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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