximated the minority interest
book value. Accordingly, no goodwill was recorded related to this transaction.
On March 9, 2000, the Company repurchased the 1.9 million shares from Swiss Re
at a cost of $21.0 million.
NOTE 8 RESTRUCTURING CHARGES
During the third quarter of 1998, the Company restructured its U.K. and Canadian
operations and realigned senior management after the resignation of its former
chairman and chief executive officer. These restructuring programs resulted in
the elimination of approximately 350 staff positions and the closing of 67
offices. After reflecting income tax benefits, restructuring charges reduced the
Company's 1998 net income by $9,692,000 ($0.19 per share).
The following is a rollforward of the Company's accrued restructuring costs:
Employee
(in thousands) Leases Separations Other Total
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 4,365 $ 2,917 $ 746 $ 8,028
Accrued 6,356 8,196 321 14,873
Acquired 371 763 -- 1,134
Utilized (2,292) (7,163) (1,067) (10,522)
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 8,800 4,713 -- 13,513
Utilized (4,379) (3,995) -- (8,374)
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 4,421 718 -- 5,139
Utilized (1,979) (402) -- (2,381)
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 2,442 316 -- 2,758
Less noncurrent portion (1,991) (118) -- (2,109)
- ------------------------------------------------------------------------------------------------------
Current portion of accrued restructuring costs $ 451 $ 198 $ -- $ 649
======================================================================================================
The noncurrent portion of accrued restructuring costs consists
primarily of long-term lease obligations related to various U.K. offices, which
the Company has vacated and is currently attempting to sublease, and extended
payments being made under employee separation agreements. Management believes
the remaining reserves are adequate to complete its plan.
19
NOTE 9 WRITE-DOWN OF INTERNAL USE SOFTWARE
In December 2000, the Company announced the termination of its contract with
Tenfold Corporation, a software development company. In connection with the
cancellation of the contract, the Company wrote down the carrying value of costs
related to internal use software, formerly under development by Tenfold. The
noncash charge totaled $10.3 million after tax, or $0.21 per share.
In 1998, the Company contracted with TenFold Corporation to develop a
custom integrated claims management system to replace the existing domestic
system. Tenfold failed to deliver an acceptable working system as required under
the contract. The Company intends to pursue recovery of amounts due from
TenFold, resulting from its failure to perform under the contract. However,
Tenfold is currently involved in significant shareholder and customer litigation
and disputes and has reported a significant operating loss for the current year.
Accordingly, any recoveries of amounts due the Company from Tenfold will be
recorded as received in cash.
NOTE 10 CONTINGENCIES
The Company has received federal grand jury subpoenas requesting
certain business and financial records of the Company dating back to 1992. The
Company has been advised that the subpoenas were issued in connection with an
investigation into the Company's billings for services in its Domestic Claims
Management and Healthcare Management Services branch offices. The Company is
cooperating fully with the investigation. It is not possible to determine what
effects, if any, this investigation might ultimately have on the Company's
financial position or results of operations.
NOTE 11 COMMON STOCK
The Company has two classes of Common Stock outstanding: Class A Common Stock
and Class B Common Stock. These two classes of stock have essentially identical
rights, except that shares of Class A Common Stock generally do not have any
voting rights. Under the Company's Articles of Incorporation, the Board of
Directors may pay higher (but not lower) cash dividends on the nonvoting Class A
Common Stock than on the voting Class B Common Stock.
Share Repurchases
In October 1997, the Company's Board of Directors authorized a share repurchase
program of an aggregate of 3,000,000 shares of Class A and Class B Common Stock
through open market purchases. In 2000, the Company completed the 1997 share
repurchase program by reacquiring 105,500 shares of its Class A Common Stock at
an average cost of $11.38. In April 1999, the Company's Board of Directors
authorized an additional share repurchase program of an aggregate of 3,000,000
shares of Class A and Class B Common Stock through open market purchases.
Through December 31, 2000, the Company has reacquired 2,150,876 shares of its
Class A Common Stock, including shares acquired from Swiss Re (Note 7), and
143,261 shares of its Class B Common Stock at an average cost of $10.99 and
$12.21 per share, respectively, under the 1999 program.
Employee Stock Purchase Plan
Under the 1996 Employee Stock Purchase Plan, the Company is authorized to issue
up to 1,500,000 shares of Class A Common Stock to U.S. and Canadian employees,
nearly all of whom are eligible to participate. Under the terms of the Plan,
employees can choose each year to have up to $21,000 of their annual earnings
withheld to purchase the Company's Class A Common Stock. The purchase price of
the stock is 85% of the lesser of the closing price for a share of stock on the
first day of the purchase period or the last day of the purchase period. During
2000, 1999, and 1998, the Company issued 83,000, 56,068, and 69,000 shares,
respectively, to employees under this plan.
Under the 1999 U.K. Sharesave Scheme, the Company is authorized to
issue up to 500,000 shares of Class A Common Stock to eligible employees in the
U.K. The Scheme has terms comparable to the 1996 Employee Stock Purchase Plan.
As of December 31, 2000, no shares have been issued under this scheme.
PAGE 35
20
2000 ANNUAL REPORT CRAWFORD & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Plans
The Company has various stock option plans for employees and directors, which
provide for nonqualified and incentive stock option (ISO) grants. The option
exercise price cannot be less than the fair market value of the Company's stock
at the date of grant, and an option's maximum term is 10 years. Options
generally vest ratably over five years or, with respect to certain nonqualified
options granted to key executives, upon the attainment of specified prices of
the Company's stock. At December 31, 2000, there were 1,036,000 shares available
for future option grants under the plans.
The fair value of options is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2000 1999 1998
- --------------------------------------------------------------------------------
Expected dividend yield 3.5% 3.8% 3.8%
Expected volatility 20% 20% 20%
Risk-free interest rates 5.5% 6.8% 4.5%-5.7%
Expected life of options 7 years 7 years 5 years
All of the outstanding and exercisable options as of December 31, 2000,
are for Class A Common Stock.
A summary of the status of the Company's stock option plans is as follows:
2000 1999 1998
Weighted-Average Weighted-Average Weighted-Average
(in thousands of shares) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 3,998 $13 4,001 $15 3,348 $14
Options granted 688 11 1,281 11 1,845 16
Options acquired -- -- 141 2 -- --
Options exercised (65) 7 (58) 6 (735) 12
Options forfeited and expired (176) 15 (1,367) 16 (457) 18
----- ------ ----
Outstanding, end of year 4,445 13 3,998 13 4,001 15
------ ------ -----
Exercisable, end of year 1,191 12 981 12 1,075 12
------ ------ -----
Weighted-average fair value
of options granted during the year:
Incentive stock options $2.33 $2.79 $2.74
Nonqualified stock options 2.29 2.88 2.44
21
The following table summarizes information about stock options outstanding at
December 31, 2000 (in thousands of shares):
(in thousands of shares) Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------
Range Of Number Weighted-Average Weighted-Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices At 12/31/00 Contractual Life Price At 12/31/00 Price
- --------------------------------------------------------------------------------------------------
$ 2 to 8 78 5.6 $ 2 75 $ 2
9 to 12 1,196 6.8 11 475 11
13 to 17 2,811 6.0 14 555 14
18 to 20 360 5.4 19 86 19
----- -----
$ 2 to 20 4,445 6.2 13 1,191 12
===== =====
As part of the PRISM acquisition, the Company acquired and converted
outstanding PRISM stock options to 141,415 options of Crawford Class A Common
Stock at an option price of $2.41 per share. At December 31, 2000, 78,323 and
75,422 of these options were outstanding and exercisable, respectively.
Pro Forma Information
The Company applies APB Opinion 25 and related Interpretations in accounting for
its stock option and employee stock purchase plans. Accordingly, no compensation
cost has been recognized for these plans. Had compensation cost for these plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with SFAS 123, "Accounting for Stock-Based Compensation,"
the Company's net income and net income per share would have been reduced to the
pro forma amounts indicated below:
(in thousands, except per share data) 2000 1999 1998
- ---------------------------------------------------------------------------------------------
Net income As reported $25,348 $39,264 $27,465
Pro forma 22,159 36,395 25,621
Net income per share - basic As reported 0.52 0.78 0.55
Pro forma 0.45 0.72 0.51
Net income per share - diluted As reported 0.52 0.78 0.54
Pro forma 0.45 0.72 0.50
PAGE 37
22
2000 ANNUAL REPORT CRAWFORD & COMPANY
REPORT OF MANAGEMENT
The management of Crawford & Company is responsible for the integrity and
objectivity of the financial information in this annual report. These financial
statements are prepared in conformity with generally accepted accounting
principles, using informed judgments and estimates where appropriate.
The Company maintains a system of internal accounting policies,
procedures, and controls designed to provide reasonable assurance that assets
are safeguarded and transactions are executed and recorded in accordance with
management's authorization. The internal accounting control system is augmented
by a program of internal audits and reviews by management, written policies and
guidelines, and the careful selection and training of qualified personnel.
Management believes it maintains an effective system of internal accounting
controls.
The Audit Committee of the Board of Directors, composed solely of
outside directors, is responsible for monitoring the Company's accounting and
reporting practices. The Audit Committee meets regularly with management, the
internal auditors, and the independent public accountants to review the work of
each and to assure that each performs its responsibilities. The independent
public accountants, Arthur Andersen LLP, are recommended by the Audit Committee
of the Board of Directors, selected by the Board of Directors, and ratified by
the Company's shareholders. Both the internal auditors and Arthur Andersen LLP
have unrestricted access to the Audit Committee allowing open discussion,
without management present, on the quality of financial reporting and the
adequacy of internal accounting controls.
/s/ Archie Meyers, Jr. /s/ John F. Giblin /s/ W. Bruce Swain
Archie Meyers, Jr. John F. Giblin W. Bruce Swain
Chairman of the Board and Executive Vice President Senior Vice President,
Chief Executive Officer and Chief Financial Officer Controller, and Chief
Accounting Officer
Atlanta, Georgia
January 26, 2001
23
2000 ANNUAL REPORT CRAWFORD & COMPANY
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Crawford & Company:
We have audited the accompanying consolidated balance sheets of CRAWFORD &
COMPANY (a Georgia corporation) AND SUBSIDIARIES as of December 31, 2000 and
1999, and the related consolidated statements of income, shareholders'
investment, and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Crawford & Company
and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
January 26, 2001
24
2000 ANNUAL REPORT CRAWFORD & COMPANY
SELECTED FINANCIAL DATA
(in thousands, except per share data) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Revenues $712,174 $701,926 $667,271 $692,322 $633,625
Net Income 25,348 39,264 27,465 46,989 42,810
Net Income Per Share:
Basic 0.52 0.78 0.55 0.95 0.84
Diluted 0.52 0.78 0.54 0.93 0.82
Total Assets 458,351 474,028 432,890 428,866 378,085
Long-Term Debt, Less Current Installments 36,662 16,053 1,854 731 376
Cash Dividends Per Share:
Class A Common Stock 0.55 0.52 0.50 0.44 0.40
Class B Common Stock 0.55 0.52 0.50 0.44 0.39
Weighted-Average Shares Outstanding:
Basic 48,845 50,380 50,341 49,566 51,032
Diluted 48,933 50,498 50,938 50,687 52,097
==============================================================================================================
All share and per share amounts have been restated to reflect the three-for-two
stock split in 1997 and the adoption of SFAS 128 effective December 31, 1997.
PAGE 39
25
2000 ANNUAL REPORT Crawford & COMPANY
QUARTERLY FINANCIAL DATA (UNAUDITED),
DIVIDEND INFORMATION AND COMMON STOCK QUOTATIONS
2000 First Second Third Fourth Fiscal Year
- --------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Revenues $177,432 $184,436 $180,117 $170,189 $712,174
Income before special charges,
year 2000 expense,
amortization of goodwill,
net corporate interest, and income taxes 18,798 19,077 17,531 10,163 65,569
Net income (loss) 10,531 10,493 9,658 (5,334) 25,348
Net income (loss) per share-basic 0.21 0.22 0.20 (0.11) 0.52
Net income (loss) per share-diluted 0.21 0.22 0.20 (0.11) 0.52
Cash dividends per share:
Class A Common Stock 0.1375 0.1375 0.1375 0.1375 0.55
Class B Common Stock 0.1375 0.1375 0.1375 0.1375 0.55
Common stock quotations:
Class A - High(A) 11.88 11.19 11.25 10.63 11.88
Class A - Low(A) 11.00 10.25 10.38 9.44 9.44
Class B - High(A) 14.13 14.00 12.94 13.00 14.13
Class B - Low(A) 11.00 11.00 11.00 11.38 11.00
1999 First Second Third Fourth Fiscal Year
- --------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Revenues $172,621 $169,827 $168,251 $191,227 $701,926
Income before special charges,
year 2000 expense,
amortization of goodwill,
net corporate interest, and income taxes 19,258 19,423 15,557 20,239 74,477
Net income 10,038 10,464 8,093 10,669 39,264
Net income per share-basic 0.20 0.21 0.16 0.21 0.78
Net income per share-diluted 0.20 0.21 0.16 0.21 0.78
Cash dividends per share:
Class A Common Stock 0.13 0.13 0.13 0.13 0.52
Class B Common Stock 0.13 0.13 0.13 0.13 0.52
Common stock quotations:
Class A - High(A) 14.06 13.50 13.88 12.38 14.06
Class A - Low(A) 10.19 10.00 10.56 10.50 10.00
Class B - High(A) 16.00 16.25 16.13 14.81 16.25
Class B - Low(A) 10.44 10.31 11.56 11.94 10.31
(A) The quotations listed in this table set forth the high and low closing
prices per share of Crawford & Company Class A Common Stock and Class B
Common Stock, respectively, as reported on the NYSE Composite Tape.
The approximate number of record holders of the Company's stock as of December
31, 2000: Class A - 1,884 and Class B - 855.