. . . EXHIBIT 13.1 2002 Crawford & Company FINANCIAL REVIEW Management's Discussion and Analysis 18 Consolidated Statements of Income 29 Consolidated Balance Sheets 30 Consolidated Statements of Shareholders' Investment 32 Consolidated Statements of Cash Flows 33 Notes to Consolidated Financial Statements 34 Report of Management 48 Report of Ernst & Young LLP, Independent Auditors 49 Report of Independent Public Accountants 50 Selected Financial Data 51 Quarterly Financial Data (unaudited) 52 Shareholder Information IBC Directors and Officers IBC MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations Consolidated net income was $24,512,000 for 2002 as compared to $29,445,000 in 2001 and $25,348,000 in 2000. Consolidated net income for 2002 includes a payment received from a former vendor in full settlement of a business dispute of $3.8 million, net of related income tax expense. There were no such payments received in 2001 or 2000. In addition, our adoption of Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" eliminated the requirement to amortize goodwill which increased our 2002 net income by approximately $3.0 million as compared to 2001 and 2000. Consolidated 2000 net income includes a charge related to the write down of the carrying value of costs associated with internal use software formerly under development. This non-cash charge, net of related income tax benefits, totaled $10.3 million. Operating earnings is one of the key performance measures used by our management and chief decision maker to evaluate the performance of our business and make resource allocation decisions. We believe this measure is useful to investors in that it allows them to evaluate our performance using the same criteria our management uses. Following is a reconciliation of consolidated net income to operating earnings for 2002, 2001, 2000, 1999, and 1998: 2002 2001 2000 1999 1998 -------- ------- ------- ------- -------- (in thousands) Net income $ 24,512 $29,445 $25,348 $39,264 $ 27,465 Add/(deduct): Special credits and charges (6,000) -- 16,740 -- -- Restructuring charges -- -- -- -- 14,873 Minority interest in loss of joint venture -- -- -- -- (1,177) Year 2000 expense -- -- -- 5,181 7,201 Amortization of goodwill -- 3,448 3,203 2,790 1,911 Net corporate interest 4,706 4,779 4,476 2,762 (526) Income taxes 14,029 18,356 15,802 24,480 16,395 -------- ------- ------- ------- -------- Operating Earnings $ 37,247 $56,028 $65,569 $74,477 $ 66,142 ======== ======= ======= ======= ======== The following is a discussion and analysis of the consolidated financial condition and results of operations of our two reportable segments: United States ("U.S.") operations and international operations. Our reportable segments represent components of our business for which separate financial information is available that is evaluated regularly by our chief decision maker in deciding how to allocate resources and in assessing performance. The individual services that are listed on the inside cover of this annual report do not represent separate reportable segments. Rather, they describe the various claims administration services that are performed within our approximately 700 field branches around the world. Revenue amounts exclude reimbursements for out-of-pocket expenses. Expense amounts exclude special credits and charges, amortization of goodwill, net corporate interest, and income taxes. Our discussion and analysis of operating expenses is comprised of two components. Compensation and fringe benefits include all compensation, payroll taxes, and benefits provided to our employees, which as a service company, represents our most significant and variable expense. Expenses other than reimbursements, compensation, and fringe benefits include office rent and occupancy costs, other office operating expenses, and depreciation. This discussion should be read in conjunction with our consolidated financial statements and the accompanying footnotes. 18 CRAWFORD & COMPANY RESULTS OF OPERATIONS Operating results for our U.S. and international operations were as follows: % Change From Prior Year ------------------ Years Ended December 31 2002 2001 2000 2002 2001 -------- -------- -------- ---- ---- (in thousands) Revenues: U.S. $508,734 $534,671 $519,150 (4.9%) 3.0% International 190,656 190,868 193,024 (0.1%) (1.1%) -------- -------- -------- Total 699,390 725,539 712,174 (3.6%) 1.9% Compensation & Fringe Benefits: U.S. 320,475 331,116 316,398 (3.2%) 4.7% % of Revenues 62.9% 61.9% 60.9% International 130,886 125,862 123,331 4.0% 2.1% % of Revenues 68.6% 65.9% 63.9% -------- -------- -------- Total 451,361 456,978 439,729 (1.2%) 3.9% % of Revenues 64.5% 63.0% 61.8% Expenses Other than Reimbursements, Compensation & Fringe Benefits: U.S. 158,998 160,300 154,207 (0.8%) 4.0% % of Revenues 31.3% 30.0% 29.7% International 51,784 52,233 52,669 (0.9%) (0.8%) % of Revenues 27.2% 27.4% 27.3% -------- -------- -------- Total 210,782 212,533 206,876 (0.8%) 2.7% % of Revenues 30.2% 29.3% 29.0% Operating Earnings:(1) U.S. 29,261 43,255 48,545 (32.4%) (10.9%) % of Revenues 5.8% 8.1% 9.4% International 7,986 12,773 17,024 (37.5%) (25.0%) % of Revenues 4.2% 6.7% 8.8% -------- -------- -------- Total 37,247 56,028 65,569 (33.5%) (14.6%) % of Revenues 5.3% 7.7% 9.2% (1) Earnings before special credits and charges, amortization of goodwill, net corporate interest, and income taxes. U.S. OPERATIONS Years Ended December 31, 2002 and 2001 REVENUES U.S. revenues by market type for 2002 and 2001 are as follows: 2002 2001 Variance -------- -------- -------- (in thousands) Insurance companies $259,090 $284,966 (9.1%) Self-insured entities 191,278 199,049 (3.9%) Class action services 58,366 50,656 15.2% -------- -------- Total U.S. Revenues $508,734 $534,671 (4.9%) ======== ======== Revenues from insurance companies decreased 9.1% to $259.1 million in 2002 compared to 2001, due to a continued softening in our referrals for high-frequency, low-severity claims and a decrease in catastrophic claim referrals. Revenues from self-insured entities decreased 3.9% to $191.3 million in 2002, due to a decline in workers' compensation and casualty claim referrals. See the following analysis of U.S. cases received. Revenues from class action services, which can fluctuate based on the timing of project awards, increased 15.2% to $58.4 million in 2002. Excluding the impact of class action services, U.S. unit volume, measured principally by cases received, decreased 17.6% from 2001 to 2002. This decrease was partially offset by an 11.3% revenue increase from changes in the mix of services provided and in the rates charged for those services, resulting in a net 6.3% decrease in U.S. revenues from 2001 to 2002, excluding revenues from class action services. Our U.S. insurance company referrals for high-frequency, low-severity claims have declined during the year resulting in an increase in our average revenue per claim. Growth in class action services increased U.S. revenues by 1.4% in 2002. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations Excluding the impact of class action services, U.S. unit volume by major product line, as measured by cases received, for 2002 and 2001 was as follows: 2002 2001 Variance ------- --------- -------- (whole numbers) Casualty 225,705 241,930 (6.7%) Workers' Compensation 242,870 266,256 (8.8%) Property 219,936 286,006 (23.1%) Vehicle 249,019 322,416 (22.8%) Other 33,696 61,954 (45.6%) ------- --------- Total U.S. Cases Received 971,226 1,178,562 (17.6%) ======= ========= The decline in property and vehicle claims for the year was primarily due to the decline we are experiencing related to U.S. insurance company referrals for high-frequency, low-severity claims. Conservative underwriting, increases in policy deductibles, and mild weather during 2002 contributed to an industry-wide decline in property and casualty claims frequency. Our decline in workers' compensation and casualty claim referrals has been primarily due to the loss of two major accounts due to bankruptcy and declines in U.S. employment levels and associated injury rates, which have contributed to a reduction in workers' compensation claims. COMPENSATION AND FRINGE BENEFITS Our most significant expense is the compensation of employees, including related payroll taxes and fringe benefits. In response to the decline in U.S. claims volume, we successfully implemented cost-cutting initiatives to reduce our operating costs by $1 million per month from second quarter 2002 levels. There were 5,266 full-time equivalent employees in 2002, compared to 5,669 in 2001. Despite this decrease in the number of employees, U.S. compensation expense as a percent of revenues increased to 62.9% in 2002 as compared to 61.9% in 2001 as a result of the decline in U.S. revenues. U.S. salaries and wages decreased to $261.9 million in 2002 from $280.3 million in 2001, reflecting the 7% reduction in full-time equivalent employees in 2002. Payroll taxes and fringe benefits for U.S. operations totaled $58.6 million in 2002, increasing 15.3% from 2001 costs of $50.8 million. This increase was primarily due to higher defined benefit pension costs, which resulted from a decline in the fair market value of our pension investments and a decrease in interest rates. EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS U.S. expenses other than reimbursements, compensation and related payroll taxes and fringe benefits increased as a percent of revenues to 31.3% in 2002 from 30.0% in 2001. This increase was primarily due to higher professional indemnity self-insurance costs, bad debt expense, and costs related to our ongoing technology initiatives. REIMBURSEMENTS Reimbursements in our U.S. operations decreased to $17.2 million in 2002 from $22.7 million in 2001, reflecting the decline in case volume during 2002. Years Ended December 31, 2001 and 2000 REVENUES U.S. revenues by market type for 2001 and 2000 are as follows: 2001 2000 Variance -------- -------- -------- (in thousands) Insurance companies $284,966 $273,177 4.3% Self-insured entities 199,049 195,936 1.6% Class action services 50,656 50,037 1.2% -------- -------- Total U.S. Revenues $534,671 $519,150 3.0% ======== ======== Revenues from insurance companies increased 4.3% to $285.0 million in 2001 compared to 2000, due to increases from mold-related claims and reopened Northridge earthquake claims during the year and from growth in surveillance services revenue as a result of our acquisition of Greentree Investigations, Inc. ("Greentree"). Revenues from self-insured entities increased 1.6% to $199.0 million 20 CRAWFORD & COMPANY in 2001, reflecting the hardening of the U.S. insurance market. A hardening of the insurance market generally leads to higher insurance premiums, making self-insurance more attractive to our clients. Revenues from class action services increased 1.2% to $50.7 million in 2001. Excluding the impact of class action services and acquired revenues, U.S. unit volume, measured principally by cases received, decreased 6.1% from 2000 to 2001. This decrease was offset by an 8.7% revenue increase from changes in the mix of services provided and in the rates charged for those services, resulting in a net 2.6% increase in U.S. revenues from 2000 to 2001, excluding revenues from class action services and acquired revenues. Our U.S. insurance company referrals for high-frequency, low-severity claims have declined during the year, resulting in an increase in our average revenue per claim. Growth in class action services increased U.S. revenues by 0.1% in 2001. Our acquisition of Greentree in March 2000 (included in non-class action revenues) increased U.S. revenues by 0.3% in 2001. Excluding the impact of acquisitions on 2001 cases received and class action services, U.S. unit volume by major product line, as measured by cases received, for 2001 and 2000 was as follows: 2001 2000 Variance --------- --------- -------- (whole numbers) Casualty 241,930 253,813 (4.7%) Workers' Compensation 264,338 285,879 (7.5%) Property 286,006 256,182 11.6% Vehicle 322,416 381,997 (15.6%) Other 61,954 74,599 (17.0%) --------- --------- Total U.S. Cases Received 1,176,644 1,252,470 (6.1%) ========= ========= The decline in workers' compensation and casualty claim referrals was primarily due to the fourth quarter 2001 bankruptcy of a major account. The decline in vehicle claims for the year was largely due to the decline we are experiencing related to U.S. insurance company referrals for high-frequency, low-severity claims. Property claims increased due to catastrophe claims related to mold losses and reopened Northridge earthquake claims. COMPENSATION AND FRINGE BENEFITS U.S. compensation expense as a percent of revenues increased to 61.9% in 2001 as compared to 60.9% in 2000. There were 5,669 full-time equivalent employees in 2001, compared to 5,534 in 2000. U.S. salaries and wages increased to $280.3 million in 2001, from $271.8 million in 2000. Payroll taxes and fringe benefits for U.S. operations totaled $50.8 million in 2001, increasing 14.0% from 2000 costs of $44.6 million. These increases are primarily due to higher costs related to our self-insured employee medical and workers' compensation programs. EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS U.S. expenses other than reimbursements, compensation and related payroll taxes and fringe benefits increased as a percent of revenues to 30.0% in 2001 from 29.7% in 2000. These increases are primarily due to higher legal fees associated with a government investigation (see Factors That May Affect Future Results for further discussion) and increased provider network access fees related to our medical bill auditing unit. These increases are partially offset by lower professional indemnity self-insurance costs. REIMBURSEMENTS Reimbursements in our U.S. operations increased to $22.7 million in 2001 from $21.3 million in 2000. INTERNATIONAL OPERATIONS Years Ended December 31, 2002 and 2001 REVENUES Revenues from our international operations totaled $190.7 million in 2002, a 0.1% decrease from the $190.9 million reported in 2001. Excluding acquisitions, international unit volume, measured principally by cases received, decreased 0.4% in 2002 compared to 2001. Small strategic acquisitions in Australia and Canada increased revenues by 4.0% in 2002. Revenues are net of a 0.3% decline during 2002 due to the negative effect of a strong U.S. dollar. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations Excluding the impact of acquisitions on 2002 cases received, international unit volume by region for 2002 and 2001 was as follows: 2002 2001 Variance ------- ------- -------- (whole numbers) Americas 122,687 112,346 9.2% Continental Europe 84,087 71,777 17.2% Asia/Pacific 21,139 21,348 (1.0%) United Kingdom 90,355 113,951 (20.7%) ------- ------- Total International Cases Received 318,268 319,422 (0.4%) ======= ======= The decline in cases received in our United Kingdom operation is due to reduced claim referrals from two major accounts and fewer weather-related claims during 2002. Our increase in the Americas is due to the receipt of approximately 15,000 product liability claims in Canada during 2002. In Continental Europe, our increase is primarily due to the receipt of approximately 12,600 low-value property claims in Sweden during 2002. COMPENSATION AND FRINGE BENEFITS As a percent of revenues, compensation expense, including related payroll taxes and fringe benefits, increased to 68.6% in 2002 from 65.9% in 2001. This increase is primarily due to an increase in capacity in the United Kingdom due to the decline in case volume. There were 3,003 full-time equivalent employees in 2002 (including approximately 220 full-time equivalent employees added by our acquisitions in Australia and Canada), compared to 2,900 in 2001. Salaries and wages of international personnel increased as a percent of revenues, from 57.2% in 2001 to 59.0% in 2002. Payroll taxes and fringe benefits increased as a percent of revenues from 8.7% in 2001 to 9.6% in 2002. EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS Expenses other than reimbursements, compensation and related payroll taxes and fringe benefits decreased slightly as a percent of revenues from 27.4% in 2001 to 27.2% in 2002. REIMBURSEMENTS Reimbursements in our international operations increased slightly to $18.8 million in 2002 from 1118.0 million in 2001. Years Ended December 31, 2001 and 2000 REVENUES Revenues from our international operations totaled $190.9 million in 2001, a 1.1% decrease from the $193.0 million reported in 2000. Excluding acquisitions, international unit volume, measured principally by cases received, decreased 3.4% in 2001 compared to 2000. Several small strategic acquisitions in Holland, Brazil, Australia, and Canada increased revenues by 3.0% in 2001. Revenues are net of a 6.3% decline during 2001 due to the negative effect of a strong U.S. dollar. Excluding the impact of acquisitions on 2001 cases received, international unit volume by region for 2001 and 2000 was as follows: 2001 2000 Variance ------- ------- -------- (whole numbers) Americas 101,581 106,108 (4.3%) Continental Europe 64,290 65,028 (1.1%) Asia/Pacific 21,019 20,551 2.3% United Kingdom 113,951 119,756 (4.8%) ------- ------- Total International Cases Received 300,841 311,443 (3.4%) ======= ======= 22 CRAWFORD & COMPANY The decline in cases received in our United Kingdom operation was primarily due to reduced claim referrals from two major accounts. Our decrease in the Americas was largely due to the absence of hurricane-related catastrophic claims in the Caribbean during 2001. The Americas region benefited during early 2000 from the receipt of claims related to late 1999 hurricanes that struck the Caribbean. COMPENSATION AND FRINGE BENEFITS As a percent of revenues, compensation expense, including related payroll taxes and fringe benefits, increased to 65.9% in 2001 from 63.9% in 2000. There were 2,900 full-time equivalent employees in 2001, compared to 2,701 in 2000. The acquisitions during 2001 added approximately 185 full-time equivalent employees. Salaries and wages of international personnel increased as a percent of revenues, from 55.6% in 2000 to 57.2% in 2001. The increase was primarily due to an increase in capacity in our international operating units due to a decline in case volume. Payroll taxes and fringe benefits increased as a percent of revenues from 8.3% in 2000 to 8.7% in 2001. EXPENSES OTHER THAN REIMBURSEMENTS, COMPENSATION AND FRINGE BENEFITS Expenses other than reimbursements, compensation and related payroll taxes and fringe benefits increased slightly as a percent of revenues from 27.3% in 2000 to 27.4% in 2001. REIMBURSEMENTS Reimbursements in our international operations increased to $18.0 million in 2001 from $14.7 million in 2000. This increase is due to an increase in revenues and related reimbursed expenses in Canada and an increase in cases that required the use of outside experts in other international operations during 2001. SPECIAL CREDITS AND CHARGES, AMORTIZATION OF GOODWILL, NET CORPORATE INTEREST, AND INCOME TAXES During the 2002 first quarter, we received a cash payment of $6.0 million from a former vendor in full settlement of a business dispute. This special credit, net of related income tax expense, increased net income per share by $0.08 during the 2002 first quarter. In December 2000, we announced the termination of our contract with a software development company. In connection with the cancellation of the contract, we wrote down the carrying value of costs related to internal use software formerly under development. The non-cash charge, net of related income tax benefits, totaled $10.3 million or $0.21 per share for the year ended December 31, 2000. On January 1, 2002 we adopted SFAS No. 142 "Goodwill and Other Intangible Assets." The adoption of this statement increased our 2002 net income by approximately $3.0 million or $0.06 per share. Net corporate interest totaled $4.7 million, $4.8 million, and $4.5 million for 2002, 2001, and 2000, respectively. The effect on net corporate interest from increases in total borrowings during 2002 was offset by declines in interest rates in 2002. Taxes on income totaled $14.0 million, $18.4 million, and $15.8 million for 2002, 2001, and 2000, respectively. In January 2002, the effective tax rate was adjusted from 38.4% to 36.4%. This decline in the effective tax rate was primarily due to the adoption of SFAS 142 during 2002. FINANCIAL CONDITION At December 31, 2002, current assets exceeded current liabilities by approximately $123.8 million, an increase of $18.8 million from the working capital balance at December 31, 2001. Cash and cash equivalents at the end of 2002 totaled $31.1 million, increasing from $22.0 million at the end of 2001. Cash was generated primarily from operating activities, while the principal uses of cash were for dividends paid to shareholders, acquisitions of businesses, investments in computer software, acquisitions of property and equipment, and payments on short-term borrowings. Cash dividends to shareholders approximated 79% of net income in 2002, compared to 92% in 2001. The Board of Directors declares cash dividends to shareholders each quarter based on an assessment of current and projected earnings and cash flows. In view of the lack of significant improvement in our earnings in the 2002 second quarter, in its July 2002 meeting, the Board of Directors reduced the dividend, declaring quarterly dividends of $0.06 per share on each share of Class A and Class B Common Stock, down from $0.14 per share declared in the previous quarter. The Board of Directors has maintained this level of dividends by declaring quarterly dividends of $0.06 per share for the third and fourth quarters of 2002. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations During 2002, we did not repurchase any shares of Class A or Class B Common Stock. As of December 31, 2002, 705,863 shares remain to be repurchased under the discretionary 1999 share repurchase program authorized by the Board of Directors. We believe it is unlikely that we will repurchase shares under this program in 2003 due to the decline in the funded status of our defined benefit pension plans (see Note 2 of the consolidated financial statements). We maintain 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, 2002 totaled $30.0 million, decreasing from $36.4 million at the end of 2001. Long-term borrowings outstanding, excluding current installments, totaled $50.0 million as of December 31, 2002, compared to $36.4 million at December 31, 2001. The increase in long-term borrowings is primarily due to the Australian acquisition made in 2002. We believe that our current financial resources, together with funds generated from operations and existing and potential borrowing capabilities, will be sufficient to maintain our current operations. We do not engage in any hedging activities to compensate for the effect of exchange rate fluctuations on the operating results of our foreign subsidiaries. Foreign currency denominated debt is maintained primarily to hedge the currency exposure of our net investment in foreign operations. We recorded minimum pension liability adjustments in Accumulated Other Comprehensive Loss, a component of Shareholders' Investment, of $43.2 million and $28.8 million, net of related income tax benefits, during 2002 and 2001, respectively. These non-cash charges resulted primarily from a decline in the fair value of our pension investments as of the September 30, 2002 and 2001 measurement dates and a decline in interest rates during 2002. Shareholders' investment at the end of 2002 was $159.4 million, compared with $188.3 million at the end of 2001. This decrease is a result of our minimum pension liability adjustment. APPLICATION OF CRITICAL ACCOUNTING POLICIES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates these estimates and judgements based upon historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of these evaluations form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies for revenue recognition, allowances for doubtful accounts, valuation of goodwill and other long-lived assets, and self-insured reserves require significant judgements and estimates in the preparation of the consolidated financial statements. Changes in these underlying estimates could potentially materially affect consolidated results of operations, financial position and cash flows in the period of change. Although some variability is inherent in these estimates, we believe the amounts provided for are adequate. We have discussed the development and selection of the following critical accounting policies and estimates with the audit committee of our Board of Directors, and the audit committee has reviewed our related disclosure in this Management's Discussion and Analysis of Financial Condition and Results of Operations. 24 CRAWFORD & COMPANY REVENUE RECOGNITION Our revenues are primarily comprised of claims processing or program administration fees. Fees for professional services are recognized in unbilled revenues at the time such services are rendered at estimated collectible amounts. Substantially all unbilled revenues are billed within one year. Out-of-pocket costs that are incurred in administering a claim are passed on to our clients and are included in revenues. Deferred revenues represent the estimated unearned portion of fees related to future services under certain fixed-fee service arrangements. Deferred revenues are recognized based on the estimated rate at which the services are provided. These rates are primarily based on a historical evaluation of actual claim closing rates by major lines of coverage. Additionally, recent claim closing rates are evaluated to ensure that current claim closing history does not indicate a significant deterioration or improvement in the longer-term historical closing rates used. Our fixed-fee service arrangements typically call for us to handle claims on either a one- or two-year basis, or for the lifetime of the claim. In cases where we handle a claim on a non-lifetime basis, we typically receive an additional fee on each anniversary date that the claim remains open. For service arrangements where we provide services for the life of the claim, we are only paid one fee for the life of the claim, regardless of the ultimate duration of the claim. As a result, our deferred revenues for claims handled for one or two years are not as sensitive to changes in claim closing rates since the revenues are ultimately recognized in the near future and additional fees are generated for handling long-lived claims. Deferred revenues for lifetime claim handling are considered more sensitive to changes in claim closing rates since we are obligated to handle these claims to their ultimate conclusion with no additional fees for long-lived claims. Based upon our historical averages, we close approximately 99% of all cases referred under lifetime claim service arrangements within the first five years from the date of referral. Also, within that five-year period, the percentage of claims remaining open in any one particular year has remained relatively consistent from period to period. Each quarter we reevaluate our historical claim closing rates by major line of insurance coverage and make adjustments as necessary. Any changes in estimates are recognized in the period in which they are determined. As of December 31, 2002, deferred revenues related to lifetime claim handling arrangements approximated $17.6 million. If the rate at which we close cases changes, the amount of revenue recognized within a period could be affected. In addition, given the competitive environment in which we operate, we may be unable to raise our prices to offset the additional expense associated with handling longer-lived claims. Absent an increase in per claim fees from our clients, a 1% decrease in claim closing rates for lifetime claims would have resulted in the deferral of additional revenues of approximately $500,000, or $0.01 per share for the year ended December 31, 2002. If our average claim closing rates for lifetime claims were to increase by 1%, we would have recognized additional revenues of approximately $400,000, or $0.01 per share for the year ended December 31, 2002. The estimate for deferred revenues is a critical accounting estimate for our U.S. segment. ALLOWANCE FOR DOUBTFUL ACCOUNTS We maintain allowances for doubtful accounts relating to our billed and unbilled receivables for estimated losses resulting primarily from adjustments clients may make to invoiced amounts and the inability of our clients to make required payments. These allowances are established by using historical write-off information to project future experience and by considering the current credit worthiness of our clients, any known specific collection problems, and our assessment of current property and casualty insurance industry conditions. Each quarter we reevaluate the adequacy of the assumptions used in determining these allowances and make adjustments as necessary. Changes in estimates are recognized in the period in which they are determined. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations As of December 31, 2002, our allowance for doubtful accounts totaled $20.9 million or approximately 8.4% of gross billed and unbilled receivables. If the financial condition of our clients were to deteriorate, resulting in an inability to make required payments to us, additional allowances may be required. If the allowance for doubtful accounts were to change by 1% of gross billed and unbilled receivables, reflecting either an increase or decrease in expected future write-offs, the impact to 2002 pretax income would have been approximately $2.5 million, or $0.03 per share. The estimate for the allowance for doubtful accounts is a critical accounting estimate for both our U.S. and international segments. VALUATION OF GOODWILL AND OTHER LONG-LIVED ASSETS We regularly evaluate whether events and circumstances have occurred which indicate that the carrying amounts of goodwill and other long-lived assets (primarily property and equipment, deferred income tax assets, and capitalized software) may warrant revision or may not be recoverable. When factors indicate that such assets should be evaluated for possible impairment, we perform an impairment test in accordance with SFAS 142 for goodwill, SFAS No. 109 "Accounting for Income Taxes" for deferred income tax assets, and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" for other long-lived assets. In the opinion of management, goodwill and other long-lived assets are appropriately valued at December 31, 2002 and 2001. The valuation of goodwill and other long-lived assets is a critical accounting estimate for both our U.S. and international segments. SELF-INSURANCE RESERVES We self-insure certain insurable risks consisting primarily of professional liability, employee medical and disability, workers' compensation, and auto liability. Insurance coverage is obtained for catastrophic property and casualty exposures, including professional liability on a claims made basis, as well as those risks required to be insured by law or contract. We record a liability for claims incurred under these self-insured programs based on our estimate of the ultimate aggregate exposure and discount that liability using an average of published short- and long-term medium quality corporate bond yields. The estimated liability is calculated based on historical claim payment experience, the expected life of the claims, and the reserves established on the claims. In addition, reserves are established for losses that have occurred but have not been reported and for the adverse development of reserves on reported losses. Each quarter we reevaluate the adequacy of the assumptions used in developing these reserves and make adjustments as necessary. Changes in estimates are recognized in the period in which they are determined. As of December 31, 2002, our estimated liability for self-insured risks totaled $27.7 million. The estimated liability is most sensitive to changes in the ultimate reserve for a claim and the interest rate used to discount the liability. We believe that the provision for self-insured losses is adequate to cover the ultimate net cost of losses incurred; however, this provision is an estimate and may be significantly greater or less than the provision established. If the average discount rate we use to determine the present value of our self-insured liability were to change by 1%, reflecting either an increase or decline in underlying interest rates, our estimated liability for self-insured risks would be impacted by approximately $1.8 million, resulting in an increase or decrease to 2002 net income of $1.1 million, or $0.02 per share. The estimate for self-insured reserves is a critical accounting estimate for our U.S. segment. 26 CRAWFORD & COMPANY MARKET RISK DERIVATIVES We have not entered into any transactions using derivative financial instruments or derivative commodity instruments. FOREIGN CURRENCY EXCHANGE Our international operations expose us 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. Our revenues from international operations were 27.3%, 26.3%, and 27.1% of total revenues at December 31, 2002, 2001, and 2000, respectively. Except for borrowings in foreign currencies, we do not presently engage in any hedging activities to compensate for the effect of exchange rate fluctuations on the net assets or operating results of our foreign subsidiaries. We measure currency earnings risk related to our international operations based on changes in foreign currency rates using a sensitivity analysis. The sensitivity analysis measures the potential loss in earnings based on a hypothetical 10% change in currency exchange rates. Exchange rates and currency positions as of December 31, 2002 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 $506,000 during 2002, had the U.S. dollar exchange rate increased relative to the currencies to which we had exposure. INTEREST RATES We are exposed to interest rate fluctuations on certain of our variable rate borrowings. Depending on general economic conditions, we use variable rate debt for short-term borrowings and fixed rate debt for long-term borrowings. At December 31, 2002, we had $30.0 million in short-term loans outstanding with an average variable interest rate of 4.4%. If the average interest rate were to change by 1%, the impact to 2002 pretax income would have been approximately $300,000. CREDIT RISK We process payments for claims settlements, primarily on behalf of our self-insured clients. The liability for the settlement cost of claims processed, which is generally pre-funded, remains with the client. Accordingly, we do not incur significant credit risk in the performance of these services. 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, our business is dependent upon general economic conditions and various conditions specific to our 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 our prospects: LEGAL PROCEEDINGS In the normal course of the claims administration services business, we are named as a defendant in suits by insureds or claimants contesting decisions made by us or our clients with respect to the settlement of claims. Additionally, our clients have brought actions for indemnification on the basis of alleged negligence on our part, our agents, or our employees in rendering service to clients. The majority of these claims are of the type covered by insurance we maintain; however, we are self-insured for the deductibles under various insurance coverages. In our opinion, adequate reserves have been provided for such self-insured risks. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations In 2000, we received federal grand jury subpoenas requesting certain business and financial records dating back to 1992. Additional document requests and grand jury subpoenas were received in 2001 and continued to be received in 2002. We have been advised by the U.S. Department of Justice Fraud Section that the subpoenas issued by the Fraud Section and local U.S. Attorney offices were issued in connection with a nationwide investigation into the billings for services in some of the U.S. Claims Management and Healthcare Management Services branch offices. We are cooperating fully with the government's inquiry and have retained outside counsel to conduct an internal investigation into our billing practices under the direction of the Board of Directors. In addition, we have issued written corporate billing policies in order to clarify our billing practices and eliminate inconsistencies in their application, and are continuing to strengthen our internal audit and branch inspection procedures. We cannot predict when the government's investigation will be completed, its ultimate outcome or its effect on our financial condition or results of operations. However, the investigation could cause disruption in the delivery of our services, and ultimately result in the imposition of civil, administrative or criminal fines or sanctions, as well as potential reimbursements to clients and loss of existing or prospective clients or business opportunities. Any such result could have a material adverse effect on our financial condition and results of operations. Expenses associated with the investigation were approximately $2.2 million in 2002 and $2.5 million in 2001, net of related tax benefits, or $0.04 and $0.05 per share, respectively. CONTINGENT PAYMENTS We normally structure acquisitions to include earnout payments, which are contingent upon the acquired entity reaching certain revenue and operating earnings targets. The amount of the contingent payments and length of the earnout period varies for each acquisition, and the ultimate payments when made will vary, as they are dependent on future events. Based on 2002 levels of revenues and operating earnings, additional payments under existing earnout agreements would approximate $3.6 million through 2008, as follows: 2003 - -$435,000; 2004 - $356,000; 2005 - $279,000; and 2008 - $2,500,000. PENSION EXPENSE We use a September 30 measurement date to determine pension expense under SFAS No. 87, "Employers' Accounting for Pensions." Due to the significant decline in the fair market value of our pension investments at September 30, 2001, as well as a decline in interest rates during 2001, U.S. pension expense increased by $10.0 million in 2002. Effective December 31, 2002, we froze our U.S. defined benefit pension plan and replaced it with a defined contribution retirement plan. U.S. pension expense in 2003, including both the defined benefit and defined contribution plans, is expected to increase $3.0 million to approximately $16.0 million. Future cash funding of our U.S. defined benefit pension plan will depend largely on future investment performance; however, we do not expect to contribute more than $10.0 million to the plan in 2003. No cash contributions to the new U.S. defined contribution plan will be required until early 2004. 28 CRAWFORD & COMPANY CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2002 2001 2000 ---------- ---------- ---------- (in thousands, except per share data) REVENUES: Revenues before reimbursements $ 699,390 $ 725,539 $ 712,174 Reimbursements 36,031 40,732 35,950 ---------- ---------- ---------- TOTAL REVENUES 735,421 766,271 748,124 ========== ========== ========== COSTS AND EXPENSES: Costs of services provided, before reimbursements 529,148 546,333 525,773 Reimbursements 36,031 40,732 35,950 ---------- ---------- ---------- Cost of services 565,179 587,065 561,723 Selling, general, and administrative expenses 132,995 123,178 120,832 Special (credits) and charges (Note 9) (6,000) -- 16,740 Corporate interest, net 4,706 4,779 4,476 Amortization of goodwill -- 3,448 3,203 ---------- ---------- ---------- TOTAL COSTS AND EXPENSES 696,880 718,470 706,974 ========== ========== ========== INCOME BEFORE INCOME TAXES 38,541 47,801 41,150 PROVISION FOR INCOME TAXES 14,029 18,356 15,802 ---------- ---------- ---------- NET INCOME $ 24,512 $ 29,445 $ 25,348 ========== ========== ========== NET INCOME PER SHARE: Basic $ 0.50 $ 0.61 $ 0.52 ========== ========== ========== Diluted $ 0.50 0.61 $ 0.52 ========== ========== ========== WEIGHTED-AVERAGE SHARES OUTSTANDING: Basic 48,580 48,492 48,845 ========== ========== ========== Diluted 48,664 48,559 48,933 ========== ========== ========== CASH DIVIDENDS PER SHARE: Class A Common Stock $ 0.32 $ 0.56 $ 0.55 ========== ========== ========== Class B Common Stock $ 0.32 $ 0.56 $ 0.55 ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 29 CONSOLIDATED BALANCE SHEETS As of December 31, 2002 2001 ---------- ---------- (in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 31,091 $ 21,966 Accounts receivable, less allowance for doubtful accounts of $19,633 in 2002 and $16,755 in 2001 135,174 139,380 Unbilled revenues, at estimated billable amounts 93,792 88,399 Prepaid expenses and other current assets 11,968 11,539 ---------- ---------- TOTAL CURRENT ASSETS 272,025 261,284 ========== ========== PROPERTY AND EQUIPMENT, AT COST: Land 2,401 2,397 Buildings and improvements 21,069 21,662 Furniture and fixtures 62,273 62,216 Data processing equipment 54,590 56,787 Automobiles 4,373 3,564 ---------- ---------- 144,706 146,626 Less accumulated depreciation (108,607) (107,898) ---------- ---------- NET PROPERTY AND EQUIPMENT 36,099 38,728 ---------- ---------- OTHER ASSETS: Goodwill arising from acquisitions, less accumulated amortization of $21,682 in 2002 and $21,566 in 2001 97,798 86,239 Prepaid pension cost -- 7,138 Capitalized software costs, net 23,977 16,402 Deferred income tax asset 31,899 11,817 Other 12,978 9,807 ---------- ---------- TOTAL OTHER ASSETS 166,652 131,403 ---------- ---------- $ 474,776 $ 431,415 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 30 CRAWFORD & COMPANY CONSOLIDATED BALANCE SHEETS As of December 31, 2002 2001 ---------- ---------- (in thousands) LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: Short-term borrowings $ 30,019 $ 36,440 Accounts payable 31,956 31,275 Accrued compensation and related costs 26,454 25,771 Self-insured risks 15,833 12,833 Accrued income taxes 9,594 16,001 Other accrued liabilities 14,384 13,118 Deferred revenues 18,516 20,543 Current installments of long-term debt 1,493 326 ---------- ---------- TOTAL CURRENT LIABILITIES 148,249 156,307 ---------- ---------- NONCURRENT LIABILITIES: Long-term debt, less current installments 49,976 36,378 Deferred revenues 12,127 12,707 Self-insured risks 11,819 11,249 Minimum pension liability 76,747 10,328 Postretirement medical benefit obligation 6,289 6,645 Other 10,138 9,501 ---------- ---------- TOTAL NONCURRENT LIABILITIES 167,096 86,808 ---------- ---------- SHAREHOLDERS' INVESTMENT: Class A Common Stock, $1.00 par value, 50,000 shares authorized; 23,925 and 23,843 shares issued and outstanding in 2002 and 2001, respectively 23,925 23,843 Class B Common Stock, $1.00 par value, 50,000 shares authorized; 24,697 shares issued and outstanding in 2002 and 2001 24,697 24,697 Additional paid-in capital 523 27 Retained earnings 191,767 186,683 Accumulated other comprehensive loss (81,481) (46,950) ---------- ---------- TOTAL SHAREHOLDERS' INVESTMENT 159,431 188,300 ---------- ---------- $ 474,776 $ 431,415 ========== ========== 31 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT Accumulated Common Stock Additional Other Total Class A Class B Paid-In Retained Comprehensive Shareholders' Non-Voting Voting Capital Earnings Loss Investment ---------- -------- ---------- --------- ------------- ------------- (in thousands) BALANCE AT DECEMBER 31, 1999 $ 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 DECEMBER 31, 2000 23,754 24,697 -- 183,664 (14,348) 217,767 Comprehensive loss: Net income -- -- -- 29,445 -- 29,445 Translation adjustment -- -- -- -- (3,825) (3,825) Minimum pension liability adjustment (net of $17.9 million income tax benefit) -- -- -- -- (28,777) (28,777) ---------- -------- ---------- --------- ------------- ------------- Total comprehensive loss (3,157) Dividends paid -- -- -- (27,146) -- (27,146) Shares issued in connection with options and benefits 89 -- 27 720 -- 836 ---------- -------- ---------- --------- ------------- ------------- BALANCE AT DECEMBER 31, 2001 23,843 24,697 27 186,683 (46,950) 188,300 Net income -- -- -- 24,512 -- 24,512 Translation adjustment -- -- -- -- 4,465 4,465 Tax benefit from exercise of stock options -- -- -- -- 4,165 4,165 Minimum pension liability adjustment (net of $23.2 million income tax benefit) -- -- -- -- (43,161) (43,161) ---------- -------- ---------- --------- ------------- ------------- Total comprehensive loss (10,019) Dividends paid -- -- -- (19,428) -- (19,428) Shares issued in connection with options and benefits 82 -- 496 -- -- 578 ---------- -------- ---------- --------- ------------- ------------- BALANCE AT DECEMBER 31, 2002 $ 23,925 $ 24,697 $ 523 $ 191,767 $ (81,481) $ 159,431 ========== ======== ========== ========= ============= ============= The accompanying notes are an integral part of these consolidated financial statements. 32 CRAWFORD & COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended December 31, 2002 2001 2000 ---------- ---------- ---------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 24,512 $ 29,445 $ 25,348 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 17,414 20,626 19,570 Write-down of capitalized internal use software -- -- 16,740 Deferred income taxes 3,975 (287) (18) (Gain) loss on sales of property and equipment (18) 125 550 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable, net 5,473 (309) (379) Unbilled revenues (1,369) 2,852 (586) Prepaid or accrued income taxes (3,525) 6,198 (1,174) Accounts payable and accrued liabilities 4,027 4,035 (1,851) Accrued restructuring charges (335) (859) (2,381) Deferred revenues (1,579) (2,741) 682 Prepaid and accrued pension costs 6,020 4,022 2,587 Prepaid expenses and other assets (1,972) (35) (3,994) ---------- ---------- ---------- Net cash provided by operating activities 52,623 63,072 55,094 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property and equipment (9,189) (11,990) (9,332) Acquisitions of businesses, net of cash acquired (13,569) (9,207) (7,243) Capitalization of software costs (11,093) (7,332) (12,405) Proceeds from sales of property and equipment 480 254 683 ---------- ---------- ---------- Net cash used in investing activities (33,371) (28,275) (28,297) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (19,428) (27,146) (26,939) Repurchase of common stock -- -- (26,598) Proceeds from exercise of stock options 578 836 1,302 Increase in short-term borrowings 18,345 13,578 10,217 Payments on short-term borrowings (24,657) (21,275) -- Proceeds from long-term debt 14,247 143 21,000 Payments on long-term debt (184) (262) (403) ---------- ---------- ---------- Net cash used in financing activities (11,099) (34,126) (21,421) ---------- ---------- ---------- Effects of exchange rate changes on cash and cash equivalents 972 (841) (956) ---------- ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,125 (170) 4,420 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 21,966 22,136 17,716 ---------- ---------- ---------- Cash and Cash Equivalents at End of Year $ 31,091 $ 21,966 $ 22,136 ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 33 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 management solutions to insurance companies and self-insured entities, with a global network of more than 700 offices in 67 countries. Major service lines include workers' compensation claims administration and healthcare management services, property and casualty claims management, class action services, and risk management information services. Substantial portions of the Company's revenues and accounts receivable are derived from United States ("U.S.") 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 accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. GOODWILL AND OTHER LONG-LIVED ASSETS The Company regularly evaluates whether events and circumstances have occurred which indicate that the carrying amounts of goodwill and other long-lived assets (primarily property and equipment, deferred income tax assets, and capitalized software) may warrant revision or may not be recoverable. When factors indicate that such assets should be evaluated for possible impairment, the Company performs an impairment test in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" for goodwill, SFAS No. 109 "Accounting for Income Taxes" for deferred income tax assets, and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" for other long-lived assets. 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 $13,508,000, $15,106,000, and $14,883,000 for 2002, 2001, and 2000, respectively. 34 CRAWFORD & COMPANY 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. Amortization expense for capitalized software was $4,230,000, $2,072,000, and $1,484,000 for 2002, 2001, and 2000, respectively. GOODWILL Goodwill represents the excess of the purchase price over the fair value of the separately identifiable net assets acquired. Goodwill acquired prior to June 30, 2001 was amortized over 15 to 40 years using the straight-line method. Goodwill acquired after June 30, 2001 was not amortized in accordance with SEAS 142. See New Accounting Pronouncements for further discussion. 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 using an average of published short- and long-term medium quality corporate bond yields. The estimated liability is calculated based on historical claim payment experience, the expected life of the claims, and the reserves established on the claims. In addition, reserves are established for losses that have occurred but have not been reported and for the adverse development of reserves on reported losses. At December 31, 2002 and 2001, accrued self-insured risks totaled $27,652,000 and $24,082,000, respectively, including current liabilities of $15,833,000 and $12,833,000, respectively. REVENUE RECOGNITION The Company's revenues are primarily comprised of claims processing or program administration fees. Fees for professional services are recognized in unbilled revenues at the time such services are rendered at estimated collectible amounts. Substantially all unbilled revenues are billed within one year. Out-of-pocket costs that are incurred in administering a claim are passed on by the Company to its clients and are included in revenues. Deferred revenues represent the estimated unearned portion of fees derived from certain fixed-rate claim service agreements. Deferred revenues are recognized based on the estimated rate at which the services are provided. These rates are primarily based on a historical evaluation of actual claim closing rates by major line of coverage. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company maintains allowances for doubtful accounts, relating to billed and unbilled receivables, for estimated losses resulting primarily from adjustments clients may make to invoiced amounts, and the inability of clients to make required payments. These allowances are established using historical write-off information to project future experience and by considering the current credit worthiness of clients, any known specific collection problems, and an assessment of current property and casualty insurance industry conditions. The Company's allowances for doubtful accounts on billed receivables were $19.6 million, $16.8 million, and $17.3 million, and write-offs, net of recoveries, were $4.8 million, $3.0 million, and $4.0 million, respectively, for the years ended December 31, 2002, 2001, and 2000. 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 minimum pension liability, unbilled and deferred revenues, prepaid pension cost, self-insurance, and depreciation and amortization. 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. 35 NOTES to Consolidated Financial Statements Below is the calculation of basic and diluted net income per share: (in thousands, except per share data) 2002 2001 2000 -------- -------- -------- Net income available to common shareholders $ 24,512 $ 29,445 $ 25,348 ======== ======== ======== Weighted-average common shares outstanding - Basic 48,580 48,492 48,845 Dilutive effect of stock options 84 67 88 -------- -------- -------- Weighted-average common shares outstanding - Diluted 48,664 48,559 48,933 ======== ======== ======== Basic net income per share $ 0.50 $ 0.61 $ 0.52 ======== ======== ======== Diluted net income per share $ 0.50 $ 0.61 $ 0.52 ======== ======== ======== Additional options to purchase 5,352,133 shares of Class A Common Stock at $7.48 to $19.50 per share were outstanding at December 31, 2002, 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 these shares would have been antidilutive. FOREIGN CURRENCY TRANSLATION For operations outside the U.S. 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 a component of Accumulated Other Comprehensive Loss in the Consolidated Balance Sheets. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) for the Company consists of the total of net income, foreign currency translation adjustments, tax benefit from the exercise of stock options, and minimum pension liability adjustments. The Company reports comprehensive income (loss) in the Consolidated Statements of Shareholders' Investment. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, no compensation expense has been recognized for the option plans because the exercise prices of the stock options equal the market prices of the underlying stock on the dates of grant. 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 No. 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) 2002 2001 2000 -------- ---------- ---------- Net income As reported $ 24,512 $ 29,445 $ 25,348 Less: compensation expense using the fair value method, net of tax 1,688 2,495 3,189 -------- ---------- ---------- Pro forma $ 22,824 $ 26,950 $ 22,159 ======== ========== ========== Net income per share - basic As reported $ 0.50 $ 0.61 $ 0.52 ======== ========== ========== Pro forma $ 0.47 $ 0.56 $ 0.45 ======== ========== ========== Net income per share - diluted As reported $ 0.50 $ 0.61 $ 0.52 ======== ========== ========== Pro forma $ 0.47 $ 0.56 $ 0.45 ======== ========== ========== 36 CRAWFORD & COMPANY NEW ACCOUNTING PRONOUNCEMENTS In November 2001, the Emerging Issues Task Force released Issue No. 01-14 "Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred." The issue requires that reimbursed out-of-pocket expenses be characterized as revenues in the income statement. This issue was effective for the Company on January 1, 2002. In order to comply with the issue, reimbursed expenses have been reclassified on the income statement for 2001 and 2000. Reimbursed expenses totaled $36,031,000, $40,732,000, and $35,950,000 in 2002, 2001, and 2000, respectively. The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002. SFAS 142 changes the accounting for goodwill and certain intangible assets from an amortization method to an impairment-only approach. The amortization of goodwill, including goodwill recorded in past business combinations, ceased when the Company adopted SFAS 142 on January 1, 2002. The Company does not currently have any intangible assets requiring disclosure under SFAS 142. The adoption of SFAS 142 requires a transitional goodwill impairment test be performed on all reportable segments. Step one of the transitional goodwill impairment test was performed on the U.S. and international segments. Based on the results of step one, the U.S. and international segments do not have an impairment of goodwill. The Company will continue to evaluate goodwill, at least annually, in accordance with SFAS 142. The following table presents the effect of adopting SFAS 142 on net income and basic and diluted net income per share: (in thousands, except per share data) 2002 2001 2000 ---------- ---------- ---------- Reported net income $ 24,512 $ 29,445 $ 25,348 Add: goodwill amortization -- 3,037 2,855 ---------- ---------- ---------- Adjusted net income $ 24,512 $ 32,482 $ 28,203 ========== ========== ========== Basic net income per share: Reported net income per share $ 0.50 $ 0.61 $ 0.52 Goodwill amortization per share -- 0.06 0.06 ---------- ---------- ---------- Adjusted basic net income per share $ 0.50 $ 0.67 $ 0.58 ========== ========== ========== Diluted net income per share: Reported net income per share $ 0.50 0.61 0.52 Goodwill amortization per share -- 0.06 0.06 ---------- ---------- ---------- Adjusted diluted net income per share $ 0.50 $ 0.67 $ 0.58 ========== ========== ========== In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123." This statement amends SFAS 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the market value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company has adopted the annual disclosure provisions of SFAS 148 for the year ended December 31, 2002. The adoption of SFAS 148 did not have a material impact on the Company's consolidated results of operations, financial position, or cash flows. In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The statement addresses accounting for costs to terminate contracts that are not capital leases, costs to consolidate facilities or relocate employees, and termination benefits. The statement requires that the fair value of a liability for penalties for early contract termination be recognized when the entity effectively terminates the contract. The fair value of a liability for other contract termination costs should be recognized when an entity ceases using the rights conveyed by the contract. The liability for one-time termination benefits should be accrued ratably over the future service period based on when the employees are entitled to receive the benefits and a minimum retention period. SFAS 146 is effective for disposal activities initiated after December 31, 2002. The adoption of this statement did not have a material impact on the Company's consolidated results of operations, financial position, or cash flows. 37 NOTES to Consolidated Financial Statements 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 $5,879,000, $5,171,000, and $5,198,000 in 2002, 2001, and 2000, 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. The postretirement medical benefit obligation was $6.3 million and $6.6 million for 2002 and 2001, respectively. Benefits payable under the Company's U.S. defined benefit retirement plan are generally based on career compensation, while its United Kingdom plans are based on an employee's final salary. 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 in equity and fixed income securities, with a target allocation of approximately 60 percent to equity securities and 40 percent to fixed income investments. The following schedule reconciles the funded status of the defined benefit plans with amounts reported in the Company's balance sheets at December 31, 2002 and 2001. (in thousands) 2002 2001 ---------- ---------- Change in Benefit Obligation: Benefit obligation at beginning of year $ 416,839 $ 373,016 Service cost 12,548 12,101 Interest cost 30,296 28,775 Actuarial loss 17,039 19,183 Benefits paid (17,348) (15,438) Foreign currency effects 6,907 (798) ---------- ---------- Benefit obligation at end of year 466,281 416,839 ---------- ---------- Change in Plan Assets: Fair value of plan assets at beginning of year 393,770 452,482 Actual return on plan assets (38,788) (45,138) Employer contributions 9,169 2,293 Benefits paid (17,348) (15,438) Foreign currency effects 7,883 (429) ---------- ---------- Fair value of plan assets at end of year 354,686 393,770 ---------- ---------- Funded status of plan (111,595) (23,069) Unrecognized actuarial loss 145,144 63,925 Unrecognized prior service cost 1,864 599 Unrecognized net transition asset (7,708) (504) ---------- ---------- Net amount recognized 27,705 40,951 ---------- ---------- Amounts recognized in the consolidated balance sheets consist of: Prepaid pension cost -- 7,138 Less minimum pension liability 76,747 10,328 Less pension obligation included in other accrued liabilities 2,663 2,575 Add intangible asset 1,752 -- Add accumulated other comprehensive loss 105,363 46,716 ---------- ---------- Net amount recognized $ 27,705 $ 40,951 ========== ========== Assumptions used in accounting for the plans were: 2002 2001 ---------- ---------- Discount rate 6.75% 7.25% Expected return on plan assets 8.50% 9.25% Rate of compensation increase 3.50% 4.00% ========== ========== 38 CRAWFORD & COMPANY Net periodic benefit cost related to the defined benefit pension plans in 2002, 2001, and 2000 included the following components: (in thousands) 2002 2001 2000 -------- -------- -------- Service cost $ 12,548 $ 12,101 $ 11,385 Interest cost 30,296 28,775 27,551 Expected return on assets (27,026) (33,016) (32,020) Net amortization (3,208) (401) (425) Recognized net actuarial loss (gain) 3,557 (1,085) (116) -------- -------- -------- Net periodic benefit cost $ 16,167 $ 6,374 $ 6,375 ======== ======== ======== The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the retirement plans with accumulated benefit obligations in excess of plan assets were $466 million, $431 million, and $355 million, respectively, as of December 31, 2002 and $417 million, $385 million, and $394 million, respectively, as of December 31, 2001. Effective December 31, 2002, the Company elected to freeze its U.S. defined benefit plan and replace it with a defined contribution plan. NOTE 3. INCOME TAXES Income before provisions for income taxes consists of the following: (in thousands) 2002 2001 2000 ---------- ---------- ---------- U.S. $ 32,029 $ 38,622 $ 27,753 Foreign 6,512 9,179 13,397 ---------- ---------- ---------- Income before taxes $ 38,541 $ 47,801 $ 41,150 ========== ========== ========== The provisions (credits) for income taxes consist of the following: (in thousands) 2002 2001 2000 ---------- ---------- ---------- Current: U.S. federal and state $ 7,264 $ 15,308 $ 14,607 Foreign 3,122 3,335 1,213 Deferred 3,643 (287) (18) ---------- ---------- ---------- Provision for income taxes $ 14,029 $ 18,356 $ 15,802 ========== ========== ========== Cash payments for income taxes were $9,518,000 in 2002, $12,153,000 in 2001, and $16,345,000 in 2000. The provisions for income taxes are reconciled to the federal statutory rate of 35% as follows: (in thousands) 2002 2001 2000 ---------- ---------- ---------- Federal income taxes at statutory rate $ 13,490 $ 16,730 $ 14,403 State income taxes, net of federal benefit 501 1,709 1,471 Other 38 (83) (72) ---------- ---------- ---------- Provision for income taxes $ 14,029 $ 18,356 $ 15,802 ========== ========== ========== 39 NOTES to Consolidated Financial Statements 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 indefinitely reinvested. At December 31, 2002, such undistributed earnings totaled $55,648,000. Determination of the deferred income tax liability on these unremitted earnings is not practicable, since such liability, if any, is dependent on circumstances existing when remittance occurs. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recorded no valuation allowance for 2002 or 2001. Deferred income taxes consist of the following at December 31, 2002 and 2001: (in thousands) 2002 2001 ---------- ---------- Accrued compensation $ 5,081 $ 4,171 Minimum pension liability 41,171 3,966 Self-insured risks 10,294 9,140 Deferred revenues 9,495 11,072 Postretirement benefits 2,289 2,552 Other 3,812 2,577 ---------- ---------- Gross deferred tax assets 72,142 33,478 ---------- ---------- Unbilled revenues 16,338 14,879 Depreciation and amortization 7,426 4,513 Prepaid pension cost 15,949 2,141 Other 1,751 858 ---------- ---------- Gross deferred tax liabilities 41,464 22,391 ---------- ---------- Net deferred tax assets 30,678 11,087 Less noncurrent net deferred tax assets 31,899 11,817 ---------- ---------- Current net deferred tax liabilities included in accrued income taxes $ (1,221) $ (730) ========== ========== 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) 2002 2001 2000 ---------- ---------- ---------- Office space $ 29,203 $ 28,938 $ 28,152 Automobile 8,925 9,962 11,358 Computer equipment -- -- 417 ---------- ---------- ---------- $ 38,128 $ 38,900 $ 39,927 ========== ========== ========== At December 31, 2002, future minimum payments under non-cancelable operating leases with terms of more than 12 months were as follows: 2003 - $32,385,000; 2004 - $24,589,000; 2005 - $17,702,000; 2006 -$13,372,000; 2007 - $9,982,000; and thereafter - $25,679,000. 40 CRAWFORD & COMPANY NOTE 5. LONG-TERM DEBT AND SHORT-TERM BORROWINGS Long-term debt consists of the following at December 31, 2002 and 2001: (in thousands) 2002 2001 ---------- ---------- Term loans payable to bank due: September 2004, interest payable quarterly at 6.8% $ 15,000 $ 15,000 September 2004, interest payable quarterly at 7.7% 21,000 21,000 June 2005, interest payable semi-annually at 6.0% 11,087 -- October 2004, interest payable quarterly at 4.9% 2,430 -- December 2004, interest payable quarterly at 4.9% 636 -- Mortgage payable, secured by building, due August 2003, interest rate of 7.3% 435 477 Capital lease obligations 881 227 ---------- ---------- Total debt 51,469 36,704 Less: current installments (1,493) (326) ---------- ---------- Total long-term debt $ 49,976 $ 36,378 ========== ========== The Company leases certain computer and office equipment under capital leases with terms ranging from 24 to 60 months and depreciates these assets over the expected useful life. The term loans payable contain various provisions that, 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 was in compliance with its debt covenants as of December 31, 2002. The Company maintains uncommitted guidance lines of credit 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 $22,027,000 at December 31, 2002. Short-term borrowings totaled $30,019,000 and $36,440,000 at December 31, 2002 and 2001, respectively. The weighted average interest rate on short-term borrowings was 4.4% during 2002 and 5.6% during 2001. Cash paid for interest was $4,225,000, $6,080,000, and $5,949,000 for 2002, 2001, and 2000, respectively. NOTE 6. SEGMENT AND GEOGRAPHIC INFORMATION The Company has two reportable segments: one which provides various claims administration services through branch offices located in the United States ("U.S. Operations") and the other which provides similar services through branch or representative offices located in 66 other countries ("International Operations"). The Company's reportable segments represent components of the business for which separate financial information is available that is evaluated regularly by the chief decision maker in deciding how to allocate resources and in assessing performance. Intersegment sales are recorded at cost and are not material. The Company measures segment profit based on operating earnings, defined as earnings before special credits and charges, amortization of goodwill, net corporate interest, and income taxes. 41 NOTES to Consolidated Financial Statements Financial information as of December 31, 2002, 2001, and 2000 covering the Company's reportable segments is presented below: U.S. International Consolidated (in thousands) Operations Operations Totals ------------- ------------- ------------- 2002 REVENUES BEFORE REIMBURSEMENTS $ 508,734 $ 190,656 $ 699,390 OPERATING EARNINGS 29,261 7,986 37,247 DEPRECIATION AND AMORTIZATION 12,130 5,284 17,414 CAPITAL EXPENDITURES 15,630 4,652 20,282 ASSETS 259,567 215,209 474,776 ============= ============= ============= 2001 Revenues before reimbursements $ 534,671 $ 190,868 $ 725,539 Operating earnings 43,255 12,773 56,028 Depreciation and amortization 13,833 6,793 20,626 Capital expenditures 12,040 7,282 19,322 Assets 232,468 198,947 431,415 ============= ============= ============= 2000 Revenues before reimbursements $ 519,150 $ 193,024 $ 712,174 Operating earnings 48,545 17,024 65,569 Depreciation and amortization 13,548 6,022 19,570 ============= ============= ============= The Company's most significant international operations are in the United Kingdom ("U.K.") and Canada. (in thousands) U.K. Canada Other Total -------- -------- -------- -------- 2002 REVENUES BEFORE REIMBURSEMENTS $ 56,736 $ 55,870 $ 78,050 $190,656 LONG-LIVED ASSETS 57,329 21,724 11,786 90,839 ======== ======== ======== ======== 2001 Revenues before reimbursements $ 65,388 $ 52,546 $ 72,934 $190,868 Long-lived assets 57,292 22,027 2,491 81,810 ======== ======== ======== ======== 2000 Revenues before reimbursements $ 74,283 $ 47,690 $ 71,051 $193,024 ======== ======== ======== ======== Revenues before reimbursements by market type as of December 31, 2002, 2001, and 2000 are presented below: (in thousands) 2002 2001 2000 ---------- ---------- ---------- Insurance companies $ 259,090 $ 284,966 $ 273,177 Self-insured entities 191,278 199,049 195,936 Class action services 58,366 50,656 50,037 ---------- ---------- ---------- Total U.S. revenues 508,734 534,671 519,150 Total international revenues 190,656 190,868 193,024 ---------- ---------- ---------- Total revenues before reimbursements $ 699,390 $ 725,539 $ 712,174 ========== ========== ========== Substantially all international revenues are derived from the insurance company market. 42 CRAWFORD & COMPANY 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. Accordingly, pro forma results of operations are not presented. The Company uses the purchase method of accounting for all acquisitions. The Company considers the purchase price allocations of all acquisitions to be preliminary for the twelve months following the acquisition date and are subject to change during that period. Results of operations of acquired companies are included in the Company's consolidated results as of the acquisition date. During 2002, the Company recorded the acquisition of the operations of Robertson & Company Group ("Robertson") in Australia, a claims adjusting company, for an aggregate initial purchase price of $10.2 million in cash, excluding cash acquired. This acquisition was made in order to expand the Company's presence in the Australian market. The strength of the going concern, the established locations, and the assembled workforce of Robertson supported a premium above the fair value of separately identifiable net assets. This premium was recorded as goodwill. The purchase price of Robertson may be further increased based on future earnings through October 31, 2008. During 2001, the Company recorded the following acquisitions: Leonard, Hirst & Miller Adjusters (1997), Ltd. ("LH&M"), a Canadian multi-line adjusting firm; Central Victorian Loss Adjusters ("CVLA"), an Australian claims administrator; SVS Experts B.V. ("SVS"), a Dutch independent adjuster; and Resin, an independent adjuster in Brazil, for an aggregate initial purchase price of $6.5 million in cash, excluding cash acquired. In 2002, an additional payment of $138,000 was paid to the former owners of Resin pursuant to the purchase agreement and an additional payment of $96,000 was paid to the former owners of SVS pursuant to the purchase agreement. The purchase price of LH&M may be further increased based on future earnings through April 30, 2004. The purchase price of CVLA may be further increased based on future earnings through June 30, 2004. The purchase price of SVS may be further increased based on future earnings through May 31, 2004. The purchase price of Resin may be further increased based on future earnings through October 31, 2003. During 2000, the Company recorded the following acquisitions: Greentree Investigations, Inc. ("Greentree"), a provider of surveillance services; HDS Taxatie en Centra-Expertise BV, a Holland-based claims administrator; and Sudexa, a France-based claims administrator for an aggregate initial purchase price of $4.6 million in cash, excluding cash acquired. Additional payments of $230,000, $239,000 and $42,000 in 2002, 2001, and 2000, respectively, were paid to the former owner of Greentree, pursuant to the purchase agreement. The purchase price of Greentree may be further increased based on future earnings through April 3, 2005. During 1999, the Company acquired the Garden City Group ("GCG"), a legal administration services provider, for an initial purchase price of $6.3 million, excluding cash acquired. Additional payments of $2.9 million, $2.5 million, $2.6 million, and $3.3 million in 2002, 2001, 2000, and 1999, respectively, were paid to the former owners of GCG pursuant to the purchase agreement. There are no additional contingent payments due under this agreement. 43 NOTES to Consolidated Financial Statements In conjunction with the acquisitions during the periods presented, the goodwill recognized, fair values of assets acquired, liabilities assumed, and net cash paid were as follows: (in thousands) 2002 2001 2000 ------- ------- ------- Goodwill recognized: U.S. operations $ 3,102 $ 2,773 $ 4,217 International operations 7,992 5,322 2,258 ------- ------- ------- Total goodwill recognized 11,094 8,095 6,475 Fair values of assets acquired 5,155 3,261 2,611 Other liabilities assumed (2,680) (2,149) (1,843) ------- ------- ------- Cash paid, net of cash acquired $13,569 $ 9,207 $ 7,243 ======= ======= ======= The changes in the carrying amount of goodwill for the years ended December 31, 2001 and 2002 are as follows: (in thousands) Domestic International Segment Segment Total -------- ------------- ------- Balance at December 31, 2000 $23,228 $59,371 $82,599 Acquired goodwill 2,773 5,322 8,079 Amortization (1,640) (1,808) (3,448) Foreign currency effect -- (1,007) (991) ------- ------- ------- Balance at December 31, 2001 ACQUIRED GOODWILL 24,361 61,878 86,239 FOREIGN CURRENCY EFFECT 3,102 7,992 11,094 -- 465 465 ------- ------- ------- BALANCE AT DECEMBER 31, 2002 $27,463 $70,335 $97,798 ======= ======= ======= NOTE 8. RESTRUCTURING CHARGES During the third quarter of 1998, the Company restructured its U.K. and Canadian operations and realigned senior management following 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, the restructuring charge totaled $9,692,000. The following is a rollforward of the Company's accrued restructuring costs: (in thousands) Employee Leases Separations Total ------- ----------- ------- Balance at January 1, 2000 $ 4,421 $ 718 $ 5,139 Utilized (1,979) (402) (2,381) ------- ------- ------- Balance at December 31, 2000 2,442 316 2,758 Utilized (624) (235) (859) ------- ------- ------- Balance at December 31, 2001 1,818 81 1,899 UTILIZED (254) (81) (335) ------- ------- ------- BALANCE AT DECEMBER 31, 2002 1,564 -- 1,564 LESS NONCURRENT PORTION (1,296) -- (1,296) ------- ------- ------- CURRENT PORTION OF ACCRUED RESTRUCTURING COSTS $ 268 $ -- $ 268 ======= ======= ======= 44 CRAWFORD & COMPANY The noncurrent portion of accrued restructuring costs consists of long-term lease obligations related to various U.K. offices, which the Company has vacated and is currently attempting to sublease. Management believes the remaining reserves are adequate to complete its plan. NOTE 9. SPECIAL CREDITS AND CHARGES In December 2000, the Company announced the termination of its contract with 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. The non-cash charge totaled $10.3 million after tax, or $0.21 per share for the year ended December 31, 2000. During 2002, the Company received a cash payment of $6.0 million from a former vendor in full settlement of a business dispute. This credit, net of related income tax expense, increased net income per share by $0.08 during 2002. NOTE 10. CONTINGENCIES The Company maintains funds in trust to administer claims for certain clients. These funds are not available for the Company's general operating activities, and, as such, have not been recorded in the accompanying consolidated balance sheets. The amount of these funds totaled approximately $141.6 million and $123.7 million at December 31, 2002 and 2001, respectively. The Company normally structures its acquisitions to include earnout payments which are contingent upon the acquired entity reaching certain targets for revenues and operating earnings. The amount of the contingent payments and length of the earnout period varies for each acquisition, and the ultimate payments when made will vary, as they are dependent on future events. Based on 2002 levels of revenues and operating earnings, additional payments under existing earnout agreements would approximate $3.6 million through 2008, as follows: 2003 - $435,000; 2004 - $356,000; 2005 - $279,000; and 2008 - $2,500,000. In 2000, the Company received federal grand jury subpoenas requesting certain business and financial records of the Company dating back to 1992. Additional document requests and grand jury subpoenas were received in 2001 and continue to be received in 2002. The Company has been advised by the U.S. Department of Justice Fraud Section that the subpoenas issued by the Fraud Section and local U.S. Attorney offices were issued in connection with a nationwide investigation into the Company's billings for services in some of the U.S. Claims Management and Healthcare Management Services branch offices. The Company is cooperating fully with the government's inquiry and has retained outside counsel to conduct an internal investigation into the Company's billing practices under the direction of the Board of Directors. In addition, the Company has issued written corporate billing policies in order to clarify its billing practices and eliminate inconsistencies in their application, and is continuing to strengthen its internal audit and branch inspection procedures. The Company cannot predict when the government's investigation will be completed, its ultimate outcome, or its effect on the Company's financial condition or results of operations. However, the investigation could cause disruption in the delivery of services, and ultimately result in the imposition of civil, administrative or criminal fines or sanctions, as well as potential reimbursements to clients and loss of existing or prospective clients or business opportunities. Any such result could have a material adverse effect on the financial condition and results of operations of the Company. Expenses associated with the investigation were approximately $2.2 million in 2002 and $2.5 million in 2001, net of related tax benefits, or $0.04 and $0.05 per share, respectively. 45 NOTES to Consolidated Financial Statements 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 non-voting Class A Common Stock than on the voting Class B Common Stock. SHARE REPURCHASES In April 1999, 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. Through December 31, 2002, the Company has reacquired 2,150,876 shares of its Class A Common Stock, including 1.9 million shares acquired from Swiss Reinsurance Company in 2000, and 143,261 shares of its Class B Common Stock at an average cost of $10.99 and $12.21 per share, respectively. 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 to up $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 2002, 2001, and 2000, the Company issued 57,652, 80,984, and 83,309 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, 2002, no shares have been issued under this Scheme. STOCK OPTION PLANS The Company has various stock option plans for employees and directors, which provide for nonqualified and incentive stock option 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, 2002, there were 1,674,200 shares available for future option grants under the plans. The fair value of options, as discussed in Note 1, is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2002 2001 2000 ------- ------- -------- Expected dividend yield 3.6% 3.4% 3.5% Expected volatility 33% 20% 20% Risk-free interest rate 3.7% 4.6% 5.5% Expected life of options 7 YEARS 7 YEARS 7 YEARS 46 CRAWFORD & COMPANY All of the outstanding and exercisable options as of December 31, 2002 are for Class A Common Stock. A summary of the status of the Company's stock option plans is as follows: (shares in thousands) 2002 2001 2000 ------------------------------- --------------------------- ------------------------- Weighted-Average Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------- ---------------- ------ ---------------- ------ ---------------- Outstanding, beginning of year 5,282 $ 13 4,445 $ 13 3,998 $ 13 Options granted 891 9 1,116 10 688 11 Options exercised (24) 4 (8) 3 (65) 7 Options forfeited and expired (654) 12 (271) 12 (176) 15 ------- ----- ----- Outstanding, end of year 5,495 12 5,282 13 4,445 13 ------- ----- ----- Exercisable, end of year 1,631 12 1,390 12 1,191 12 ------- ----- ----- Weighted-average fair value of options granted during the year: Incentive stock options $2.23 $1.90 $2.33 Nonqualified stock options 2.35 1.90 2.29 The following table summarizes information about stock options outstanding at December 31, 2002 (shares in thousands): Options Outstanding Options Exercisable ------------------------------------------------------- ----------------------------------- Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/02 Contractual Life Exercise Price at 12/31/02 Exercise Price - --------------- ----------- ---------------- ---------------- ----------- ---------------- $ 2 to 8 143 7.4 $ 4 53 $ 2 9 to 12 2,723 6.8 10 740 11 13 to 17 2,285 4.0 14 703 14 18 to 20 344 3.4 19 135 19 ----- ----- $ 2 to 20 5,495 5.4 12 1,631 12 ===== ===== As part of the PRISM acquisition during 1999, 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, 2002, 52,941 of these options were outstanding and exercisable. 47 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 accounting principles generally accepted in the United States, using informed judgements 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, comprised 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 auditors to review the work of each and to assure that each performs its responsibilities. The independent auditors, Ernst & Young LLP, are recommended by the audit committee of the Board of Directors, and selected by the Board of Directors. Both the internal auditors and Ernst & Young 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/ Grover L. Davis /s/ John F. Giblin /s/ W. Bruce Swain - ----------------------- ---------------------------- --------------------------------------- Grover L. Davis John F. Giblin W. Bruce Swain Chairman and Executive Vice President and Senior Vice President, Chief Executive Officer Chief Financial Officer Controller and Chief Accounting Officer Atlanta, Georgia January 27, 2003 48 CRAWFORD & COMPANY REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Shareholders and Board of Directors of Crawford & Company: We have audited the accompanying consolidated balance sheet of Crawford & Company as of December 31, 2002, and the related consolidated statement of income, shareholders' investment, and cash flows for the year then ended. 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 audit. The financial statements of Crawford & Company for the years ended December 31, 2001 and 2000 were audited by other auditors who have ceased operations and whose report dated January 25, 2002 expressed an unqualified opinion on those statements before the reclassification adjustments described in Note 1 and the transitional disclosures required by Statement of Financial Accounting Standards (Statement) No. 142, "Goodwill and Other Intangible Assets," described in Note 1. As discussed above, the financial statements of Crawford & Company as of December 31, 2001 and for the two years then ended were audited by other auditors who have ceased operations. As described in Note 1, the Company reclassified reimbursements received for out-of-pocket expenses from operating expenses to revenues as required by Emerging Issues Task Force Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred." We audited the adjustments that were applied to reclassify the balances reflected in the 2001 and 2000 financial statements. Our procedures included (a) agreeing the reclassification amounts to the Company's underlying accounting records, and (b) testing the mathematical accuracy of the reclassification adjustments. In our opinion, such adjustments are appropriate and have been properly applied. As described in Note 1, these financial statements have been revised to include the transitional disclosures required by Statement No. 142, "Goodwill and Other Intangible Assets," which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 1 included (a) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in those periods related to goodwill that is no longer being amortized to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related net income per share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Company other than with respect to such adjustments and disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Crawford & Company as of December 31, 2002, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, in 2002 the Company ceased amortization of goodwill in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." /s/ ERNST & YOUNG LLP Atlanta, Georgia January 27, 2003 49 The following is a copy of a previously issued Report of Independent Public Accountants. This report relates to prior years' financial statements. This report has not been reissued by Arthur Andersen LLP. 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, 2001 and 2000, and the related consolidated statements of income, shareholders' investment, and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Arthur Andersen LLP Atlanta, Georgia January 25, 2002 50 CRAWFORD & COMPANY SELECTED FINANCIAL DATA For The Years Ended December 31, 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- (in thousands, except per share data) REVENUES BEFORE REIMBURSEMENTS $699,390 $725,539 $712,174 $701,926 $667,271 OPERATING EARNINGS(1) 37,247 56,028 65,569 74,477 66,142 NET INCOME 24,512 29,445 25,348 39,264 27,465 NET INCOME PER SHARE: Basic 0.50 0.61 0.52 0.78 0.55 Diluted 0.50 0.61 0.52 0.78 0.54 OPERATING MARGIN 5.3% 7.7% 9.2% 10.6% 9.9% CURRENT ASSETS 272,025 261,284 264,187 267,836 251,146 TOTAL ASSETS 474,776 431,415 458,351 474,028 432,890 CURRENT LIABILITIES 148,249 156,307 157,639 157,990 140,574 LONG-TERM DEBT, LESS CURRENT INSTALLMENTS 49,976 36,378 36,662 16,053 1,854 TOTAL DEBT 81,488 73,144 81,298 55,430 39,613 SHAREHOLDERS' INVESTMENT 159,431 188,300 217,767 250,279 239,672 TOTAL CAPITAL 240,919 261,444 299,065 305,709 279,285 CURRENT RATIO 1.8:1 1.7:1 1.7:1 1.7:1 1.8:1 TOTAL DEBT-TO-TOTAL CAPITAL 33.8% 28.0% 27.2% 18.1% 14.2% RETURN ON AVERAGE SHAREHOLDERS' INVESTMENT 14.1% 14.5% 10.8% 16.0% 12.1% CASH FLOWS FROM OPERATING ACTIVITIES 52,623 63,072 55,094 68,648 20,936 CASH FLOWS FROM INVESTING ACTIVITIES (33,371) (28,275) (28,297) (36,778) (40,409) CASH FLOWS FROM FINANCING ACTIVITIES (11,099) (34,126) (21,421) (21,790) (26,733) SHAREHOLDERS' EQUITY PER SHARE 3.28 3.88 4.49 4.93 4.71 CASH DIVIDENDS PER SHARE: Class A Common Stock 0.32 0.56 0.55 0.52 0.50 Class B Common Stock 0.32 0.56 0.55 0.52 0.50 WEIGHTED-AVERAGE SHARES OUTSTANDING: Basic 48,580 48,492 48,845 50,380 50,341 Diluted 48,664 48,559 48,933 50,498 50,938 ======== ======== ======== ======== ======== - --------------- (1) Earnings before special credits and charges, year 2000 expense, amortization of goodwill, net corporate interest, minority interest, and income taxes. For a reconciliation of operating earnings to net income, see page 18 of this annual report. 51 QUARTERLY FINANCIAL DATA (UNAUDITED) DIVIDEND INFORMATION AND COMMON STOCK QUOTATIONS Fiscal 2002 First Second Third Fourth Year - ------------------------------------ ------- ------- ------- -------- ------- (in thousands, except per share data) REVENUES BEFORE REIMBURSEMENTS $171,767 $177,989 $175,912 $173,722 $699,390 PRETAX INCOME 12,841 7,653 8,863 9,184 38,541 NET INCOME 8,167 4,867 5,637 5,841 24,512 NET INCOME PER SHARE - BASIC 0.17 0.10 0.11 0.12 0.50 NET INCOME PER SHARE - DILUTED 0.17 0.10 0.11 0.12 0.50 CASH DIVIDENDS PER SHARE: Class A Common Stock 0.14 0.06 0.06 0.06 0.32 Class B Common Stock 0.14 0.06 0.06 0.06 0.32 COMMON STOCK QUOTATIONS:(A) Class A - High 12.00 11.55 7.79 5.50 12.00 Class A - Low 8.40 6.15 4.97 4.06 4.06 Class B - High 14.85 14.97 10.50 7.30 14.97 Class B - Low 11.00 7.60 5.86 5.00 5.00 Fiscal 2001 First Second Third Fourth Year - ------------------------------------ -------- ------- ------- ------- ------- (in thousands, except per share data) REVENUES BEFORE REIMBURSEMENTS $179,455 $186,527 $181,412 $178,145 $725,539 PRETAX INCOME 13,291 14,274 10,806 9,430 47,801 NET INCOME 8,187 8,793 6,657 5,808 29,445 NET INCOME PER SHARE - BASIC 0.17 0.18 0.14 0.12 0.61 NET INCOME PER SHARE - DILUTED 0.17 0.18 0.14 0.12 0.61 CASH DIVIDENDS PER SHARE: Class A Common Stock 0.14 0.14 0.14 0.14 0.56 Class B Common Stock 0.14 0.14 0.14 0.14 0.56 COMMON STOCK QUOTATIONS:(A) Class A - High 10.38 12.50 12.10 9.65 12.50 Class A - Low 9.65 9.00 8.89 8.45 8.45 Class B - High 13.45 18.00 15.25 12.90 18.00 Class B - Low 11.23 10.50 11.42 11.50 10.50 - --------------- (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, 2002: Class A - 1,916 and Class B - 782. 52 CRAWFORD & COMPANY